Pension Schemes Bill [HL]
Tuesday 7th January 2020
(4 years, 10 months ago)
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Pension Schemes Bill [HL]
Tuesday 28th January 2020
(4 years, 9 months ago)
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The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Stedman-Scott) (Con)
My Lords, I take this opportunity to thank all noble Lords for the positive engagement and feedback they have provided over the past couple of weeks and since the Bill was originally introduced in October last year. From the conversations I have had with many noble Lords, I believe there is a genuine desire across the House to tackle the matters addressed by the Bill. It is my sincere hope that we can continue to engage in this way as the Bill progresses through this House. Should any noble Lord wish to discuss any part of the Bill between its stages, our doors are always open.
It is unlikely to have escaped noble Lords’ attention that this is not a small Bill, partly because we have also legislated for Northern Ireland. Now there is a functioning Assembly again we have been in contact with Northern Ireland Ministers to establish whether they are content in principle for Westminster to legislate on their behalf in this Bill. I believe it is important to ensure that the people of Northern Ireland also benefit from the changes and safeguards put in place for the rest of Great Britain.
Although the Evening Standard referred to the Bill in October as a morsel of “fresh legislative meat,” it is far more than that. It has been built on consensus across the pensions community and political spectrum and has consumer protection at its heart. It focuses on a range of key measures that are a priority today, not just for those who are already receiving a pension, but for record numbers who are now saving for their retirement. This Bill will help people plan for the future, provide simpler oversight of pensions savings and protect people’s savings by providing greater powers for the Pensions Regulator to tackle irresponsible management of private pension schemes.
Before I talk a little more about the measures in this Bill and why they are so important, I would like to touch on delegated powers. I know from talking to noble Lords that there are some concerns about the number of delegated powers in the Bill and how they may be used. There are a number of good reasons why we have structured the Bill the way we have, and we will respond fully to any concerns the DPRRC may have when we reply to its report. However, I have listened to what your Lordships have said to me and have asked my officials to prepare illustrative regulations under Part 1 before we reach Committee. I hope that they will help your Lordships understand the way delegated powers in that part are intended to be used and the limitations in pre-empting their use.
The measures in this Bill build on the reforms of the past 10 years, and I shall take a few moments of noble Lords’ time to explain how. On Part 1, which relates to collective defined contribution schemes, which are known as CDCs, current UK pensions law defines all private pension benefits as either money purchase, where investment and longevity risks are shouldered by the individual member, or as non-money purchase, where all risks are born by the sponsor, usually an employer or insurer. Current pensions legislation means that new types of pension schemes have to fit within those two definitions. This stifles innovation and prohibits new kinds of risk sharing.
Part 1 sets out the regulatory framework for new collective money purchase schemes. These are more commonly known as collective defined contribution schemes or CDCs. In developing these measures, I welcome the cross-party and external stakeholder support for the methodology and the legislative approach that the Government have used. The measures facilitate, and build upon, the initiative between the Royal Mail and the Communication Workers Union which have concluded that a CDC scheme would best suit their needs for the future. I put on the record our thanks for the constructive and supportive way in which both Royal Mail and the Communication Workers Union have engaged in developing these measures. It is right for us to support employers and unions working together to bring about such a positive outcome. The scheme will be the first of its type in the UK, and it offers a model for other employers and other workforces to launch their own schemes.
There has been some interest in CDC provision from other unions and large commercial master trusts. However, we believe that this new type of provision and the supporting regulatory regime need time to bed in before a decision is made on whether multiple employer, sector-specific or commercial CDC provision should be facilitated. Nevertheless, the Bill provides for us to adapt the legislation, where appropriate, to extend the framework in the future.
These new schemes will enable contributions to be pooled and invested to give members a target benefit level. They aim to deliver for members an income in retirement without the high cost of guarantees and without placing unpredictable future liabilities on the employer, and they will give employers new options for managing their pension obligations.
In its press release on the Bill’s introduction in October, the Pensions and Lifetime Savings Association said that CDC schemes
“offer employers increased flexibility and choice in how they structure schemes to benefit savers.”
Further, Hymans Robertson commented:
“Providing a framework for collective money purchase schemes … will offer the clear benefits that can be derived from pooling of these risks across individuals.”
I hope that we can all welcome these measures, which enable employers and workers to come together in a way that will benefit both.
I move on to CDCs in Northern Ireland and shall focus briefly on Part 2 of the Bill. As noble Lords know, private pensions are a devolved matter for Northern Ireland. Throughout the development of this Bill, Ministers and officials have worked closely with the Northern Ireland Office and the Department for Communities, Northern Ireland. In the absence of an Assembly, the Department for Communities has asked the UK Parliament to include provisions for Northern Ireland in the Bill. This will ensure regulatory alignment across the UK and parity for pension schemes and their members in Northern Ireland. Part 2 and other clauses embedded in each part of the Bill therefore make provision for corresponding Northern Ireland legislation.
Moving on to the Pensions Regulator, several recent high-profile insolvency cases in relation to defined benefit pension schemes have weakened confidence in the pensions system. They have highlighted that the existing regulatory regime is not always an effective deterrent to serious wrongdoing. Doing nothing will mean that more people are likely to be affected by employers not taking their responsibilities seriously, and the existing fines that the Pensions Regulator can pursue are an ineffective deterrent to more serious wrongdoing. In order to amend the existing powers and provide the regulator with new powers, changes and additions must be made through primary legislation. Not doing so will mean that the current gaps and problems continue to exist.
Part 3 addresses that and fulfils a commitment that we made in 2017. It places a requirement on those responsible for corporate transactions to set out in a statement how they will mitigate any adverse effects on the pension scheme. The measures will improve the regulator’s information-gathering powers, enabling it to enter a wider range of premises and require individuals to attend an interview. This will boost the regulator’s ability to ensure that those responsible comply with pensions legislation. There will also be new civil and criminal sanctions to punish those who wilfully or recklessly harm their pension scheme, including a maximum seven-year prison sentence and a civil penalty of up to £1 million.
I know that some noble Lords have expressed concern about the adequacy of the sentences outlined in the Bill and have advocated even tougher ones. We have set the maximum level of the financial penalty at a level similar to equivalent sanctions in the financial sector for financial crimes. However, we also recognise that there might be a need to increase this maximum amount in the future to ensure that the financial penalty continues to provide suitable levels of deterrence and punishment. The Bill therefore includes a regulation-making power enabling the maximum amount of the financial penalty to be increased if needed in the future.
Charles Counsell, the chief executive of the Pensions Regulator, said of these measures:
“Fines and criminal sanctions, combined with improved avoidance powers, have the potential to act as a strong deterrent in respect of behaviour that represents a risk to savers.”
The Pensions and Lifetime Savings Association was also clear, saying:
“While most pension schemes are well-run and managed, high-profile cases like Carillion and BHS damage confidence in the pensions system. We support new powers for the Pensions Regulator to take action sooner, impose significant fines, and have more oversight of risky corporate transactions in order to prevent reckless behaviour and protect savers’ hard-earned money.”
Cumulatively, the improvements to the regulator’s powers outlined in this Bill will help the regulator to meet its aim of being “clearer, quicker, and tougher”. In turn, this will afford increased protection for defined benefit scheme members’ savings.
Part 4 of the Bill delivers on our commitment to provide for pensions dashboards. Many savers worry that they do not have adequate information or knowledge to enable them to plan and make decisions about their saving for retirement. This can be exacerbated by the fact that it can be hard for savers to keep track of pension savings where they have had multiple jobs. Dashboards will provide an online service allowing people to view all their pension information—including state pension—in a single place.
The measures in this Bill set out the legislative framework to define what a qualifying dashboard service is, along with requirements that must be met by potential dashboard providers. Importantly, they will compel occupational, personal and stakeholder pension schemes to present an individual’s pension information to them through a qualifying dashboard service. To make sure that they do, the measures also introduce compliance powers for enforcement of this requirement through the Financial Conduct Authority and the Pensions Regulator. Finally, Part 4 also provides for the Money and Pensions Service to oversee the development of the dashboard infrastructure.
As I said earlier, there is broad support for pensions dashboards. For example, Aegon has commented:
“Millions of individuals have multiple pensions in which they’ve built up benefits over their working lives and Pension Dashboards will for the first time allow them to see all of these, online at the touch of a button. This offers a huge opportunity to help millions of individuals better engage with their retirement planning”.
I turn now to Part 5 of the Bill. The measures within this part cover four important areas. Clause 123 and Schedule 10 relate to defined benefit scheme funding. The defined benefit landscape is changing, with many schemes now closed to new members and future accrual. As more schemes reach maturity, with fewer contributing members and more members receiving their pension benefits, it is important that we act now to ensure that trustees manage their funding and investment in a way that is appropriate to the specific characteristics of their scheme.
The measures in the Bill will enable the Pensions Regulator to enforce clearer scheme funding standards in defined benefit pension schemes. They will support the regulator’s risk-based regulatory approach by introducing a requirement for trustees to have a funding and investment strategy for the scheme, and for the statutory funding objective to be achieved consistently with this strategy. The measures also require trustees to explain their approach to the regulator in a statement of strategy. The measures can require trustees to send this statement to the regulator at such occasions and intervals as may be prescribed.
These provisions seek to help trustees to improve their scheme funding and investment decisions, and to better manage potential risk. They enable the regulator to take action more effectively to protect members’ pensions, mitigate risks to the Pension Protection Fund, and take account of the sustainable growth of the employer.
Clause 124 introduces new powers to protect individuals’ pensions savings by helping trustees to prevent transfers to fraudulent schemes through restricting the statutory right to transfer a pension. This will protect members from pension scams by helping trustees of occupational pension schemes to ensure that transfers of pension savings are made to safe, not fraudulent, schemes.
Clause 125 rectifies some of the unintended outcomes of a High Court judgment. It retrospectively restores the policy intent with regard to the calculation of Pension Protection Fund compensation payments. The measure will provide statutory cover for past payments and will ensure that there is no question of vulnerable members being asked to repay any overpayments.
Clause 126 updates the definition of “administration charge” to make clear which costs are in scope of the overarching definition contained in the Pensions Act 2014.
I beg to move.
Lord McKenzie of Luton (Lab)
My Lords, I thank the Minister for her introduction of the Bill. It is her first pension Bill and we wish her well. I welcome the open approach that she has signified and the focus already on delegated powers, which I am sure we will discuss extensively.
As we have heard, the Bill focuses on three significant areas: a framework for setting up, operating and regulating “collective money purchase” schemes, otherwise known as collective defined contribution pensions or CDC; enhanced powers for the pensions regulator; and pensions dashboards. As we have heard, Part 1 relates to England, Scotland and Wales and Part 2 to Northern Ireland. We have agreed to consider these in parallel.
My noble friend Lady Drake will focus in particular on matters relating to the dashboard while my noble friend Lady Sherlock will focus on the powers of the regulator. On the former, we know that the move away from DB schemes has been accompanied by a growing tendency for individuals to lose track of their pension pots through moving house or changing jobs. That is why we support the dashboard, but with a preference for it to be a single publicly funded one. On the latter, we are registering concerns about the breadth of Clause 107 and will wish to pursue them in Committee. Otherwise, we are broadly in agreement with the measures in the Bill. I acknowledge the close engagement of my colleague Jack Dromey MP with the Royal Mail and the CWU in formulating the CDC proposals.
In concentrating on the main provisions, though, we should not overlook the measures in Part 5, which the Minister referred to and which also have our support. These variously provide for amendments to DB scheme funding to help improve decision-making and governance across the sector. This runs from the 2018 White Paper, which concluded that DB pension schemes were well managed on average, and we agree with the proposal for a DB funding code. Although active membership of DB schemes continues to fall—in the private sector it now has some 500,000 members, but with assets of £1.5 trillion—we should not write them off. However, we understand that the Pensions Minister, Guy Opperman, has made it clear that he would not support CDC schemes being a route to enable the closure of DB schemes. How is this secured in the Bill, if indeed it is? How many more CDC schemes, if any, are currently being considered? I take it from her introduction that the answer should be none, but it would be good to have that on the record.
So we have DB, DC and now CDC schemes. How can an individual best save in a cost-effective manner for a predictable income in retirement? An individual would of course typically not know for how long they might live, but they should know with greater accuracy how long on average a group of people might live. So finding ways of harnessing collective arrangements to allow the sharing of longevity risk is one way forward, and that applies to CDC.
Much of our consideration of pensions policy provisions hitherto has been a binary matter, with choices conducted between DB and DC schemes. On the one hand, the investment, longevity and inflation risk are with the sponsoring employer, and on the other, they are with the individual member until on annuitisation they are shared more widely. Annuities are a collective risk through contracted insurance contracts, but these have become very expensive.
UK legislation now allows for a different approach. The Pension Schemes Act 2015 enables sharing of risks by individual members through payment of collective benefits, the value of which could vary. However, the Government have chosen not to implement the 2015 provisions but, as has been explained, to bring forward in the Bill a more bespoke regime. The overlapping provisions are repealed. Can the Minister tell us what future plans there are, if any, for the remaining 2015 Bill provisions that have not been repealed? There may be none.
The impetus for the provisions in the Bill has come from Royal Mail and the CWU, which should be congratulated on their collaboration and determination. This development of course came in the circumstance of decisions to close the DB scheme. As we know, the structure of CDC involves pensions being set by reference to targets determined by actuaries. It is argued that CDC arrangements typically have better outcomes. This is in part due to economies of scale on investment and enabling a timeline on investment beyond the individual member. It is of course a feature of CDC that there are no guarantees on pension levels paid out on assets of the scheme. As the Minister said, there is no recourse to a sponsoring employer. Indeed, pension levels set by actuarially determined targets rather than binding targets require a robust communications effort to ensure that Royal Mail employees, in this case, are fully aware of what this all means.
However, numerous studies by academics and practitioners have concluded that CDC can give better outcomes when compared to DC plus either draw-down or annuitisation. We take some comfort from the fact that the CDC concept has the support, we understand, of both the CBI and the TUC. While novel in the UK, it has been operated by the Dutch and Danish systems, albeit not on identical terms, for a number of years.
As has been pointed out, and indeed acknowledged by the Minister, this is very much a framework Bill, with much detail to be filled in by regulations. These will have to cover extensive issues, from financing, fit and proper persons, scheme design, sustainability, actuarial valuations and much more. There is a need to understand the valuation timetable and the gap between asset valuation and changes to pensions to be paid. If there is not to be a buffer, what alternative headroom measures are envisaged?
What can the Minister tell us about the tax regime which will operate and how auto-enrolment will work? Will it require changes to primary legislation? In relation to the SIs and the information that will come forward, can the Minister tell us when this will be available? I think she said by Committee, but that is actually very soon. I wonder how much detail we will get if that is the timeframe. We would certainly welcome it by Committee, but it is often more usual to get it by Report. However, I do not want to deter the Minister or suggest that she spends her time on other matters.
One of the criticisms raised about CDCs is that they invariably generate intergenerational unfairness, with older members doing better at the expense of younger members. How does the Minister respond to that? As is often the case with pensions legislation, it is the things left undone, just as much as those included, on which judgments will be made.
A number of commentators have expressed disappointment that the opportunity has not been taken to implement the changes to auto-enrolment recommended by the 2017 review: namely, to extend the application to workers aged 18, and to remove the qualifying earnings deduction and the earnings threshold. As NOW: Pensions points out, all three of these would help to narrow the gender pensions gap. Is it not time that we got to grips with the self-employed issue?
I am told that the Tory party manifesto, which I have not read, contained a promise to sort out the net pay anomaly. I would welcome that, but do not know whether the Minister has an update on the timeframe. I acknowledge the efforts of a group of professionals, prompted by the noble Baroness, Lady Altmann, in engaging with HMRC to that end.
One further disappointment is the lack of a consolidator regime. It is suggested that superfunds will provide a new and affordable option to enable schemes to consolidate—although, like CDCs, they would require a robust authorisation and supervisory regime. We trust that the Minister, Mr Opperman, has not spent all his capital on CDCs.
Lord Sharkey (LD)
My Lords, for the sake of transparency, I should record that one of my children works for the Money and Pensions Service and that I have not had, nor will I have, any discussions about any of the matters covered by the Bill with her—or, probably, about anything else.
We welcome the Bill and the Minister’s openness and willingness to engage. We congratulate the Government on their engagement with stakeholders; we especially congratulate the Royal Mail and the CWU on their successful advocacy for CDC schemes. We think it a good thing that the Bill makes general provision for these schemes, rather than for only a bespoke Royal Mail scheme. However, we have some serious reservations about the approach taken by the Bill in several key areas. In large part, especially in Part 1, this is actually a skeleton Bill. Let me take CDCs or, as the Bill now calls them, CMPB schemes. As I said, we support the general idea enthusiastically but have serious concerns about how the Bill sets things out.
Our greatest concern is the number and scope of the powers to make regulations given to the Secretary of State. Part 1 runs to 41 pages. In these 41 pages, I counted 39 separate instances of giving the Secretary of State powers to make delegated legislation. I recognise that pensions legislation is often necessarily complex and that secondary legislation plays a vital role. But it is very difficult to have a realistic view of the Bill’s effects or scrutinise it effectively if we have no detail at all of this secondary legislation. Perhaps the Minister can explain why it has not been possible to provide drafts of these regulations. After all, the Bill was first presented to Parliament last October.
I also draw the Minister’s attention to the apparently random use of affirmative and negative procedures for the regulation-making powers. Can she give the House guidance on the principles underlying the choice of procedure? In particular, can she explain why, on numerous occasions, the first use of a regulatory power is subject to the affirmative procedure but all subsequent uses of the same power are subject only to the negative procedure?
Some of these powers are very wide. For example, Clause 28(3) on page 18 seems to allow the Secretary of State to define significant events entirely as he pleases. In Clause 18, on the calculation of benefits, subsection (4) seems to give power to change the very substance of any CMPB scheme. Is this to do with the need to safeguard intergenerational fairness within the scheme? If not, what is it for, how is intergenerational fairness to be protected and why does such provision not appear to be in the Bill? What is to prevent transfers out of the older members with large sums, to the clear detriment of their younger colleagues who remain? Does not the absence of a requirement for a capital buffer make this situation even worse, as the ABI’s excellent briefing note suggests?
In the context of powers given to make regulations, I would highlight subsections (6) and (7) of Clause 36, which appear to give the Minister unlimited discretion on how schemes may be restructured in the case of continuity option 1, while Clause 47(5) appears to be a fully-grown, entirely naked Henry VIII power. I am sure that the House will want to consider this provision carefully. Finally on delegated powers, we will want to discuss Clause 51, especially subsection (2), which again seems to confer unfettered power. We will also want to discuss Clause 31, dealing with triggering events, especially as it might concern eventually the withdrawal of a significant employer from a multi-employer scheme.
I am sorry if all this has sounded rather negative, as I am sure it has. Perhaps I should conclude my remarks on Part 1 by saying again that we enthusiastically support the idea of a CMPB scheme. We are, however, very concerned about the number and scope of the delegated powers that Part 1 contains and the absence of any drafts. I am grateful to the Minister for his commitment to provide the House with notes on what all these SIs hope to achieve, but that is not the same as being able to scrutinise draft legislation. I hope that we will have the opportunity to meet between now and Committee to discuss these issues further.
Part 3 deals with the Pensions Regulator, who I see was busy this morning exercising its powers by fining its fellow regulator, the FCA—only £2,000. We welcome the increase in the scope and strength of the regulator’s powers. My only general comment is to wonder whether the proposed penalties are sufficiently large to provide effective deterrence and to change behaviour. Clause 112, in inserting new Section 77A into the Pensions Act 2004, specifies a maximum penalty of £50,000 for failure to comply with Sections 72 to 75 of that Act. How was this limit arrived at? I think I heard the Minister explain that it was to parallel a limit elsewhere. What consultation or modelling took place to determine whether it would have effect?
In Clause 115, there is a new £1 million upper bound on penalties related to Section 88 of the Pensions Act 2004. The same clause, as the Minister remarked, gives the Secretary of State the power by regulation to increase this amount. No new upper bound is specified in the Bill. Is it wise to give such unlimited and potentially draconian powers to the Secretary of State? In any case, the House will want to know how the original limit of £1 million was set and what consultation or modelling took place. The provision to raise the £1 million limit without restriction and without further scrutiny not only seems rather dangerous but suggests a clear lack of confidence that the original limit will work. I can see why that might be so, given the resources of some of those on whom the penalty may fall, but surely it would be better to have in the Bill an original limit that we thought might work. We will want to come back to this in Committee, but I would be grateful for the Minister’s thoughts on the matter.
I also note that the noble Lord, Lord Balfe, who I do not think is in his place, has a Private Member’s Bill which proposes among other things to require the consent of pensions trustees before dividends are paid. I hope we may see amendments in Committee that allow us to discuss what may be an interesting proposal.
I now turn to Part 4, dealing with the pensions dashboards. I note that there is an obvious and obviously increasing need to provide better information and guidance about pensions, particularly pension draw-downs. This need has grown substantially since we last discussed it in the Chamber during the passage of the Financial Guidance and Claims Bill. Since then, FCA data suggests that over 645,000 pensions have been accessed, with only 15% believed to have had a Pension Wise appointment before accessing their benefits. More than half of the pensions accessed by savers for the first time between April 2018 and March 2019 saw the saver withdraw the maximum amount. This has all the hallmarks of a not-so-slow motion disaster, and the best remedy is more information, more advice and more guidance.
We agree that the pensions dashboard is a very important part of this, especially since auto-enrolment has brought an additional 10 million people into saving for a pension and, alarmingly, one in five adults admits to having lost track of a pension pot. The latest PPI research indicates that £19 billion has gone astray in this way. The dashboard, or dashboards, will help relocate this huge amount.
The question in my mind is whether it should be “dashboard” singular or “dashboards” plural. Should it be a dashboard provided only by MaPS, or should it be many dashboards, provided by MaPS and other qualified organisations? On the assumption that there will be very tight restrictions on how dashboard information is presented, and that future projections will not be allowed much variation, I see the merit in multiple dashboards. It seems to me that the key argument is one of reach. Allowing many dashboards will get more people to take notice and use dashboards. Restricting dashboards to MaPS risks a much smaller take-up. This has an analogue in Pension Wise, a superb service taken up historically by far too few people.
But there is more to helping the consumer than the dashboard. The increase in scams and unwise transfers connected to pension draw-downs is of urgent and increasing concern. Last week, the Times reported that the FCA had written to financial advisers warning against unsafe recommendations of transfers out of DB schemes, and last Saturday the front-page headline in the FT read:
“FCA urged to probe pension … advice”
with the sub-heading
“fears over fresh mis-selling scandal”.
The article noted that the regulator planned to write to 1,841 financial advisers about “potential harm” in their DB transfer advice. That is 76% of all advisory firms.
Noble Lords may remember that I, the noble Lord, Lord McKenzie, the noble Earl, Lord Kinnoull, and the noble Baroness, Lady Altmann, proposed a simple default guidance draw-down mechanism, Amendment 24, during Report stage of the Financial Guidance and Claims Bill. The House passed this amendment by a majority of 80 or so. The Commons substituted its own version, which we accepted, perhaps a little reluctantly. This Commons version is now Sections 18 and 19 of the Act. They delegate the design of a “nudge” to the FCA, the industry, the DWP and MaPS.
As a result, there are now in the field two pilot tests. Both have the aim of delivering a nudge to guidance at the point at which someone wishes to access their pension pot, with a view to making receiving guidance a social norm. The trials will run for three months or so, and MaPS has said that it will publish a report on the outcome in spring 2020. This is quite a long time from October 2017, when we passed Amendment 24. Could I encourage the Minister to see whether this process could be accelerated? Government definitions of spring have been known to extend to July, sometimes in the same year.
More importantly, can the Minister say how the results of the trial will be judged? I do not mean one trial against the other; what absolute levels of take-up or behavioural change will be considered large enough to trigger a full-scale national rollout? I note that the Long Title to this Bill is simply to
“Make provision about pension schemes.”
This seems to me to allow scope for the reintroduction of Amendment 24 if the trials fail to produce the right result. This is certainly something we will want to consider as the Bill proceeds.
Again, we very much support the intentions of this Bill. I stress again how important we think it is that we see the draft regulations for Part 1 before Committee.
Lord Vaux of Harrowden (CB)
My Lords, I too generally welcome the Bill, which makes a number of improvements to the pensions landscape. However, there are a few areas that I would like to raise.
I welcome the introduction of the new class of pensions: collective money purchase schemes, or CDCs. The ability to pool risks across members should bring real benefits, including potentially higher pensions than current defined contribution schemes can produce. However, I would strike a note of caution. I fear that these schemes are being seen as a replacement for defined benefit schemes, which they most emphatically are not.
First, as the noble Lord, Lord McKenzie, said, we must clearly understand that CDC schemes do not guarantee any particular level of pension but merely provide a target. More importantly, even once you start to receive your pension, the amounts paid each year are still not guaranteed and may go down as well as up. That is a fundamental difference compared with defined benefit schemes and annuities purchased under defined contribution schemes. Retirees will expect their pension to at least grow in line with inflation, but the experience in the Netherlands shows that that is not always the case. Indeed, none of the five largest Dutch schemes has managed to keep up with inflation over the last decade, and three of them have made cuts in nominal terms to the level of benefits. If we are to avoid scandal, this risk must be clearly communicated, with very clear health warnings when people sign up to a CDC, in any communication that includes a forecast, and when people are nearing retirement, so that they understand the risk that their pension is not a fixed and growing amount.
Secondly, the principal benefits from CDC schemes arise, as we have heard, from the pooling of risk. However, when risk is shared, there are inevitably winners and losers. As the noble Lord, Lord Sharkey, mentioned, it is important to ensure that we do not create further intergenerational unfairness. Because employers have no obligation to increase funding, a CDC scheme has only two ways of reacting to lower returns: cutting benefits for existing pensioners or raising contribution levels for employees, or a combination of both. It is always easier to push the problem into the future. This creates the risk that one group is favoured over another. Trustees and the regulator will need to ensure that risks and returns are not skewed against the younger generation to the benefit of pensioners, or indeed the other way around. It would be good if the Minister could comment on these issues.
The next part of the Bill strengthens the powers of the Pensions Regulator, especially in relation to corporate transactions, which is greatly to be welcomed. However, I cannot help feeling that there is a missed opportunity to do more here. Recent high-profile failures, such as Carillion and BHS, went under with significant pension fund deficits after shareholders had taken substantial sums out of the companies; for example, Carillion consistently paid out dividends in the range of £50 million to £75 million a year, while at the same time the pension deficit grew from less than £100 million to over £600 million. In the year to March 2018, FTSE 100 companies with DB schemes paid £84 billion in dividends, compared with £8.2 billion repairing their deficits—a ratio of over 10 times. For FTSE 350 companies with DB schemes, the median ratio of dividends to deficit reduction contributions is even higher, at 14.2 times, and is growing. The Pensions Regulator itself has said:
“We are concerned about the growing disparity between dividend growth and stable deficit reduction payments. Recent corporate failures have highlighted the risk of long recovery plans while payments to shareholders are excessive relative to deficit repair contributions.”
It would be tempting simply to prevent companies with pension fund deficits from paying dividends at all, but commercial reality is not that simple. Stopping a company paying dividends might actually make its financial position less stable as markets react badly and the cost of capital increases. Deficits can be short-term, and the payment of a dividend may have no material adverse impact on the position of the pension fund. We should also remember where dividends go; much goes into pension funds. There is a balance to find here. However, we could move that balance to strengthen the position of pension funds relative to shareholder returns. Clause 103 in Part 3 goes some way in this direction, but we could do more to safeguard scheme members.
The noble Lord, Lord Sharkey, mentioned the Bill that the noble Lord, Lord Balfe, introduced to make it a requirement for trustees and the regulator to approve the distribution of dividends, which I support. This important protection could easily be covered in this Bill, at least in part, simply by including the declaration of a dividend as a notifiable event under Clause 109, to be treated in the same way as any other relevant corporate transaction. I would welcome the thoughts of the Minister on this.
Related to this, we have heard about delegated powers in this Bill, but one that jumps out at me, where the Bill and the Explanatory Memorandum are somewhat less than clear, is what will actually constitute a notifiable event in Clause 109. The Explanatory Notes refer simply to,
“circumstances to be prescribed by regulations.”
It seems odd that such an important, even headline, element of the Bill is left completely to be dealt with by future regulation. It would clearly be better to put what is intended into the Bill. Perhaps the Minister could clarify what notifiable events will in fact include and why that cannot be included in the Bill. At least, could the regulations be published before Committee, as with those from Part 1, which she mentioned earlier?
My next point relates to pensions dashboards. I wholeheartedly welcome them. As someone who is rapidly approaching his crucial 55th birthday and trying to work out what to do about pension funds from various past employers, having all the information in one place will be of great benefit. In fact, I am probably one of the one in five to whom the noble Lord, Lord Sharkey, referred. My fear, however, is that those funds that are oldest and hardest to find will be the very ones that do not end up on the dashboard. How do the Government propose to ensure that all funds can be added to dashboards in a reasonable timescale? Also, importantly, will the state pension entitlements be included in the dashboard?
Finally, the Bill makes some welcome changes to transfer rights, but it does not address the important underlying issue of how transfer values themselves are calculated. I greatly recommend an article in the Sunday Times by Louise Cooper on 27 October, from the last time we were about to look at the Bill, which sets out the problem very clearly. She gives the example of a fund that will pay an inflation-linked pension of £4,000 a year. The transfer value that she was quoted from that fund for that £4,000 a year is £130,000. An annuity providing the same benefits would cost £240,000: nearly double the transfer value.
This chimes with my experience of looking into consolidating a small pension from an old DB scheme. The differences between transfer values and annuity prices are so large that, intuitively, someone must be profiteering here. While the law requires advice to be taken before the transfer of funds over £30,000, there seems to be no legal way to ensure fairness in respect of the transfer valuation itself—how it is calculated. I imagine that consumers may be losing out substantially. It would be good to hear the Minister’s thoughts on that as well.
Baroness Altmann (Con)
My Lords, I declare my interest as set out in the register of interests and warmly welcome my noble friend to the Front Bench on the Bill. I certainly agree that this is far more than a morsel: whoever called it that had not quite seen its scale. I warmly welcome it.
My remarks will be mostly framed from the perspective of members of pension schemes, customers of pension providers, and their interests, being future pensioners. Part 1 on collective defined contribution, is adding a new type of pension scheme with the concept of a target pension. As the noble Lords, Lord McKenzie and Lord Sharkey, mentioned, it is important that people realise that this is not one of the two current systems. It is not a money purchase system, where there is no guaranteed outcome and members shoulder all the investment risk and costs, whatever the final outcome. Nor is it a non-money purchase scheme, where there is some element of guarantee: either the traditional defined benefit with an assured lifetime pension income—although that can be reduced in the PPF—or the assurance of a lump sum payment, where employers bear some of the risk and the costs, beyond just their contributions.
The aim of this scheme is to ensure that employers know the limits of their liabilities. That means that the huge challenge with the CMPSs, as they will be called—we have added another acronym to our arsenal—will be communications to explain the lack of security that these schemes will provide.
The shouldering of investment risk and the intergenerational risks is vital for us to help members to understand. As with the Netherlands and Denmark, as the noble Lord, Lord Vaux, mentioned, CDC pensions can reduce when in payment. The risk is still on the worker. Although the scheme will bear the cost of the actuarial analyses, and will look after the management of investment choices and the decumulation options for some members if they stay, there are still residual risks. The Bill is not yet sufficiently robust on what regulatory protection there should be for members’ money. Of course, Royal Mail, which is expected to be the first scheme using this CDC structure, may be a powerful and well-resourced employer.
I am pleased that Clause 7 requires the authorisation of these schemes and that Clauses 11 to 17 suggest that there will be criteria but, as other noble Lords have said, we need to know what those criteria are and what attention will be paid to a situation where authorisation is withdrawn, as proposed in Clause 26. We also need to know what provisions we need to put in place at this stage if the scheme needs to wind up and members’ pensions must be raided to cover the costs of the wind-up, to make sure that members do not end up with no pension—as could happen in theory, although I hope not in practice. We need some more robust underpinning and assets set aside to cover the cost of a wind-up, or some kind of insurance could be embedded in the Pension Protection Fund.
Having seen this before, I know that there are risks. So what risk margins will be retained for future market falls? This is particularly relevant to Clause 25 where members will apparently have a right to transfer their benefits, but these are not accrued pension rights. They do not have accrued rights to an income. So what reserving requirements and risk margins need to be applied to members who want to transfer out on the basis of their rights to a particular portion of the fund today, which may then leave future members and those who do not transfer out—those who are trusting the scheme, if you like—at risk of having reduced pensions later on because those who transfer out today took more than they would ultimately have been entitled to?
Part 3 deals with the regulator’s powers. I fully support the idea of giving the regulator extra powers—its statutory duty to protect scheme benefits is certainly important—such as the power to intervene sooner and the power to demand information. At the moment, the regulator can ask for information but it must use its powers before it can require that, so I warmly welcome this measure.
The aim is to focus on forcing employers to fund these schemes in full but, as we have heard from the noble Lord, Lord Vaux, and others, the annuity cost of these schemes are way beyond the ongoing costs of running them. So the ongoing funding and the technical provisions of these schemes are well below what would be required in buying out with an annuity. Even certain billionaires have been allowed to walk away without meeting Section 75 debt. Just paying an initial starting pension means that the future pensions will be lower, which recognises some of the problems that exist in the annuity market today as a result of quantitative easing and its impact on the cost of buying so-called secure or risk-free long-term assets.
I support the aims, but perhaps my noble friend will consider whether we need to look at the issue of Section 75 debt as well because it is imposing draconian costs. I want particularly to raise the issue of the plumbing pension scheme. In this case, employers are being asked to pay money they do not have without selling their own homes and losing everything they have built up over their entire lives in order to fund Section 75 debts for an event that they were never warned about, which is their retirement and which apparently crystallised these debts, and yet the scheme is supposedly fully funded. There has been no deficit recovery and all the dues have been paid. I urge my noble friend to facilitate a meeting to discuss this issue and consider whether some of these problems can be dealt with in the Bill.
I fully support the aim of having a pensions dashboard, but I fear that the Government have severely underestimated the challenge facing the Money and Pensions Service in delivering any kind of comprehensive pensions dashboard. It needs to include charges and the information that members would actually like to see, as called for by Which?, but the Bill seems to imply that the Government believe that the existing regulatory framework will provide appropriate consumer protection. I have serious concerns about that. There are more than 12 pension regimes with different subsets of those regimes, legacy schemes which have guaranteed annuity rates, protected tax-free cash and death benefits. All of these need to be identified on a dashboard before members decide whether they want to transfer money or consolidate their benefits. We need to make provision for that.
There are masses of manual records in the depths of life assurance companies and pensions administrators, so I fear that the powerful financial institutions may not wholly support the dashboard, especially those which have bought closed books of past pensions. The cost of transferring millions of partial manual records on to a platform on an electronic database has not been adequately appreciated. I would therefore welcome my noble friend asking her department to consider mandating the simple statements that are currently being consulted on. These could be sent out to everyone in a standard format as the very minimum requirement to facilitate a comprehensive dashboard, regardless of whether they are immediately provided in an electronic format. The Money and Pensions Service could work together with the consultation team to make sure that a dashboard-compliant annual statement is produced so that the data can be merged. Of course, any commercial pensions dashboard needs to be properly regulated and authorised. I have severe concerns about this being used as a marketing tool, which may not be in the best interests of the members.
There is also the issue of DB funding and transfer rights, along with the allied problem of scams. Of course we must put duties on trustees and managers to facilitate transfers where members want them, but I support what the noble Lord, Lord Sharkey, was saying about how best to protect those members who have potentially fallen for a scam, which is usually the result of a cold call, against transferring their pensions out of the scheme and then regretting it later. Perhaps we could put conditions on the transfer rights that would ideally trigger an automatic referral to Pension Wise. Its representatives could go through questions with the individual to help identify whether it is likely to be a scam. Or, at the very least, it would require the trustees to ask those questions themselves, which to be fair are not that many, such as, “Are you trying to transfer out as the result of a cold call? Do you know the people who are recommending you to transfer? Do you know anything about the scheme that you want to transfer to?” Those would raise red flags and thus would immediately help to protect members from what we all want to ensure does not happen. We must not forget how many hundreds of billions of pounds of taxpayers’ money is in these pension schemes from the tax relief they receive over the years. That money was given to make sure we do not have problems of having to support poor pensioners.
I implore my noble friend to look at a couple of other issues dear to my heart; I know a number of other noble Lords have alluded to them. Number one is the problem of net pay pension schemes and whether we can put in this Bill a duty on trustees and the regulator to ensure that any member automatically enrolled in a pension scheme is enrolled in one that is suitable for them—in other words, not one that charges the lowest earners 25% extra for their pension, which a net pay pension scheme currently does. Finally, there is an issue with the National Health Service Pension Scheme. It might be worth pursuing whether we can look at putting any of this problem into this Bill to help sort out on the scheme-pays side for the NHS.
I stress that I welcome this Bill. I am delighted that we are looking at all the measures in it; it is a very large piece of legislation. I look forward to hearing from my noble friend and to discussing it further in Committee.
Baroness Drake (Lab)
My Lords, I draw attention to my interests in the register. I too welcome this Bill, but I believe that parts need strengthening.
The Pensions Regulator protects pensions from the moral hazard of employers avoiding their responsibilities, but the BHS and Carillion cases raise two questions of public interest to tackle today: is the regulator deploying its existing powers in an effective and timely manner, and are the powers in the regulator’s armoury sufficient to prevent employers avoiding their responsibilities?
The regulator’s recent activities have focused on using and testing the full range of existing powers. This Bill strengthens them—which is welcome—extending when an employer can be required to contribute money into a scheme, and enhancing powers to collect information and sanctioning those that mislead on corporate activities.
During the Work and Pensions Select Committee inquiry into BHS, documents from the regulator revealed that on 9 March 2015 the chair of trustees advised the regulator that they were still awaiting from the company information needed to make the moral hazard assessment. Two days later the company was sold.
Clause 107 introduces new civil and criminal sanctions. I welcome the Government’s intention to address what they describe as plundering by “reckless bosses”. But concerns have been expressed, including by the Association of Pension Lawyers, that a power designed to prevent future BHS and Carillion-type situations has been drawn incredibly widely, such that it could criminalise minor actions or ordinary business activities and expose third parties such as banks and even trade unions to sanctions, giving rise to consequences not properly considered. I certainly support stiffer sanctions, but these concerns should be probed, given the range and credibility of the people expressing them. Will the Government give consideration to the concerns expressed?
Part 5 provides for more enforceable scheme funding standards. One important supporting amendment—referenced by the noble Lord, Lord Vaux—was also captured well by the Government Actuary in evidence to the Work and Pensions Select Committee. The committee’s report said that
“the average ratio of deficit recovery contributions to dividends has declined”
over the last five years for FTSE 350 companies, meaning that more than half of these companies paid out
“Ten times more … to shareholders”
than to their DB pension scheme—largely due to the significant increase in dividends over the period, without a similar increase in contributions.
Financial technology can deliver a pensions dashboard and make a real difference to savers, finding their lost pots and allowing them to see in one place their total pensions savings, state and private, to assist them in making important decisions. A finder service could search the records of all schemes to identify data matched to an individual, which could be presented to the individual to view, transforming accessibility for more than 22 million people. But public good cannot be traded off against commercial interests. Notwithstanding future government decisions on commercial dashboards, there must be a public good dashboard, the governance, control and ownership of which must be with a public body.
The CEO of the Pensions Regulator appeared to be with me in that view, and he emphasised to the Work and Pensions Select Committee on 25 June 2019 that
“there must be a public dashboard.”
It would be extraordinary if the Government compelled all private, public and state schemes to release the data of over 22 million individuals and £7.6 trillion of pensions assets, when individuals can access their own data only in the commercial marketplace because the Government have denied them access to a safe space in a public good dashboard.
The public are with me on this. Surveys of public attitudes conducted by the Money Advice Service, the DWP, the ABI, ComRes and others all found that the public wanted an accessible public good dashboard, publicly owned, which they would trust more than a commercial dashboard. The DWP feasibility study on dashboards in December 2018 stated that
“evidence would suggest that starting with a single, non-commercial dashboard … is likely to reduce the potential for confusion and help to establish consumer trust.”
In April 2019, in response to the consultation, the Government altered their view and referred to simultaneous testing of commercial dashboards and an openness to further functionality, taking multiple dashboards beyond their initial find and view purpose. The impact assessment states:
“Option 2: Government to legislate: (the preferred option). Government supports the coordination of an industry-led dashboard … This will lead to the creation of dashboard service designed, developed and owned by industry, facilitated by Government”.
This is a remarkable statement. There is no public dashboard mentioned, only a commercially owned pensions “dashboard ecosystem”, with no limit on its functionality. There is a reference tucked away in paragraph 50 to the industry being expected to create a non-commercial dashboard—a loose expectation, undefined.
Equal in importance to ownership is consumer protection. The provisions in Part 4 are far too weak. As Which? argued in its briefing,
“it is absolutely crucial that there are strong regulations in place to prevent potential harm against consumers from the misuse of commercial dashboards by providers. The bill does not go far enough to mitigate against this harm, and should be amended.”
The Bill must establish a high bar for consumer protection at the heart of the dashboard which hardwires the best interests of the savers and the resolution of conflicts of interest in the sole interests of members and beneficiaries. Transactional dashboards should not be allowed without further legislation; they open up a new market, with very significant potential for consumer detriment. We need to understand market and consumer behaviour, with legislation being brought forward before dashboards become transactional.
As has been mentioned, there is also public interest in data standards, the information to be provided, how it is presented, who can hold it and how, and so on. A priority is getting schemes’ basic data fit for release—for many it is not—but demands for further information will come, such as where investments are held and whether they align with the Paris Agreement on climate change.
If the Government compel the release of the data of 20 million to 30 million individuals to commercially owned dashboards, while simultaneously denying the public the right to access their own data through a public good dashboard not owned by the industry, and failing to implement a tough consumer protection regime, then they will fail in their obligation to millions of people. The technology is great and it should be available to people, but in a way that protects their interests.
Efficient ways for workers to share risk are to be welcomed. The Bill allows these collective money purchase schemes to be set up by a single employer or group of connected employers. However, like master trusts, these CMPSs will have to meet a financial sustainability requirement and demonstrate that they have sufficient financial resources to run the scheme for a period of time in the event of a scheme failure, such as employer insolvency and a loss of contributing members, administrative failure or removal of authorisation. As the noble Baroness, Lady Altmann, referenced, it is important to probe how this protection will work and the extent to which the employer who set up the CMP scheme has to financially contribute to the sustainability requirement. This is the issue not of funding the benefits, but of resources to manage a potential failure in a CMP scheme.
I am conscious of the time, so I will be brief. I completely support the noble Baroness, Lady Altmann, in her campaigning on the way the tax system can really disadvantage not only consultants but a large number of low-paid women. I was disappointed that the Bill does not address the gender pension gap. I compliment her on the work she has done, but I want to raise an issue that I keep raising: I will take advantage of my last minute to do so again.
There should be a carer’s credit paid through the social security system towards a private pension, complementing the carer’s credit in the state pension system. Prior to the flat rate state pension introduced in 2016, carers were credited with entitlements in both the first-tier basic state pension and the second-tier state second pension. Now that the second-tier has been totally transferred to the private pension, carer’s credit should not be lost. Prior to 2016, public policy accepted that caring was an economic contribution credited for the first and second-tier pension. Until that crediting is rightly restored, our reforms will have disadvantaged carers.
Baroness Bowles of Berkhamsted (LD)
My Lords, I only very recently decided to speak on the Bill. Unfortunately, due to other commitments, I was unable to attend any of the meetings with the Minister—but that will be forthcoming in due course. But here are my initial thoughts on what I have found out so far as, I suppose, a newcomer to pensions.
I agree with all the Bill’s general intentions, but there are some areas where I do not think it has gone far enough and many where pensioners’ security will depend on regulations that we have very little policy guidance on, or reassurance about, in the Bill. I note that the Minister said that we will have illustrative regulations, but we need the shape of the policy and how far in the future those regulations can or cannot go outlined in the Bill. I hope that, once they are written, something can be adduced from them and reflected backwardly.
Collective money purchase schemes seem entirely sensible for well-known reasons that have already been explained. They enable longevity and other risks to be pooled, and they potentially allow a more consistent investment policy. That is the theory, at least, but it has to be recognised, especially in the potential case of smaller schemes, that the pooled advantages can be undermined by too many transfers out, or even the equivalent of a run by older members. What safeguards are there? Can the Minister say whether this will be kept under watch and count as an “event” to trigger the operation of some safeguards or a continuity plan?
It is clear that a person who has the power to take decisions under the scheme, or a trustee, can intervene to indicate that, for example, the fund should be wound up—but what if they do not give such an indication? How is the regulator to know and intervene; is it only through obtaining valuations and making directions under Clause 23, or are there other mechanisms that make sure that the regulator is well informed?
What is the role of the viability statement in this regard? Is it a specific matter to be reported to the regulator, and, if not, why not? Will schemes be expected to have provisions for lock-in periods or redemption windows? The questions now being asked about investment fund redemptions, following the run on the illiquid Woodford funds, are mirrored here—with the slant, as the noble Lord, Lord Sharkey, and others, have pointed out, that the older generation has the whip hand. I agree very much with the noble Baroness, Lady Altmann, that these new schemes are a halfway house. Something is missing, some kind of capital provision or buffer so that when there is trouble, there is something to call on, rather than seeing those still in the scheme left in the lurch by those old enough to do a runner.
Turning to penalties, I found 20 recitations to do with the new collective scheme, when only the small civil penalties under Section 10 of the Pensions Act 1995 can be invoked. Some of these things deserve greater penalties, especially if done repeatedly or deliberately: for example, not taking actuarial advice; not getting valuations; not carrying out a continuity strategy; not properly dealing with the discharge of liabilities and winding up; or not dealing with directions regarding failures. Seriously, should the maximum fines for what could be pretty egregious omissions really be just £5,000 for an individual or £50,000 for companies?
While researching, I looked at the recent fines levied on the regulator’s website. They were all smaller than the Section 10 maximums. I raised an eyebrow at the FCA pension scheme’s fine, but today’s Times says that the £2,000 fine is the highest possible fine for lack of information to members in a chair’s report. Irrespective of what fine the FCA merited, it is another pretty derisory maximum for what could be a serious lack of information provided to members. These fines are lower than the cost of taking advice on whether you have got your report right. What kind of incentive is it to get your report right?
Elsewhere in the Bill, there are new escalating fines for failing to provide information or allow site inspections. Of course, by that stage things will have got pretty serious, but should the escalating concept be widened for repeat offences and more serious matters related to the viability or stability of a scheme? Early warnings are key, before things get to notifiable or dangerous status. Also, can the Pensions Regulator remove persistent repeat offenders on the basis that they are no longer fit and proper persons? We found out from the FCA’s report on the GRG that removing people as fit and proper was not all that easy, because they put lots of other rules around it that were not necessarily infringed. So what is the situation with the Pensions Regulator and that possibility?
Going up in amounts, of course I note the new £1 million fine that the regulator will be able to apply in what are the worst instances of behaviour around deficit matters in defined benefit schemes, or providing false and misleading information. But this is way too small for all circumstances, given the deficits revealed with BHS—Philip Green eventually put back £363 million of the £571 million deficit, which was just about his dividends, but we are still way off—and £2.6 billion for Carillion. Last year, the UK’s direct benefit pension scheme deficit increased by another £60 billion to £260 billion. Companies with deficits are continuing to increase dividends significantly, without pro-rata repayment of deficit. I, too, welcome the initiative the noble Lord, Lord Balfe, is taking on this matter.
Against that background, £1 million looks like an affordable cost of doing business for larger organisations. I consider that it would be relevant to apply fines that match, for example, a multiple of the unpaid deficit, or based on turnover, such as the fines for offending against the GDPR or competition law. Putting employees’ pensions at risk or raiding the public purse via the Pension Protection Fund is egregious behaviour and deserves no less penalty than those other policy areas where larger fines can be levied. There are precedents beyond financial services, which are behind the game on what fines should be for egregious matters.
I realise that there are new criminal offences and there is always nervousness about them, especially by the people who probably never risk being caught by them. We have to try to make them work against the people we need to catch, but we know how difficult it can be to prove mens rea in the collective decision-making of the corporate environment. Frankly, I think that prosecutors and judges can recognise wrongdoing when they see it and so I do not take so strongly as the noble Baroness, Lady Drake, the cautions in this regard.
Finally, I come to the pensions dashboard. Yes, it is a good idea to have somewhere where you can access all your information. I have already done some of the voluntary ones on platforms where I have got pensions—I have filled things in and got things popping out at the other end—but, in the longer term, there are lots of ideas around these things that we are thinking of. There is the nudge effect that such dashboards can have on encouraging more savings into pensions. Commercial platforms enabling you to act on the nudge may well be more successful than just getting a message to save more somewhere. For example, it may turn out that banks are better placed to nudge regularly as people log-in online to banks more frequently, and there is already the open banking experience to model upon.
The noble Baroness, Lady Drake, is right: we have to take great care when we introduce any kind of transactional dashboard. Even before that, whatever the rules say, once there is a dashboard other people will come along with their dashboard, which may not be a qualifying dashboard. So we have to make sure that we can catch scammers and other dashboards where you catch your own data, because they will not fall within the rules of a non-qualifying platform.
You cannot rely on entities being regulated. We have had plenty of experience of highly regulated entities, such as banks, where wrongdoing has not been caught because the activity itself was not regulated. For example, again with GRG, the FCA report says that it was unable to act against bankers because the activity of commercial lending is unregulated. So the only way to catch perpetrators who in some way abuse the concept of dashboards is for dashboard activity—whatever it is in a wider sense—to be regulated in a widely defined way so that regulators can act. It is just too risky to leave wriggle room with matters as precious as people’s pensions.
Lord Young of Cookham (Con)
My Lords, I wish to make a brief contribution to this Second Reading debate and, like others, I welcome the provisions in the Bill. I wish my noble friend well in piloting it through your Lordships’ House and commend her and her department for the briefing with which they have provided us.
It may be my noble friend’s first pensions Bill but I hope she will not mind if I tell her that I first spoke on a pensions Bill on 18 March 1975. The Bill was Barbara Castle’s Social Security Pensions Bill and the Opposition spokesmen were the now noble Lord, Lord Fowler, and Mr Kenneth Clarke. I must have been the Whip on the Bill, and reading my Second Reading speech, I was clearly a pretty obnoxious young man, haranguing Barbara Castle as follows:
“As a generation we have the collective effrontery to insist that our children make sacrifices on our behalf, on a scale that we are not prepared to make on behalf of the elderly today.”—[Official Report, Commons, 18/3/1975; col. 1538.]
I went on:
“If the benefits which she has promised are forthcoming, it is not she whom we ought to thank but the future generations, as yet unborn, who have been committed by her to a level of contributions that we are not prepared to pay ourselves.”
My parting shot at Barbara Castle was:
“I leave the Minister with this thought. How sad it would be if, in order to meet the contributions that future generations will have to make, the retirement age had to be raised to generate the necessary income.”—[Official Report, Commons, 18/3/1975; col. 1540.]
That was an accurate prediction of what has in fact happened.
Forty-four years later, and a beneficiary of that Bill, I want to focus my remarks on Part 4, dealing with the pensions dashboard. Like other noble Lords, I welcome putting this on a statutory footing and placing a requirement for pension schemes to provide information for the dashboard. Most people make inadequate provision for their old age, despite the success of auto-enrolment, and this is particularly true of young people. The excellent briefing by Which? for this debate showed that half of those over 50 and still in employment are not sure of the value of their pension savings, one-third find it difficult to keep track of their pension pots and one-fifth have never checked. The dashboard will bring home to people at the flick of a mouse what their entitlement will be and perhaps cause them to think seriously about whether that will suffice. Perhaps the dashboard might have some options indicating what that individual’s contributions would need to be if they wanted to retire on today’s salary.
I have a few queries, which my noble friend might like to address in a letter if that is more convenient. Over the weekend, I logged on to the Pensions Dashboard Prototype Project, which I found informative, but right at the end it said:
“The industry and government hope to have Pensions Dashboard services ready by 2019.”
That sounds as if folk will already be able to access the service, but they cannot.
Reading the response to the consultation document, we are told:
“Once the supporting infrastructure and consumer protections are in place, and data standards and security are assured, most pension schemes should be ready to provide consumer’s information to them within three to four years.”
Even that rather long timescale is qualified by the words “most” and “should”. This project has been on the stocks for some time, and I wonder whether we really have to wait that long for this. If we do, perhaps somebody might amend the wording on the website as it is seriously misleading.
My second query is about the identity service referred to in Clause 119(3). The government response says:
“Before the pension search can take place, the identity service will authenticate the user to an accepted standard.”
The Explanatory Notes state:
“For example, the regulations may provide that ID verification must be completed before any information is provided”.
As I understand it, that means one has to register with a service such as Verify in order to get the digital key that unlocks access to this new service.
Last year, the NAO issued a very critical report on Verify:
“GDS reported a verification success rate of 48% at the beginning of February 2019, against a 2015 projection of 90%.”
GDS is the Government Digital Service. I tried to access Verify and was rejected by two before I succeeded with the third of the six private sector authenticators. Government support for Verify ends this March, with the hope that the private sector will take over. Is my noble friend satisfied that those who want to access the dashboard will not be deterred by the at times cumbersome and unreliable identity services?
My third query is about the many pension schemes where the widow, widower or partner has benefits when the principal beneficiary dies. Will those “secondary” beneficiaries be able to access their entitlement under the principal’s scheme both before and after the principal has died? If the objective is to give people a good idea of what their pension will be and whether they need to make additional provision, that information is essential if they are to get a complete picture. There may be data protection issues, but I think that this issue needs addressing and I hope that my noble friend will be able to say something about it.
It is not clear—this point was raised by my noble friend Lady Altmann—whether the information will include charges and income projection figures. To be meaningful, both should be included. Presumably, schemes will not be able to make their own heroic assumptions about projections. Can the Minister confirm that there will be a standardised methodology for projections?
Next, equity release is becoming an increasingly important component of retirement planning. A person’s equity might be worth far more than their pension pot and be capable of providing an income stream in retirement. I do not want to suggest anything that might slow down the rollout of the dashboard, but is it being configured in such a way that it will be possible downstream to incorporate the savings locked up in equity as well as the savings locked up in the pension pot, together with potential income streams?
My final query relates to the use of “pensions dashboards” in the plural—a point raised by other noble Lords. If I were mischievous, I would table an amendment to delete “dashboards” and insert “dashboard” in the singular in Clause 118. I assume, incidentally, that there will be no charge for access to any dashboard, and perhaps that might be made explicit in the Bill.
As a Conservative, I am in favour of competition and choice, but I asked myself why we need more than one dashboard, particularly as under Clause 122 the Money and Pensions Service will be obliged to provide one itself. Of course, the same information will be available to all dashboards, and designing and setting one up will involve providers in considerable expense, with no revenue. The excellent Library briefing refers to the industry’s concern about the costs of establishing a dashboard.
I see a parallel with the directory enquiry service. That was abolished in 2003 and replaced with a bewildering array of no less than 20 118 schemes. I am not convinced that competition and plurality has always been a worthwhile innovation. Any mischief on my part might be avoided if any dashboard had to be regulated by the FCA—as suggested by the noble Baroness, Lady Drake—to make sure that it was compliant.
As a postscript, can my noble friend shed some light on the recent support of the Pensions Minister for a new pensions commission, as suggested by the Fabian Society and Bright Blue?
Having said all that, I welcome the Bill and hope that it might reach the statute book before too long.
Lord Hain (Lab)
My Lords, we always welcome the contributions of the noble Lord, Lord Young of Cookham. I say that we all do but I am not sure that that is always the case with his Front Bench, which he occupied with distinction. He is very fortunate that Barbara Castle is not present to reply to him in her normal robust fashion.
I refer to the Members’ register in welcoming the Second Reading of this Bill, especially having been Secretary of State for Work and Pensions in 2007-08. Its provision for collective defined contribution—CDC—schemes is a step forwards in addressing the UK’s growing pensions crisis.
Individual, as opposed to collective, defined contribution schemes are now the default for occupational pensions, but these individual DC schemes are characterised by inadequate contribution rates and uncertain outcomes that completely fail to provide a decent standard of living in retirement. The average total contribution rate for an individual defined contribution scheme is just 5% of pensionable earnings, and the average pension pot is £50,000, which would give an annual income of just £2,500 a year. That is nowhere near enough to live on, and experts are saying that we should save at least 13% of our income from the age of 25. By comparison, average contribution rates for defined benefit—DB—schemes are far higher, at nearly 26% of earnings, compared with 5%.
Fresh impetus was given to the push for collective defined contribution pension schemes when Royal Mail and the Communication Workers Union agreed in February 2018 that they would seek to introduce a CDC pension scheme for Royal Mail’s 143,000 employees. I commend Royal Mail and the CWU for their efforts in working closely together to pursue this new “third way” pension scheme, which, as CWU national officer Terry Pullinger said at the time of the agreement, would
“secure our members’ future employment, standard of living and retirement security”.
Nobody pretends that CDC is some silver bullet, as the noble Baroness, Lady Altmann, pointed out so succinctly; indeed the Royal Society for the Encouragement of Arts, Manufactures and Commerce has recently published an excellent analysis, which I hope the Minister will read, highlighting some of the specific issues of concern that all CDC schemes must address. But there is widespread recognition that CDC schemes can provide greater certainty about retirement outcomes than is possible in traditional individual defined contribution schemes.
When in 2018 the CWU secured this ground-breaking deal with Royal Mail to introduce a CDC scheme after the company closed its defined benefit scheme to future accrual due to rising deficit costs, the union had fought to save the DB scheme, but, with the deficit repayments increasing from £400 million to £1 billion a year, they had no choice but to discuss alternatives.
The agreement opens the way for new collective pension schemes to be rolled out across the UK with the help of this Bill. It shows how elements of defined benefit can be linked to CDC because it includes a defined benefit cash balance fund that will provide guaranteed lump sums for members. In pushing for this deal, the union saw a clear need to do something to improve pension provision for all its members, 80,000 of whom were in the company’s defined benefit scheme and 40,000 in the defined contributions scheme. The DB scheme was closed to new entrants in 2008. Most DC scheme members were on the base contribution level, which was very low, and most were in the younger age bracket, so there was a question of generational fairness and making sure that younger employees had access to a decent pension scheme. There was also the need for the CWU to protect those who were in the defined benefit scheme, as moving them on to the defined contribution scheme would have substantially reduced their expected benefits.
Although a CDC scheme provides for a target rather than a guaranteed pension benefit—a point made by other noble Lords and Baronesses—modelling shows that the Royal Mail CDC scheme would hugely outperform the individual defined contribution scheme and could even deliver the kinds of benefits that would have been expected under DB.
It is important to understand why CDC schemes, at least of the kind negotiated between the CWU and Royal Mail in 2018, have clear advantages over individual DC schemes. First, they allow savers to pool their risk, which enables higher yield investment strategies and better returns. Studies have shown that CDC schemes can generate a pension that is up to 39% higher than a traditional DC scheme. Evidence from other countries—such as the Netherlands, as has been mentioned, where CDC schemes are widespread—clearly demonstrates that CDC schemes offer a better alternative to DC schemes. Secondly, collective pensions are subject to less volatility than individual pensions, making them far more predictable. They also avoid the need for an annuity or draw-down, which reduces costs and avoids difficult and often stressful decisions for savers about how to invest their funds. It is no secret that the guarantees associated with annuities are expensive and consumers often receive a poor deal when choosing them.
There has been some resistance to these plans from those with a vested interest in selling DC products, of course. They say that CDC schemes could run counter to the trend towards individual freedom and choice in pensions, but the evidence suggests that the majority of scheme members do not want the responsibility of managing their savings pot when they come to retire, or the uncertainty that comes with it. I certainly would not want that. Most savers just want financial security with the guarantee of a pension income for life, and that is what CDC offers.
Of course, there are also benefits for employers because CDC schemes avoid the risk of large, long-term pension liabilities on their balance sheets. Defined benefit schemes remain the gold standard for occupational pension provision and should be defended as far as possible. Sadly, however, DB schemes have been closing at an alarming rate over the last decade as companies have sought to cut costs. There has also been a total lack of innovation in the pensions space. The only show in town has been inadequate defined contribution —DC—schemes. If they remain the norm, and the Government, with business, do nothing, the state—which means the taxpayer—will begin incurring multi-billion costs in future to save millions of elderly citizens from abject destitution.
As the CWU’s Terry Pullinger has explained, in the Royal Mail we have a generation of people fast approaching 40 years of age who do not own any property and have little or no pension provision. It is a social car crash waiting to happen and, if not addressed, will leave an entire generation facing poverty in old age with total reliance on the state.
Research by the TUC has found that a typical DC saver could be £5,000 a year poorer in their old age if they retire after a bad period of investment returns for pension funds rather than in a good period. The benefits of scale and pooling of investment and longevity risk in CDC schemes are clear; modelling by the highly respected Pensions Policy Institute likewise confirms that, over the long term, CDC produces better outcomes than individual DC schemes.
Overt measures have been taken in the design of the Royal Mail scheme to ensure that there is no deliberate saving up of a capital buffer which would represent money paid in by one generation that is held back from that generation’s benefit provision. While there will inevitably be variations across generations, Royal Mail and the CWU have worked to ensure that these are only the product of varying circumstances rather than an inherent bias.
Furthermore, the legislation before us is drafted in such a way as to ensure that CDC schemes are governed within a strict regulatory structure and implemented only once a clear governance and disclosure framework is put in place. This regulatory framework is vital in providing savers with full confidence in this new type of scheme. There is an indisputable case for enabling CDC schemes through legislation and encouraging their take-up as an alternative, at least to DC pensions. That is why it is welcome that the Bill sets out not only how Royal Mail and the CWU can progress with their CDC scheme, but also how other companies could follow suit.
As the CWU has said, this scheme will drive pension innovation for current and future generations of working people, and will resurrect the principle of dignity and security in retirement. Royal Assent to this Bill is needed as early as possible. Can the Minister in replying please say when exactly that is expected to occur?
CDC schemes offer a third way forward, which has been recognised by one of our largest employers, Royal Mail, and one of our largest trade unions, the CWU. If we get this legislation right and enable the establishment of these schemes, I believe that they could offer a positive way forward for many other employers, as well as unions.
Baroness Neville-Rolfe (Con)
My Lords, I always welcome the contribution of the noble Lord, Lord Hain, who likes to call a spade a spade. He is right to say that everyone should be encouraged to save more, especially in pensions, as they represent such a favourable form of saving.
I thank my noble friend Lady Stedman-Scott for her summary of the Bill. She used to be my Whip, and I can think of nobody more kindly and more helpful. It is a tribute to her ability that this Bill has started in this House. Her experience in the charitable sector, her openness—on which everyone has commented—and her readiness to tackle the nitty-gritty are just what is needed today. I look forward to helping her make any necessary improvements.
This is a very complicated subject and I will deal with only a few issues, which unfortunately involves leaving many important ones unmentioned by me.
The truth is that pensions legislation has a rocky past, from which we must learn. The combination of long timescales, complexity and unexpected changes in the market and in demography has been disastrous. In the 1980s, the Government promoted private pensions —a good idea in principle. However, the selling was largely unregulated and, as a consequence, a substantial number of teachers and nurses were persuaded to relinquish their state-financed final salary pensions.
In the 1990s, Robert Maxwell dealt with his financing difficulties by borrowing money from the Mirror pension funds, and he came to a sticky end. When the markets were strong, pension funds did well, but there was a rule that you could not keep more than a certain surplus in a pension fund so a number of companies gave staff pension holidays instead of saving such surpluses for a rainy day. The rain came with the arrival of Gordon Brown, who made a substantial raid on the pension funds, arguably setting them up for later failure.
I was responsible for pensions when I was an executive at Tesco, and I used to have cups of tea with Frank Field as we both felt that private provision for all company staff was a marvellous benefit. The pensions cap that limited payouts to senior staff perversely encouraged executives to wind down the favourable final-salary pensions and to reduce corporate contributions to all employees.
One of the positive changes in this sorry story has been auto-enrolment, which makes young people save for a pension with a match from their employers. In its time, that was very unpopular, especially with small business, but I believe it was right. As the noble Lord, Lord Sharkey, said, it has boosted the pension prospects of 10 million people in just seven years.
Today I shall mention just two aspects of the Bill and one omission. The first aspect is the introduction of collective money purchase schemes. I strongly support this as it will remove the unhappy choice between, on the one hand, defined benefit schemes that are unaffordable and, on the other, defined contribution schemes that put most of the risk on the individual. Savers pool their money into a single fund and share the risks of longevity and investing. As we have heard, this will help the Royal Mail, whose workers now face huge challenges as online life replaces the letter and the stamp. However, I will want to question the Minister on the potential danger of the transfer of DB scheme members to collective money purchase, possibly leading to pension providers reneging on their promises, as highlighted by the Institute and Faculty of Actuaries.
The second aspect is the requirement for pensions dashboards. With employment patterns changing, many people have several small pots and find it very difficult to keep track of them. Dashboards would allow people to see how much they could expect on retirement and to prepare better, by putting more money aside where they can—for example, through tax-free ISAs—or indeed working for longer. When the Tesco scheme was established, the average beneficiary lived until 62.
The pensions dashboard is a great digital idea. Matt Hancock would be proud of it. However, there is another problem that we will have to debate in Committee: the substantial cost, and whether that is borne by employees, employers or other beneficiaries. I have to say that the impact assessment for the Bill is impressively fat, but, unfortunately, it is difficult to understand. The various dashboard costs appear to me to tot up to well over £1 billion, which is a lot of money. We must try to keep that cost down. Can we work up a single, secure and simple dashboard system in order to do so? Is this another area where we could see a draft statutory instrument and debate the options? And is there a case for some state help for the smallest and poorest schemes? The noble and, if I may say so, expert Baroness, Lady Drake, also made some good points about the dashboards that I think need to be addressed and discussed.
I also listened to the noble Baroness on the subject of sanctions. I would like to express some doubts about the scale and nature of penalties. I think the noble Baroness, Lady Bowles, needs to listen to the Minister on this. Most pension schemes are well run and well managed. Indeed, I fear that increasing penalties, especially increasing them more than proposed, could deter respectable people from becoming trustees or entering the pensions industry. That would obviously be another perverse effect.
My final point relates to the omission in the Bill of any remedy to tackle the problem of the pension cap for professionals, notably in the health sector. This Treasury-inspired cap is leading to many GPs and hospital doctors retiring early and/or refusing to work extra hours. I understand that there has been a short-term interim fix, but my doctor friends tell me that it has introduced other disincentives. I know this is not within the Minister’s remit, but will she undertake to talk to the Treasury and write to us about this whole issue before Committee? That is just in case we need to use this Bill to help the Government to solve this appalling problem.
Baroness Warwick of Undercliffe (Lab)
My Lords, I declare my interest as a board member of the Pension Protection Fund, which protects the pensions of employees in defined benefit schemes when their employers go bust and cannot pay their pensions.
Looking at this Bill from a defined benefit perspective, I find much to support. I shall touch on four topics: the DB scheme funding code; TPR’s anti-avoidance powers; the pensions dashboard; and some areas that I believe require further consideration.
Before diving into the detail, it is worth stepping back for a moment and making two broader observations. First, the Bill looks to build on and improve the defined benefit landscape rather than radically reshape it. In broad terms, it confirms that the settlement established by the Pensions Act 2004, which created the regulator and the PPF, has stood the test of time.
Secondly, it is of course right that we need to focus on how we can further improve outcomes and strengthen member protections, but it is worth saying loudly that, compared to pre-2004 days, DB scheme members are considerably better protected today, thanks to the Pension Protection Fund. Before 2004, your holiday was better protected than your pension. There was no safety net for DB scheme members in the event of employer insolvency. In some cases, that meant heavy reductions on their promised benefits; some faced real hardship in retirement. In some ways, it is a shame that memories of the pre-PPF days have now largely faded, but it speaks volumes for the quiet achievement of the PPF. BHS is an example: if PPF had not existed, members of the pension scheme would have faced dramatic reductions on what they had been promised. Today, PPF provides safe harbour for over 250,000 members and its compensation can make a huge difference to many people’s lives. I hope the Minister will join me in recognising the valuable protection that it provides and its role as a force for good.
Turning to the Bill itself, I welcome the measures to review and improve the DB scheme funding regime. Striking the right balance between sponsor affordability and member protection is of course easier to say than do, and as we go through the Bill we will undoubtedly find that the devil is in the detail. Having said that, we should be careful in guarding against the new scheme funding code being seen as an opportunity to increase flexibilities or to ease up on closing down funding shortfalls. The majority of DB schemes still remain in deficit. Flexibility is of course essential, given the range of circumstances facing schemes and employers in the DB universe, but recent experience has shown that, if anything, that very flexibility has in some cases been inappropriately used. Take Carillion: senior managers apparently viewed contributions to the pension schemes as a “waste of money” to be ranked below dividends to shareholders.
If we are to ensure members are not exposed to unnecessary risks, now is not the time for schemes and sponsors to take their foot off the gas. It is vital that the new code results in schemes closing their deficits within reasonable timeframes, prevents excessive recovery plans on the basis of current covenant strength and ensures schemes are given equitable treatment with other financial stakeholders.
I also welcome the provisions to further enhance TPR’s anti-avoidance powers. The regulator must have the right tools in its armoury so it can be proactive in preventing detriment to pension schemes. While it already has an array of powers, these targeted enhancements may help deter potential wrongdoing and are useful for TPR to have in its back pocket. I suspect that these provisions are likely to be needed only in extremis, if at all. They are, one would hope, for use in only exceptional cases, not in relation to the vast majority of sponsors and schemes which do the right thing by their members.
As other speakers have said, the pensions dashboard is an important innovation. For too many savers, pensions can be confusing and difficult to understand. Added to this, many savers have multiple pension pots and keeping track of these can be difficult. Therefore, I welcome the underlying ambition to enable people to better engage with their pension savings through digital channels, while very much endorsing the cautionary points made by my noble friend Lady Drake.
Having welcomed a lot in this Bill, I cannot help but identify some notable omissions. There are two areas which are not currently covered by the Bill but which are important to draw out briefly in the context of this debate. First, in relation to commercial consolidation vehicles, the current DB legislative and regulatory framework as set out in the 2004 Act was predicated on a continuing link between scheme and sponsor. The emergence of the consolidator model challenges this. Well-run consolidators could be beneficial, offering a route to improved security for scheme members. Equally, they also present significant new potential risks, particularly to PPF members and levy payers. To manage these, a new legislative and regulatory framework will certainly be required. However, I recognise that this is relatively new and fast-evolving territory and it is important to get it right, so it is understandable that provisions are not currently contained in the Bill.
The second area relates to PPF compensation. The Bill contains measures intended to address the outcome of the Beaton case. I would appreciate it if the Minister could say whether she expects there will similarly need to be legislative clarity in relation to the Hampshire case in due course.
Pension freedoms are a further area of interest for us as policymakers and for scheme members. Since 2015, something like 160,000 members have opted out of their DB schemes. Some were required to take independent legal advice. There are growing concerns about the advice they received. For example, in the case of British Steel in 2017, it is clear that some members were given poor advice. It may not be a matter specifically for this Bill but, given its scale and impact, it is something we must address.
Baroness Noakes (Con)
My Lords, it is some time since I have spoken on a pensions Bill. Indeed, I think the last occasion may well have been when the noble Lord, Lord McKenzie of Luton, was sitting in the place now occupied by my noble friend the Minister and I was sitting where the noble Lord now sits. I particularly recall many hours late into the night spent debating the powers of the Pensions Regulator in the Pensions Act 2008. I shall return to that when I speak about Part 3 later in my speech.
I shall start with collective defined contribution schemes. These account for more than half the pages in this quite long Bill. We are promised large volumes of delegated legislation to follow. I have no particular objection to CDC schemes, but the plain fact is that this extraordinarily complex legislation is being introduced to accommodate just one employer, namely Royal Mail. Despite a wide-ranging consultation and exposure in the specialist media, there has been absolutely no other corporate interest in CDC schemes. Other private sector companies have transitioned in whole or in part from their DB schemes unaided and it is far from clear to me that this is a good use of government and parliamentary time.
Nevertheless, now that we have the Bill, I would like to raise one question with the Minister. The Government have been clear that they wish to ensure that pension freedoms are available to members of CDC schemes as they are to members of other schemes. At one level, that sounds perfectly okay, but I am concerned about the impact that this might have on the notion of shared risk, which is an intrinsic part of CDC schemes. My particular focus is on longevity risk.
Pension freedoms are not always used wisely, but one clear beneficial use case—it applies even to defined benefit schemes—concerns members whose health status means that they can do better by removing their funds and purchasing an impaired life annuity. If members of CDC schemes in this situation acted rationally and took their share of the assets out of the scheme, that could well disadvantage the remaining members. The average life expectancy of those remaining would increase and, all other things being equal, the benefits payable to them would reduce. Are the Government comfortable with this outcome, in effect allowing selective risk-sharing under this new arrangement? This is a subset of the wider issue of intergenerational fairness, which has been raised by other noble Lords, including the noble Lord, Lord Sharkey.
I now turn to Part 3 and the Pensions Regulator. I thank the Association of Pension Lawyers for its analysis of the new offences, which I know has already been provided to the Minister’s officials. Very briefly, its concerns relate to the scope of the new criminal offences set out in Clause 107, the meaning of “likelihood” and “materiality” in that clause, and the way in which the reasonable excuse defence will work.
When the Government first announced these new offences, they were explained in terms of people running their companies into the ground. It often happens that, when legal draftsmen get to work, an intuitively reasonable proposal ends up being so wide that it can trap the unwary. The issues that have been raised are serious and I hope the Minister will be able to allay the fears expressed. In doing so, I hope that she will not simply fall back on the courts acting reasonably in interpreting the new offences. If we have to wait until we get a body of case law, which could take a decade or more, that will mean major uncertainty for the business community.
I have a separate question for the Minister on Part 3, concerning the new financial penalties of up to £1 million in Clause 115. I support the principle of the Pensions Regulator being able to take swift action, but such powers carry dangers, especially when used against those concerned with the pension funds of smaller companies. I would like to understand what checks and balances exist within the system to ensure that this power is used in a proportionate way. Can a person in receipt of a financial penalty challenge the Pensions Regulator? Will there be an opportunity for an appeal to an independent body? This is particularly important because the invocation of the penalty powers involves several key judgments, including materiality and likelihood, just like the criminal offences, but there is no court to interpret them. The Minister will know that something more accessible than judicial review is needed because in practice that is simply not available for those with limited resources.
My last topic is the pensions dashboard in Part 4. I have to say that this is at best a half-baked policy. We have no idea exactly how this will work. Part 4 is littered with rule-making powers which may well tell us in due course what is involved. The impact assessment has a huge range of potential costs between £0.5 billion and £2 billion over 10 years. My noble friend Lady Neville-Rolfe referred to the figure of £1 billion, but it is over £2 billion if you take the set-up costs and the ongoing costs over the first 10 years. If this were a business proposition, it would be sent away and told not to come back until the costs and precise impacts had been precisely worked up. Furthermore, benefits have not been clearly identified and the impact assessment admits that the behavioural impacts are “highly uncertain”. I do not doubt that having 10 or 11 jobs over a working life means that keeping track of pension entitlements is a problem. But I am far from clear that the dashboard is the answer and we are no further forward in giving people access to advice, as opposed to guidance, on what to do when faced with the information that the dashboard contains.
I have long thought that a more sensible approach would be to facilitate the consolidation of pension pots, which means tackling the cost and bureaucracy involved when people attempt to do that for themselves. Switching bank accounts has been made pain free for consumers but there has been no equivalent for pensions. I completely accept that the issues are far more complex for pensions than for bank accounts; equally, the industry has no real interest in solving this problem. The Government would be doing pension savers a great service if they set their sights a bit higher than this dashboard.
Baroness Donaghy (Lab)
My Lords, it is always a pleasure to follow the noble Baroness, Lady Noakes. I suspect that she is correct about CDCs, but if they had not been put in the Bill, there would not have been a Bill. This is possibly a case of the tail wagging the dog, but at least we have an opportunity to deal with other important aspects of pensions.
I thank the Minister for her presentation of this Second Reading, which she did in her usual frank and open-handed way. I am not the first person to say that, but I see no harm in saying it again. She accepts that the Bill is limited in its objectives. We are used to skeleton framework Bills from successive Conservative Governments. I can only add to the plea that we are given as much information as possible before Committee if we are to keep the number of amendments to a manageable amount and have sensible discussion. The Bill needs to be set in the context of the wider issues of pensions and the inequality of pensions provision, as well as being about dashboards, CDCs and auto-enrolment.
On CDCs, briefly, they have attracted support from both sides of industry. The scheme agreed between the Royal Mail and the CWU, the communications union, appears to be potentially reasonably good, but let us not forget that it was done in the context of the decision to close the defined benefit scheme. The union was faced with the harsh reality of today’s pension jungle, so it represents some security for employees. CDCs could give a better outcome than other schemes, such as defined contribution schemes, but I echo what others have said about the importance of informing employees in the pension scheme that these schemes are not guaranteed and that pension amounts could go down as well as up. How will workers be made aware of this? How can we be assured that CDCs do not represent the death knell for defined benefit schemes, and how will intergenerational unfairness be dealt with? Does the Minister agree that CDC pension schemes could have a negative impact on members of defined benefit schemes? It is clearly not for me to oppose such a scheme when it has been negotiated in good faith by Royal Mail and the CWU, but I hope that the Minister will be able to reply to some of my questions on and clear reservations about the uncertainties surrounding this pension option.
Nowhere in our unequal society is inequality so stark and shocking as in the area of pensions. According to the Money and Pensions Service, 22 million people say that they do not know enough to plan for their retirement, while the OECD places the UK well down the rankings of G20 countries—behind France, Norway and many others. The Money and Pensions Service went on to say:
“Financial wellbeing is about feeling secure and in control”
and that poor financial well-being affects mental and physical health and relationships. Examples of inequality are the huge gaps in protection for the self-employed, those working in the gig economy and those excluded from auto-enrolment, and those who, for whatever reason, do not take up the pension credit to which they are entitled. Almost 2 million older people aged 65 and over are living in poverty in the UK. Independent Age has been asking the Government to set out an action plan to improve the take-up of pension credit. More than two in five of the pensioner households which are entitled to pension credit do not receive it. The Explanatory Notes refer to the Government’s commitment to help people with better planning for retirement and for achieving financial security in their later life. What better way could there be than ensuring that the 1.3 million pensioners who miss out on £3.5 billion every year actually receive their entitlement? I echo the question asked by Independent Age: what is the Government’s action plan to improve the take-up of pension credits?
So much has already been said about the pensions dashboard. I favour having one publicly funded pensions dashboard, but I do not think that the Government are looking that way. How will they ensure data quality and the protection of privacy in multi schemes? The director of policy at The People’s Pension has said:
“if the government continues to promote multiple dashboards it’s imperative that a legal duty to operate in the best interests of savers is placed on all … operators.”
Will the Government agree to such a legal duty?
As the noble Lord, Lord Young, said, Which? has called on the Government to clarify that it is their intention for dashboards to include pension charges and income projection figures at the earliest opportunity. This is too important to be left to secondary legislation and the Financial Conduct Authority. As Which? stated, the Government recently proposed including charges on annual statements; the same principle should apply to dashboards. Although Which? supports in principle the proposals for commercial dashboards, it has said that it is absolutely crucial that there are strong regulations in place. It calls on the Government to make the provision of a pensions dashboard a regulated activity, to ensure that providers are authorised and subject to the FCA’s complaints-handling rules.
It is in everyone’s interest to get this right. According to the Association of British Insurers, it is estimated that £19.4 billion is held in pots that consumers have lost track of. The DWP—the Minister’s own department—estimates that, without a dashboard, 50 million pension pots will be lost or dormant by 2050, leaving people wide open to frauds and scams. In 2017, the victims of pension scams lost £91,000 each to fraudsters.
On the subject of auto-enrolment, I did not expect the Government to address the injustices done to women born in the 1950s, who lost thousands of pounds in pension payments, nor did I expect them to deal with pension equality between men and women— that would be very nice and I deplore the fact that it is not in the Bill, but I did not expect it. What I did expect is a boost to the auto-enrolment system. As my noble friend Lord McKenzie said, the Government should include an increase in auto-enrolment minimum contribution rates. They should support those in multiple occupations, so common in the gig economy, so that their collective earnings can be counted towards eligibility for auto-enrolment. They should expand auto-enrolment to include the self-employed, allow 18 year-olds to join and remove the lower earnings limit, which in turn would solve the problem in relation to multiple occupations. This would lead to an additional £2.5 billion in savings. What plans do the Government have for auto-enrolment?
Finally, I am fortunate that I have two modest public service pensions and a state pension. I always assumed when I was working that things would get even better. Looking at today’s pensions landscape does not fill me with great confidence. However, there is much to discuss, and I look forward to Committee stage.
Lord Kirkhope of Harrogate (Con)
My Lords, I want to make just a short contribution to this debate, looking mostly at the provisions and powers relating to the functions of the Pensions Regulator. I declare my interest in doing so as a pension trustee for a UK company scheme.
I support the proposals generally and the emphasis on the need for faster responses to deal particularly with reckless or irresponsible behaviour by employers and, as my noble friend the Minister said in her introduction, certainly to look at “serious wrongdoing” and tackle it. I agree with her on that. We have all seen examples of bad behaviour which have resulted in pension schemes being put at serious risk by deliberate acts or omissions.
In the 2018 consultation paper Protecting Defined Benefit Pension Schemes–A Stronger Pensions Regulator, the Government invited responses to proposals to widen the scope of “notifiable events” to include more corporate transactions and board decisions. The responses were very mixed, partially in the area of possible penalties for failure to comply. As my noble friend Lady Noakes mentioned in her remarks, criminality was, rightly, to be in areas of wilful and reckless behaviour where a mental intent was involved, as is the case in other areas of criminal law. As a lawyer, I worry slightly about giving a regulator—indeed, any institution outside the direct courts—rights in relation to the imposition of criminal penalties. Mere failure to comply with notifiable events was suggested to be subject only to civil penalties. Clause 107 therefore produces a quandary for me. Bad employers should always be criminalised in appropriate circumstances, but applying criminal sanctions to anyone associated with a scheme, including especially trustees, for some areas where simple judgment has been exercised by them could result in some quite minor actions and even normal business activity becoming a criminal matter. The Government should look carefully at this to avoid injustice. That is not to say that there have been many demonstrable situations which need much tougher penalties attached to them. I fully support remarks made earlier by noble Lords on that theme.
I am also concerned at Clause 110(4), where the criminal offence is extended to cover a situation where an individual summoned for interview by the regulator fails to answer a question or provide an acceptable explanation on any matter specified in a notice under new Section 72A(1) of the Pensions Act 2004. I am concerned because an “explanation” is defined as a statement or account that makes something clear. This is of course a highly subjective matter and provides the regulator with a criminal sanction that cuts across the basic rights of individuals, including, so far as the country generally is concerned, the right to avoid self-incrimination.
I fully support the need to tackle serious “offenders”, but the powers of the regulator must be seen as equitable and enforceable. It is not the duty of the regulator, I would submit, to run businesses or make major corporate decisions. Indeed, my remarks are partly to protect the regulator, because it should not be put in a compromising position and provided with powers where it is required to make decisions which are strictly beyond its proper remit or abilities. That is an unfair burden on our regulator.
My final point relates to the relationship between trustees and employers. That relationship needs to be close, as we all know, especially in regard to the funding plans in a scheme and the investment strategy. In the end, it is important not to require employer agreement to long-term investment plans. Under Section 35(5) of the Pensions Act 1995, the employer’s consent is not required, so, to avoid confusion, paragraph 6 of Schedule 10 to the Bill must make it clear that the trustees at the end of the day may make investments without the employer’s consent if they regard that as necessary. That is not to say that good practice does not always suggest full consultation—I think anyone running a scheme worth looking at is conscious of the need for that consideration and consultation.
A close and positive relationship between employer, trustees and the regulator is absolutely necessary for the success and viability of any pension scheme. To flourish, however, the provisions in place, including those set out in this Bill, must be workable, understandable, flexible and pragmatic.
Lord Hutton of Furness (Lab)
My Lords, it is a great pleasure to follow the noble Lord, Lord Kirkhope, with whose remarks I am mostly in full agreement.
This is a necessary Bill, and I am delighted that we have the opportunity to have this Second Reading debate so early in our Session. It is designed to make a number of welcome reforms, which will, for example, help reinforce the existing safeguards protecting defined benefit pension schemes. The reforms have been made necessary, as we have all seen, by recent scandals, especially in the case of BHS, which have highlighted failures in the existing framework. Measures such as these provide greater confidence in pension savings, help assure savers that schemes are properly managed and assist the process of encouraging more people to save for their retirement, whether in DB or DC schemes. That should remain the focus of pension policy. Sadly, there are still far too many workers in the UK—many millions—who are either not saving for their retirement at all or are seriously undersaving. This is still a subject that we in this House and in Parliament as a whole should keep under careful review, because we cannot afford complacency.
I also welcome the fact that the Bill has been the subject of extensive consultation, as the Minister said in her opening remarks, because that helps build consensus, which is important if these reforms are to be allowed to work over the long term. I welcome particularly the clauses providing for collective money purchase schemes and the new pensions dashboard. I do not believe that collective money purchase schemes are a panacea or somehow represent a miracle cure, but they give employers a new option. These schemes are designed to focus on levels of retirement income, which is entirely right, but without the significant costs and risks faced by employers in respect of defined benefit schemes, which, as we all know, have almost entirely disappeared from the private sector in the UK. Collective money purchase schemes add a new string to our bow, and it is right that we should debate these provisions in more detail.
The pensions dashboard will contribute towards greater knowledge and awareness for pension scheme members and is an important part of the Bill. There is some evidence from the Netherlands that dashboards can help increase engagement with pension savings, and the FCA highlighted the need for this in 2016. The details are going to be set out in regulations under the Bill, and obviously we will need to take the greatest care in establishing how this can best be done. The Minister said in her opening remarks that she wanted to present draft regulations covering Part 1 of the Bill for Committee stage. That is a noble and brave offer, and I hope that she will be able to do that for Part 4 as well, because this will be very important indeed.
I echo many of the comments in this debate about the importance of doing no harm to consumers in the process of setting up these pensions dashboards. The obvious way to avoid that is for there to be a publicly funded dashboard service. If there are going to be multiple dashboards driven by commercial interest, it is crucial that we establish an overarching duty on the part of those providers to act in the best interests of savers. There is no hint or sign of that in the Bill as currently drafted.
I also understand and support the need for the new criminal offences in the Bill, because I think that they are fully justified. However, as has been referred to by a number of speakers, the scope of the proposed new offence in Clause 107—what will be new Section 58B of the Pensions Act 2004—goes significantly beyond the criminal sanction proposed in the consultation which preceded the Bill. The original framing of this offence was going to criminalise
“wilful or reckless behaviour in relation to a pension scheme”
and was targeted, so we were told, at a small minority of employers and connected persons. In fact, the wording “wilful or reckless behaviour” was used by the Minister in her opening remarks. The problem is that the Minister’s words do not appear in the Bill.
By contrast, the wording in the Bill is much wider, as it covers anything that
“detrimentally affects in a material way the likelihood of accrued scheme benefits being received”.
It is clear that not only is the scope of this new offence much wider than what was originally proposed but it is also very possible that it could operate at a much lower level—criminalising the existing material detriment test, which forms part of the contribution notice regime, and bringing into its net persons associated with scheme management and administration. I really do not think the case for this extension has been made.
The use of the word “likelihood” in this context is also an intriguing concept. Would it bring, for example, corporate investment decisions or taking on new corporate debt within the range of the new offence? I really do not think that it should, but these are things we will have to examine in Committee.
There is also a strong argument for saying that the parameters for any new offence such as this, where there is considerable room for interpretation, should be clearly set out in a statutory code of practice—to define those parameters in advance so that people know where they stand. That is exactly what Parliament decided to do with the Bribery Act 2010; when there was a new offence which was quite extensive in its scope, it was accompanied by extensive Ministry of Justice guidelines.
Before I leave this part of the Bill, the other thing that troubles me is that, the way it is currently drafted, there are three prosecuting authorities: the Secretary of State, the Pensions Regulator and the Director of Public Prosecutions. I do not think that is appropriately drafted at all. I do not want to see the Secretary of State bringing criminal proceedings where, for example, the Pensions Regulator or the DPP might have decided not to do so.
There is much to welcome in this Bill, but it is also quite clear that there is much work to be done in Committee.
Baroness Hayman (CB)
My Lords, it was with some trepidation that I put my name down to speak in today’s debate, given that my experience in the field of pensions is extremely limited—mainly as a trustee of charities, where I have found the discussions, particularly on the potential ending of defined benefit schemes, both difficult and complex. It is with even more trepidation that I stand to speak given the expertise and experience that have been evident in other contributions. I now bitterly regret—I see the noble Lord, Lord Young of Cookham, in his place—that I was not in my place in the Chamber of another place some 44 or 45 years ago and taking notice. I may have been, but I fear I have to tell him that I have no recollection of that particular speech, from which I could undoubtedly have benefited.
Noble Lords may well therefore ask why I am contributing at all. The clue comes in my declaration of interests. I co-chair the House of Lords cross-party group Peers for the Planet, which looks at the climate crisis. I should also declare that my youngest son works for a new organisation called Make My Money Matter, which aims to allow savers and investors to align their investments with their values. Unlike the noble Lord, Lord Sharkey, I have indeed spoken to him about the Bill.
The former Pensions Minister Steve Webb said:
“This Bill is notable more for the things that have been left out than for what it contains.”
It is on one of the issues that has been left out that I will speak briefly tonight: the environment, climate change and sustainability. There is no reference in the Bill to the environmental, social and governance responsibilities of pension funds, although they now have a responsibility to report on those issues. It will simply not be sustainable—if I can use that word—if in 2020, the year in which the UK will be hosting COP 26 and which brings in the decade in which the global community must respond to the challenges of the climate crisis, which is of pivotal importance to the future of our planet, we as parliamentarians do not challenge all policies and legislation on their impact on these issues.
Pension funds and schemes are particularly relevant in this area for two reasons. One is simply the amount of resources involved: $2.9 trillion. It is enormous, and the size and influence of pension funds mean that they can have a vital role to play in ensuring that the UK meets its climate commitments, as the Environmental Audit Committee of another place noted its Greening Finance report. The Pensions Minister himself put it very well last year when he said that
“pensions schemes ought to be thinking about the assets which help drive new investment … which deliver the sustainable employment, communities and environments which all of us wish to enjoy.”
Pension funds could have huge impacts on and give new impetus to a new green economy and the Government’s zero-emissions target.
As others have noted, the Long Title of the Bill is very short—but it is also very wide. I would like to see the Bill include provision for pension schemes to align their portfolios with the Paris Agreement objectives and report against the framework of the Task Force on Climate-related Financial Disclosures. This is not an issue simply of environmental benefit; it is an issue for investors and the safety and protection of beneficiaries. As Mark Carney, the outgoing Governor of the Bank of England, has made crystal clear, the financial and economic risks parallel the climate risks. Again, this has been acknowledged by the Pensions Minister, who said:
“The financial risks from climate change … were too important to ignore.”
So, although it goes much wider than the contributions of other noble Lords, I hope that the Minister will give some encouragement to the views of her department about taking the pensions industry along this line.
I have a more specific question on Clause 119 and the dashboard provisions in the Bill. There is much evidence that savers and investors would like to invest responsibly. For example, a recent DfID report showed that 68% of UK savers said that they would like their investments to take impact on people and planet into consideration, alongside financial factors. As I understand it, the proposals for the pensions dashboard are aimed at giving savers more information so that they can make better choices about their pensions. Is it possible—the noble Baroness, Lady Drake, referred to this—that issues far wider simply than those that have been spoken about so far, such as the environmental, social and governance information that the new pensions investment regulations welcomely require schemes to publish, will also be made available to people looking at their personal dashboard?
I will not apologise for diverting Peers from more specific and technical issues. As I said earlier, it is of immense importance that, as parliamentarians, we look at all the issues that are in front of us through the lens of the overwhelming issue of climate change.
Baroness Fookes (Con)
My Lords, I am delighted that my noble friend Lady Stedman-Scott is piloting the Bill through all its stages, and I wish her and the Bill itself all possible success. I say to my immediate predecessor, the noble Baroness, Lady Hayman, that it was a refreshing change to look at this from an entirely different angle, which is also worthy of further consideration.
On the Bill itself, clearly, pensions have had a chequered career so far, and it may not be altogether plain sailing in the future. However, I cast my mind back to more than 100 years ago when there were no pensions of any kind. Many of the poorest people in the land faced the prospect of destitution if they did not have a family to support them, if their work gave up on them because they were unable to carry it out, or if they were suffering the infirmities of old age. We have come a long way from then, thank God. None the less, obviously we still have things to do, but I am delighted that the Bill is taking us further forward. Like the noble Baroness, Lady Hayman, I have no particular expertise in this subject, and if she was feeling some trepidation, I share the feeling.
I welcome the part which the noble Lord, Lord Hain, talked about as the third way for pensions, in particular that it has brought together Royal Mail and a major union—the Communication Workers Union. I can recall a time when employers and trade unions appeared to be totally at loggerheads—positively at war —and I am delighted that we have come to a pleasanter era, in which the trade unions can do a valuable job for their members. I give this union full credit, and I hope that it will be the forerunner of others.
Of course, we regret the gradual—or maybe rather fast—decline of the defined benefits scheme, but I do not know that anyone, through the Bill or through any other means, can force employing organisations to continue with it if they feel that it is not for them. Therefore, surely it is better that we have another scheme, which may not be as good but is infinitely better than nothing in particular.
On the regulator, I take the point that was made about not having such fierce penalties for errant employers that you put people off becoming trustees—I fully accept that. I hope that the draconian powers are intended only as a last resort for people who have gone completely beyond the pale. However, the proper emphasis should be on those other powers of the regulator, to make sure that employers and schemes do not get into that dire position and so that there are reins to hold them back. I hope that that is the intention; perhaps my noble friend the Minister can tell me that that is what the Bill has in mind.
On delegated powers I always twitch a bit, as I was both a member and later chairman of the Delegated Powers Committee, and I am immediately suspicious when faced with regulations yet unknown, particularly when there seems to be a vast number of them. Other Members have detailed that, so I will not repeat it. I am glad that the Minister herself mentioned delegated powers and has offered kindly to try to give us some indication of the scope in Part 1.
However, I am also interested in Part 4, on the dashboard. I hope that the Minister might be able to bring forward some draft regulations on that basis. That is probably asking a great deal. But I recall that, when I chaired the Delegated Powers Committee, we held a short inquiry into what one might call the birth of Bills. We were told that there was a Cabinet committee, through which a proposed Bill had to pass to ensure that it was fully operational and all right before it was let through the gate. The fact is that a lot of them escape through the gate without that serious consideration of all the details. I would have supposed, with a Bill of this kind—which is in its second incarnation and which has been the subject of full consultations, which I fully applaud—that somewhere in the background, some of these regulations and powers should have been sorted out. As we all know—it has become a cliché, has it not?—the devil is in the detail. It is therefore extremely important that we have some idea of what the Government have in mind before we get to the point when regulations are laid before us and, as I rather crudely put it, you either swallow them whole or spit them out. I do not want to get to that stage.
Incidentally, how did the dashboard scheme come by that curious name? I presume that it refers to the driving of a car with the dashboard in front of you. However, as far as I am aware, no car I have ever driven could rely on the dashboard alone. But that is by the by. It seems to have acquired that name. I welcome it, and I would have done so years ago when I had several pensions. I had done my utmost to make sure that I had provided as well for myself as possible. However, I have to say that I was one of those people in their 50s who have been referred to, and I did not know what I would get at the end of it. I would certainly have welcomed that sort of information, which will be very useful for people today. Although it gives just basic information, how much easier will it be if you want to go to a decent, reputable finance adviser and they have that information on which to work? I think it is a good idea.
Like my noble friend Lord Young, who is not in his place, I query why we want one main public dashboard and a series of commercial ones. I would have thought that, at the very least, one would start with the public one and, if it seemed necessary at a later stage to introduce commercial ones, so be it. I am blessed if I can see why we have six, seven or whatever number when one would do. Again, perhaps my noble friend can enlighten me on this point.
That said, the measure is welcome. I hope that it might be simple to start with, to obviate the point made by another noble Baroness that it could be extraordinarily expensive; in fact, I think that two noble Baronesses made this point. I take that entirely. Perhaps we can start with something straight and simple and work up from there; otherwise, it may be 10 years before we have sight of this noble enterprise if it becomes too complicated. In fact, part of the problem sometimes is that something that starts as a good, simple idea is then elaborated on and has further layers added to it until, in the end, it bears no resemblance to the straightforward, simple scheme we all thought we had.
On that basis, I conclude my remarks since the hour is late and I do not have the expertise of so many of those around me.
Baroness Bryan of Partick (Lab)
My Lords, I think I can claim to be the most intimidated speaker in having to follow the noble Baroness, Lady Fookes, who spoke for eight minutes without a note in front of her. I will proceed to read my contribution.
Although I welcome some of the Bill’s aspects, like other noble Lords, I am sorry that the opportunity to address some outstanding concerns around pensions has not been taken. I want to keep some of them on the agenda by raising them today. The Bill could have introduced controls on the level of profits that pension companies can make from annuities schemes. Secondly, as has been mentioned, it could have addressed the stark problem of gender inequality in pension provision. Lastly, it could have included provision for women born in the 1950s whose pension rights were hit so hard by the rush to equalise the retirement age: the WASPI women.
First, I congratulate the Communication Workers Union on its campaign, which resulted in Part 1 of the Bill enabling collective defined contribution—CDC—pension schemes. It has been said by many speakers that although CDC schemes do not provide all the certainties of defined benefits, they are in many ways preferable to defined contribution schemes. I also congratulate the Fire Brigades Union on its successful challenge to the discrimination against its younger members, who were not given the same conditions in their pension scheme as older members. These two examples demonstrate the importance of the collective strength that comes from the trade union movement.
As others have done, I declare an interest as someone who receives a pension through a defined benefit scheme. Like others, I looked on in horror as friends and family members were transferred to defined contributions schemes with all their uncertainties, particularly in purchasing lifetime annuities.
Patrick Collinson wrote this in the Guardian last year:
“Annuities have turned out to be fabulously profitable for Britain’s pension companies – and something of a disaster for many of those forced into them”.
He explained that the pension companies based their annuity rates on projections of how long people were likely to survive—but they got their projections wrong. It turns out that we are not living as long as they expected. Actuaries have now reduced the life expectancy rate, making it 13 months lower than they predicted in 2015. The money set aside for those pensions has been released—however, to be paid not to the pensioners who built up that fund but to the shareholders of the pension companies. The amount released is already more than £1 billion and is likely to be £4 billion over the next seven years. The Bill could have improved the regulation of these annuities to ensure that pensioners who have saved so hard are not overcharged and that, where there is excess, it is paid to pensioners rather than distributed to shareholders. We must always remember that pensions are deferred wages, not a gift or an unearned benefit.
I know that the Minister has rather a lot to do today but I hope that she will take the time to reassure the House that there are no plans to increase the retirement age. The suggestion by a previous Secretary of State for Work and Pensions that the state pension age could be increased to 75 is outrageous, particularly as we are now seeing an end to the rise in life expectancy and its reduction for people on lower incomes. The life expectancy for men in Glasgow is in the low 70s, but even in areas with higher life expectancy, it is a cruel prospect for people in their later years. I do not believe that anyone proposing further increases in the retirement age really expects people to work until they are 75. They simply want to reduce the number of years that people will be entitled to the state pension. Instead, people would have to face their old age as benefit claimants or through scraping by on a workplace pension. Any further increase would mean that more people would die without ever receiving a penny of the state pension that they had contributed to throughout their working lives.
Pension contributions based on earnings will inevitably favour men as long as we have a gender pay gap. As my noble friend Lady Drake pointed out, women are far more likely to take time off work or work part-time while caring for children or elderly or sick relatives, and they usually cannot recover those missed contributions. The pay gap is a disadvantage to women throughout their working years and continues into retirement, making a substantial difference to their final pension. It is not surprising that women of all ages are more likely to opt out of auto-enrolment than men.
The treatment of the WASPI women is also likely to make all women more sceptical about pensions. I imagine that Ministers blush when they talk about the importance of pensioners being able to predict their income in later life or their aim to build greater trust in schemes. This is what the WASPI women expected and trusted in from their state pensions. They thought that they could predict their pensions but suddenly found that their circumstances had been changed without giving them enough time to make adequate alternative provision. Is there any possibility of the Government making an act of good faith to the women who were misled over their pension entitlement? Legal avenues are still being pursued against the Government, whose own lawyer had to fall back on the defence that
“legislation carries with it no duty of fairness to the public.”
Following what appears to be an admission that their treatment of these women was unfair, I hope that the Government will feel honour-bound to do the right thing and give the WASPI women the compensation that they are entitled to.
Lord Flight (Con)
My Lords, I echo the comments made by my noble friend Lady Neville-Rolfe about my noble friend Lady Stedman-Scott. I also make the point that my noble friend Lady Fookes spoke not only without notes but with enormous common sense in this difficult territory. I thank her. I also agree very much with what my noble friend Lord Young and the noble Lord, Lord Hutton, had to say.
The most important aspect of this Bill is, as we would probably all agree, the introduction of pension dashboards and of CDCs as a new option. Dashboards are important because they should enable more individuals to look up and thus know what pension savings they have. I declare an interest as a consultant to TISA, which is itself a consultant to the savings industry, where we have campaigned for dashboards over quite a long period and have been in liaison with the Government on the subject.
Since pension saving has become largely the responsibility of individuals after having simply been provided by the employer—a crucial point of change which I do not think is necessarily for the better—it has been a challenge for them to know what pension savings they have. The Which? research carried out in 2016 found that nearly half of people aged over 50 in employment were unsure of the value of their pensions, while over a third of those approaching retirement found it difficult to keep track of their pensions, as well as a fifth who said that they had never checked how much they had in total. It really is an area that needs a bombshell under it in terms of letting people know what they have.
The Bill is a good start but there are areas where Which? and others are correctly looking for further commitments from the Government to ensure that all the key information that consumers need will be shown on dashboards, that commercial dashboards are properly regulated, that the state pension is fully integrated, that there is full coverage of pension schemes and a clear timetable for their delivery. It would also be nice if at some point equity release assets could be included. It has been pointed out that these are becoming an increasing source of income in retirement. Inevitably, one of the key issues is who is going to pay for the dashboards. Which? has pointed out that the whole project could cost between £1 billion and £2 billion when taking into account the related costs as well as the direct costs. The pensions industry has warned the Government that it is not willing to bear all the costs.
The key clauses enabling dashboards are Clauses 119 and 121. They set out that the Secretary of State and the FCA can require all necessary pension scheme information for dashboards to be provided. It is not yet clear whether such information is to include pension charges and income projection figures, which would clearly be helpful if they were included. The Bill appears to leave a lot of specific information requirements to the secondary legislation, but the Government should clarify whether it is their intention for dashboards to include both pension charges and income projection figures. Consumers need to know what they have paid and where charges can have a significant impact on investment returns. An increase in fees from 0.5% per annum to 1% per annum requires contributions to increase by 10% to achieve the same retirement income.
The FCA’s Financial Lives survey found that 71% of respondents with defined contribution pensions are not aware of the charges incurred. Charges need to be shown on the annual dashboard statements. It is clear that people are not saving enough for their retirement. A single retired person needs an income of some £20,000 per annum to have a comfortable retirement lifestyle. Under the current auto-enrolment system, a middle income earner should be able to save £114,000, but they would not expect this to deliver an income of more than £13,450.
Dashboards will also show the retirement income projection as part of the annual benefits statement. The objective is that by providing the necessary information in a readily digestible package, individuals will be motivated to follow it and to save more for their retirement. It is also necessary to ensure that adequate regulations are put in place to prevent the potential misuse of commercial dashboards by providers, and obviously to prevent fraud. Which? thinks that the legislation does not go far enough on this and that it should make the provision of a pension dashboard a regulated activity, but as several noble Lords have said, in many ways the proposals go too far and may discourage people from serving as pension trustees. There is also a risk that at least some commercial dashboard providers will use the opportunity to present information designed to attract custom. If dashboards remain outside FCA regulation, protection for customers if something goes wrong depends solely on the providers. There is a clear and strong case that the FCA should set standards, monitor compliance and ensure that providers are subject to its complaints and handling rules.
I agree with the comments of my noble friend Lord Kirkhope about penalties being excessive. The Bill enables information about the state pension scheme to be shown on dashboards, but it does not prescribe in what form. State pension information needs to be fully integrated as it forms a significant share of most individuals’ total retirement income. It is to be hoped that the Money and Pensions Service will give priority to designing the government-backed pensions dashboards, which could provide a model for the private sector.
Decisions also need to be taken on whether or not the provision of dashboards should be an activity regulated by the FCA, the Pensions Regulator or both. It is clear that there will be trouble ahead in the form of rivalry between the regulators if this is not sorted out. We need to see how much information about an individual state pension will feature on dashboards. Should it be required that all pension schemes provide information to dashboards? Will the Government set out time deadlines for pension schemes to provide dashboards?
The introduction of pension dashboards requires the creation of a supporting infrastructure enabling consumers to access their pension information. The design and development of this infrastructure is a task for the new industry delivery group working with the oversight of the Money and Pensions Service. Recent high-profile insolvency cases in relation to defined benefit pension schemes such as BHS and Carillion have, not surprisingly, damaged confidence in our pension system. It is difficult not to conclude that dashboards should be FCA regulated. Official policy now seeks to provide greater protection for scheme members by strengthening the pensions regulators’ powers, including new civil and criminal sanctions. However, there is clearly an issue as to what should be done by the FCA and what by the Pensions Regulator.
Another major aspect of the Bill is the provision of a framework for collective defined pension contributions, and in fact this takes up half of the Bill. These are a new concept for the UK. As others have pointed out, they provide members with a variable income in retirement by the pooling of investment and longevity risks. CDC pensions also have the potential to remove risk from employers’ balance sheets as there is no guarantee about the level of income to be provided. I agree very much with what the noble Lord, Lord Hain, had to say about CDCs.
The Bill is drafted to ensure that schemes are set up on a sound footing, that members will get good quality communications, and know that if things go wrong, their rights are protected. Schemes will have to satisfy the Pensions Regulator that they should be authorised and subject to ongoing scrutiny. CDCs may also prove to be a useful vehicle for master trusts.
Part 5 of the Bill introduces four other measures, all of which are essentially protective of pension schemes. Opposition parties have had little to add and indeed there has been broad political agreement on this legislation. Labour has welcomed pension dashboards and the CTC legislation, which should resolve the Royal Mail dispute. Labour and the SNP have argued for compensation for women affected by the raising of the state pension age. In the 2017 general election, the Liberal Democrats advocated the establishment of a review to consider introducing a single rate of tax relief for pensions that is more generous than the current 20%. Former Minister Steven Webb expressed the view that the Bill is notable for things that have been left out rather than for what it contains, as has already been mentioned. I think that is a little harsh. He pointed to a lack of measures advocated by some in the industry, such as expanding auto-enrolment saving—clearly something that has to happen—and the regulation of direct benefit superfunds. There are a few other anticipated measures not yet in the Bill, such as remedying the discrepancies in the tax treatment of relief-at-source schemes versus net payment schemes and the unintended consequences of pension taxation rules for higher earners.
All in all, this is a necessary piece of legislation. A reasonable amount needs to be added to it and sorted out. It is positive that there is cross-party political co-operation on this legislation.
Viscount Eccles (Con)
My Lords, it is a pleasure to follow my noble friend Lord Flight. He mentioned equity release, and about 20 years ago he assisted me with a major chunk of equity release when I moved from a house into a flat. I am very grateful; it certainly eased my way to comparatively old age.
Of course, I come from the defined benefit era. I would have had an interest to declare, being trustee and chairman at various times of several pension schemes, and I have a SIPP—probably about the purest money purchase scheme you can possibly have. There are no contributions from anybody else except the Chancellor of the Exchequer and the taxpayer, and those contributions were immensely welcome.
I will concentrate on Part 1, which is welcome. The pooling of assets has a very long history, all the way back to tontines. It is a framework Bill; I suppose we have become quite used to framework Bills. Yes, there are a lot of regulations—about 30 in Part 1. Only one of them has a “must”—most have a “may” and some are silent—so I suppose we can take some guidance from the master trusts Act, which was on a similar scheme, and from my noble friend, whom I welcome on the Front Bench. She has just arranged to send a 120-page document to the Delegated Powers Committee setting out all the proposed regulations and the reasons for them, so I am sure we will return to that and find out more about how this part of the Bill will be implemented and over what time.
There seem to be a lot of people involved: predominantly the employers in this case; the union; the trustees; the members; the Secretary of State with his many powers, some of which I suspect are to be held in reserve—sort of “if it happens” powers—the Pensions Regulator; the Financial Reporting Council; the Institute and Faculty of Actuaries; the Money and Pensions Service; and potentially the Prudential Regulation Authority. I hope these bodies do not trip over each other. I rather agree with the noble Lord, Lord Hutton, that there is quite a possibility that they will.
I will concentrate on the actuary, a shadowy body not much mentioned in the Bill and not much referred to in this debate. I have a memory; of course, as my noble friend Lord Young of Cookham may find out, memories are quite risky. I recall an actuary saying to a board of trustees, which then informed the employer: “You don’t have to make any more contributions for a considerable number of years.” This was in a defined benefit scheme, and its investment experience had been very good. However, some short period afterwards, the same actuary came and said: “Things have changed. Not only do we need to continue with contributions, but I want a one-off special contribution from the employer.” The reason was that outside intervention had entirely altered the business plan of that organisation and put it in a completely different position. If it had not been for the professionalism and strong-mindedness of the actuary, the correction might never have been made.
Of course, in those days and perhaps—I do not know —even now, sometimes employers agitate for positive changes. It may be that they would like the rules of the scheme improved because they see it as a recruiting tool. They go to the trustees, who go to the actuary, and the actuary says: “I hope you all realise how much this will cost and what this might mean to the contribution rate.” That applies in defined benefit schemes.
As has been much referred to today, all sorts of negative things may happen that the actuary has to assess and report on. The actuary’s job is complex, important and difficult. In the Bill, the two phrases he has to bear in mind as he gives his advice to trustees are
“the available assets of the scheme”
and “the required amount”. In those few words, you have what he has to try to do—and, of course, he is doing it over a very long timescale.
I admit that I have been a member of a pension scheme for 65 years—not the state pension scheme but a private one. I have no intention of doing so, but if I were—rather belatedly—to marry somebody 30 years younger than me, I suppose the timeframe would become 100 years in today’s circumstances. That is a very difficult period of time for anybody to deal with when they sit down to work out
“the available assets of the scheme”
against the rules of the scheme, and “the required amount”. In that period, there are huge social changes, enormous economic changes and all sorts of unexpected events.
Although sometimes things can be done positively with the rules of a scheme, sometimes you run into negative circumstances such as a market disappearing. Let me cite deep-mined coal as an example. All the firms that used to supply a lot of equipment to the deep coal mines of this country no longer have a market in this country. In these circumstances of rapid and complicated change, there is always tension between the employer, the trustees and the actuary. The actuary is in the most difficult position of the three, because he is a paid servant of the trustees and has to nerve himself on some occasions, I suspect, to convey some of the news that he needs to convey as he does his professional calculations.
Recently, there has been much comment and criticism of the present arrangements for actuaries. Following a report written by Sir Derek Morris in 2005, action was taken and a memorandum of understanding entered into between the Institute and Faculty of Actuaries and the FCA. That is coming on for 15 years ago, and in 2018, a powerful report was produced by Kingman, who said that the memorandum of understanding is not going well. He made radical proposals for reform, in the sixth chapter of his report, entitled “Other Matters”. It is quite short, but he thinks that the system for regulating the actuaries and for taking responsibility for measuring their performance should be moved from where it is now to part of the Bank of England. In response to Kingman, the Government said—motherhood and apple pie—that they would reflect on these recommendations and bring forward proposals in due course. Will my noble friend on the Front Bench tell me where this is getting to?
My experience, as a trustee of pension schemes, is that the actuary was the most important person, and the one with whom I spent most time to assess whether or not our scheme really was in a circumstance with which we could be content for the time being—and only for the time being. It seems to me that there is a strong argument for saying that the actuaries are unlikely to be in the best place at the moment to discharge their complicated responsibilities and ensure accountability for performance. I look forward to hearing why this has not been included in this current pensions legislation—2018 is a fair time ago. What is the Government’s intention?
Baroness Jones of Whitchurch (Lab)
My Lords, I intend to speak relatively briefly. I welcome the Bill and echo the excellent points made by my noble friend Lord McKenzie in his opening statement. I agree with many of the points made by noble Lords around the Chamber this afternoon. Like the noble Baroness, Lady Hayman, I do not claim to have any expertise in this matter and, also like the noble Baroness, I will concentrate my remarks on the environmental impact of pension investments and the lack of controls in the Bill. The noble Baroness mentioned Peers for the Planet, so perhaps I should say that I have had some involvement with it. I do not know whether we have to formally declare that, because in an ideal world all noble Lords would be members of Peers for the Planet and it would be a badge of honour. Perhaps we should aspire to that.
I believe that this is a lost opportunity to use the pensions dashboard, and the powers of the Pensions Regulator, to address how pension schemes are meeting the challenge of the climate change emergency. As things stand, we are currently on track for an increase of 2 to 4 degrees centigrade of global warming by the end of the 21st century. This will have profound consequences for the global economy, and therefore for the investments and financial returns of occupational pension schemes.
The Bank of England Governor, Mark Carney, has stated that pension fund investments held by millions of people could become “worthless” unless the financial sector reacts quickly to the climate change crisis. As the noble Baroness, Lady Hayman, said, the Environmental Audit Committee produced an excellent green finance report last year, which recognised that, due to their size and influence, pension investment portfolios have a vital role to play in delivering our climate commitments. At the same time, recent polling by the charity ClientEarth has shown that the majority of savers want to move their money away from fossil fuels and would consider moving their pension to another provider if they found out that their fund had significant fossil fuel investments.
This is a rare opportunity to align pension funds with the Government’s stated commitments in the Paris Agreement, which will be reviewed and updated at COP 26 in Glasgow later this year. We can do this through the Bill by requiring pension funds to disclose information about their investments to individual savers via the pensions dashboard. We can also require trustees to align their investment and stewardship activities with the objectives of the Paris Agreement.
The new pensions dashboard will quickly become the primary means through which savers will obtain information about their pension fund. Obviously, it is an important step forward to empower savers with details of fees and charges, the benefits of their scheme and other issues we have debated this afternoon. But full transparency requires more than this. Very few savers have a good understanding of the steps their pension fund is taking to manage climate change risks. Obtaining this information is time-consuming, slow and difficult. Given the potential high impact and the systematic nature of climate change risks, reporting through the dashboard would enable savers to judge whether the risks are being properly mitigated. It could also help build trust and stronger engagement between savers and pension fund providers. Does the Minister accept the principle that savers should have easy access via their dashboard to information about how their fund is mitigating the damaging effect that climate change could have on their savings?
There is also a wider challenge for pension funds to play their part in meeting our obligations under the Paris Agreement. Increasingly, evidence shows that the long-term best interests of savers are most likely to be met where global warming is held as close as possible to 1.5 degrees centigrade. As stewards of a significant portion of the UK’s capital, pension funds clearly have a critical role to play in shaping corporate business plans so that they de-risk their capital investment by switching to green alternatives. Some are already playing their part and rising to the challenge, but we clearly need a level playing field for consistency across the sector. This can be achieved only if it is done not on a voluntary basis but under an obligation to comply with our Paris Agreement promises.
Given the acute nature of the climate change emergency, does the Minister accept that this Bill could be used to require pension funds to align their investments with Paris-compliant business models? Does she agree that the regulator’s role could be enhanced to ensure compliance with these objectives? I very much hope that, when she replies, she accepts that the Bill would indeed be an excellent vehicle for achieving these objectives. I look forward to hearing that she agrees with those views.
Lord Freeman (Con)
My Lords, I intend to be very brief indeed. Having sat through most of today’s proceedings, I am not sure that I have all that much original to say. I agree with the earlier comments of the noble Baroness, Lady Stedman-Scott: this Bill is designed to help people plan for a secure future. We make judgments about what government does in the light of that statement, which I very much agree with.
It has been far too long since we last considered pension reform in your Lordships’ House—quite a considerable time, as I recall. In my judgment, it should be much more regular. I humbly suggest that a five-year review maximum should be put in place.
I very much agree with the noble Baroness, Lady Neville-Rolfe, on the use of the dashboard. She was exactly right, and I very strongly support the use of the dashboard so that people can keep track of their savings and pension entitlements and, very importantly, understand what their financial situation is.
Finally, I will suggest one novel recommendation. Schoolchildren should also benefit from education about financial planning and entitlement, and, indeed, fund management. Many leave school without the vaguest idea about planning their financial resources. With that, I conclude my remarks and sit down.
Lord Warner (CB)
My Lords, I rise with the rather dubious proposition that, as the last Back-Bencher to speak in the debate, I should be brief. I will have to take a bit of time because I will talk about something that has not really been discussed this afternoon and I hope to persuade the Government to add something to the Bill that is not already there.
The issue I wish to raise is that of senior doctors’ pensions, where anomalies in the pension taxation system are resulting in doctors having to reduce significantly the contribution that they are willing to make to the NHS, sometimes by retiring early and sometimes by reducing the time they are willing to devote to NHS work. The problem is caused by the tax charges many senior clinicians incur due to exceeding their pension threshold and which can result, in some instances, in them in effect paying to go to work.
Let me illustrate the problem that the current pensions taxation situation has caused with some figures provided by the Royal College of Physicians from a survey of nearly 3,000 members. Of these members, 45% of respondents reported that in the past two years they have decided to retire at an earlier age than planned. In the past two years, 38% of clinicians aged 50 to 65 have reported having had an annual pension tax charge due to exceeding their pension threshold. These numbers are rising, not diminishing. Once the decision to retire is taken it is much less likely to be reversed. We know that senior doctors told the royal college that they are doing so as a result of these tax charges. Some 62% of senior clinicians said that they were avoiding extra paid work such as waiting list initiatives or covering for colleagues; 43% are bringing forward their own retirement; 25% have reduced the number of programmed activities they work. Similar data is available from the Royal College of Surgeons and the Royal College of Emergency Medicine.
I know from my conversations with the BMA—as an ex-Health Minister I still have a reasonable relationship with the BMA—that its members have the same concerns, with the most recent BMA survey of more than 6,000 doctors from hospitals and general practice across England, Wales and Northern Ireland revealing that 42% of GPs have already reduced the number of hours spent caring for patients because of actual or potential pension taxation charges. In addition, 34% of GPs now plan to reduce their hours. Some 30% of hospital consultants have already reduced their hours and 40% have told the BMA that that was also their intention. Data from an earlier BMA Scotland survey had similar findings.
The impact of the pension tax charge is hitting direct patient care. A recent survey by the British Society of Gastroenterology showed that 40% of its consultant membership had dropped at least one endoscopy list. This resulted in 74% reporting a rise in two-week waits for endoscopy for patients suspected of having cancer, with 22% saying that the increased wait was an extra four weeks. It is now the case that figures for cancer waiting times, routine care waiting times and A&E performance are the worst since records began and 11 million patients are waiting more than four weeks for GP appointments. A lot of this is directly related to the pensions problems.
These are big numbers and they relate to an experienced group of doctors that the NHS relies on very heavily. We are seeing losses of senior doctors on a scale not seen before, seriously damaging the NHS and putting patients at risk. These doctors realise that they are in society’s higher earnings band, but even high earners can reasonably expect to be paid for their labour rather than working for nothing or, in some cases, paying to go to work.
In the time available to me I have struggled to find out who is to blame for this mess. It is somewhere in the territory of the Government and employer failure to understand how these tax arrangements would impact many public sector workers, not just doctors. Whoever is to blame, it certainly is not the fault of doctors. They have often been presented with an unexpected tax bill at the end, or even after the end, of a tax year. As far as I can judge, doctors were given too little advance explanation and warning about the tax and pension changes to plan their finances in advance and to mitigate the financial risks. As a result, doctors are now taking understandable steps to limit their financial exploitation.
The profession’s leaders have made all this information available to the Prime Minister, the Chancellor and the Health and Social Care Secretary as part of the ongoing review led by the Treasury. However, in the meantime, senior doctors continue to leave and cut their workloads. Waiting times lengthen. Unless something is done urgently, we will soon reach the end of another tax year and another tranche of senior doctors will receive a tax charge. They will add themselves to the growing numbers deciding to retire early or cut their hours working for the NHS. Every month that passes without a government solution being implemented, the more experienced doctors leave the NHS.
I expect the Minister will tell me that this is a very complicated matter and that a review is under way in time for an announcement in the Budget. However, we are now on to not our first but our second review. So far, the Government have produced just a couple of modest tinkering moves, including a temporary scheme for refunding annual allowance payments at the point of retirement, so doctors can put off paying the debt. The catch about that is that they also charged 5% a year for the pleasure of doing so. These measures have not convinced anybody that the Government are serious about fundamentally resolving this problem.
In contrast to such totally inadequate tinkering is the solution, supported by, among others, the Royal College of Physicians, the BMA and the Treasury’s own advisory body, the Office of Tax Simplification, that the Government should remove completely the annual allowance, including the taper in defined benefit schemes. I recognise that this might cause convulsions in Great George Street and I suggest that maybe a more modest approach would be to require the Secretary of State immediately after the Bill’s Royal Assent to make regulations that enable doctors and NHS workers in the NHS Pension Scheme to pass for payment by the scheme any such transfer of payments tax charges from HMRC, with any such payments attracting no interest or detriment to the scheme’s participants.
Before deciding what to do in Committee, I would welcome the Minister’s response to my two suggestions. One way or another, the Government will have to remove this unplanned tax burden from scarce senior doctors. If they do not, even more patients will suffer and NHS England’s long-term plan will not be delivered. I wish to hear what the Minister has to say.
Baroness Janke (LD)
My Lords, the three strands of the Bill contain proposals that have been broadly welcomed across the sector and across this Chamber.
My noble friend Lord Sharkey spoke about secondary legislation and Henry VIII powers, on which large parts of the Bill are dependent. As other noble Lords have said, in this House we are suspicious of such measures. We are reluctant to delay this long-awaited Bill, but we would like assurances from the Minister that the substance of measures not included on the face of the Bill, if not the actual letter of the legislation, will be made available to us in good time. As my noble friend Lord Sharkey said, this is a skeleton Bill with random use of affirmative and negative procedures. I thank the Minister for her recognition of these issues and very much hope that the illustrative regulations she spoke about will be substantive and informative.
CDCs—collective defined contribution schemes—have been supported across the parties, and the provisions in the Bill will enable these pensions, in the first instance as requested by Royal Mail and the Communication Workers Union. The Minister suggested that other employers who still have open defined benefit schemes are watching closely. Nevertheless, she has said that the Government will wait to see how the scheme beds in. Unlike defined benefit pension schemes, there is no hard pension promise or guarantee. However, unlike a defined contribution pension scheme, there is a pension target, which makes it easier to plan for retirement. If things do not go well, everyone in the scheme suffers collectively. In retirement, longevity is pooled. As I said, there is cross-party support, and the Bill builds on legislation passed in 2015 to enable risk sharing and risk pooling in workplace pensions.
Noble Lords have raised questions about safeguarding the interests of members of the scheme, in respect of, for example, transfer of rights and the destinations of transfers in the light of poor advice. Several noble Lords raised the issue of whether this should be an opportunity to prevent fraud, for example by making such transfers conditional on advice or levels of information—the noble Baroness, Lady Altmann, and my noble friends Lady Bowles and Lord Sharkey all raised that point. Other issues include intergenerational fairness, losses caused by market fluctuations or through transfers from the scheme, and the need for a capital buffer if the employer becomes insolvent. As the ABI has said, the success of CMP schemes will depend on their financial strength, combined with robust governance and regular reporting and disclosure. Careful thought must be given to how best to communicate to scheme members the crucial difference between a guaranteed and a targeted income. These are questions that many of us will have considered when reading the Bill.
As far as increasing the powers of TPR, the question of whether those powers are strong enough has been raised by a number of noble Lords—particularly the noble Baroness, Lady Drake—as have the issues of early intervention, how TRP can become aware of issues concerning pension funds and whether there should be growing duties on the Pension Regulator to become familiar with some of these very large schemes.
On the whole business of criminality, which was raised by the noble Lords, Lord Kirkhope and Lord Hutton, and the noble Baronesses, Lady Drake and Lady Noakes, this needs to be looked at again by the Minister. On the scope, to whom do the new criminal offences apply? Is it not only directors but also trustees and any other party who may be involved in an action that could have an intended knock-on effect on a pension scheme, even though they were trying to do the right thing? Is the intention of the policy that the new criminal offences should apply to activities and events that are much wider than the “wilful and reckless behaviour” described by the previous Minister? Are they to include day-to-day business activities that get caught accidentally but which are without wilful intent? The Bill needs to be looked at again, and some redrafting needs to be done.
The noble Lord, Lord Vaux, highlighted the different treatments of the shareholders and the pension holders and whether it is appropriate to pay a dividend when there are constraints on the pension fund and questions about its viability. Noble Lords asked whether the new measures will lead to people like Philip Green facing a criminal charge. I think the general view is that it is unlikely. My noble friend Lady Bowles wanted greater penalties. I think that people would support that if it was clear that the people getting those penalties had seriously offended and, as the previous Minister said, had wilfully brought ruin or damage to the scheme.
The pensions dashboard has received a lot of attention. The noble Baronesses, Lady Neville-Rolfe and Lady Noakes, drew attention to such issues as the cost, the importance of engagement with the public and how much care there needs to be in making information available about an individual’s personal circumstances. According to the ABI, already one in five adults have lost pension pots. The DWP estimates that 50 million pension pots will be lost or dormant by 2050. People are also highly vulnerable to fraud and scams. We believed that multiple dashboards with robust regulations, as proposed within the Bill and endorsed by Which?, is the right road to take.
Obviously, consumer engagement will be key to making this work. The noble Lord, Lord Young, mentioned the whole business of accessibility and security measures—and the time that this has taken—and other noble Lords mentioned the online banking model, which has proved so successful, and whether this could be a better model.
Like other noble Lords, I wish to talk about some outstanding issues. The DWP review recommends extending auto-enrolment; the noble Baroness, Lady Neville-Rolfe, mentioned what a success this had been. The noble Baroness, Lady Donaghy, agreed that it should be extended, particularly by reducing the lower age limit to 18 and removing the lower earnings limit. This could have a powerful impact on many people.
Noble Lords, particularly the noble Baroness, Lady Bryan, have mentioned the 1950s women. Might this Bill be an opportunity for the Government to give fairness and justice to these women, who have lost out on so much as a result of government policy?
The noble Baroness, Lady Altmann, mentioned the gender pay gap, which is a matter of great importance to many of us in this Chamber. This Bill could provide another opportunity to look at that. The qualifying earnings deduction operates against workers with multiple part-time jobs, particularly low-paid workers, including woman.
The noble Baronesses, Lady Hayman and Lady Jones, mentioned the duties to climate change and the importance of investment in sustainable businesses and the duties which could be placed on pension funds, which we are very supportive of.
Finally, the noble Lord, Lord Warner, spoke about the BMA. Has the Minister considered the briefing sent to us by the BMA? Have the Government plans to address that issue as part of this Bill?
As we have all said, there is great cross-party support for the measures in the Bill but a feeling that there are opportunities for action on a broader pensions landscape which could bring significant benefit to many people. I hope they will not be missed. We support the Bill and look forward to taking some of these issues forward in Committee.
Baroness Sherlock (Lab)
My Lords, this has been an interesting and thoughtful debate and I have learned a lot during the evening. I now know a lot more about doctors’ pay, thanks to the noble Lord, Lord Warner, and more about actuaries, thanks to the noble Viscount, Lord Eccles. I should draw the attention of the House to an historic interest: I am former senior independent director of the Financial Ombudsman Service, to which I will refer later. I, too, look forward to my first Bill with the Minister and her team and I look forward to engaging with them in the weeks ahead.
I thank the noble Baroness, Lady Fookes, for reminding us of what the world was like without pensions and how important it is to get this right. I am grateful to her for that piece of context.
Labour is in broad agreement with the aims of the Bill, but we will want to see clarifications, assurances and improvements. As we have heard, this is a framework Bill with many delegated powers—a point made very elegantly by the noble Baronesses, Lady Fookes, my noble friend Lady Donaghy, the noble Lord, Lord Sharkey, and others. I am delighted to hear that the Minister will bring forward some illustrative regulations—I am not sure what they are but I look forward to seeing them —for Part 1. I hope she will heed the recommendations from her noble friend, the noble Baroness, Lady Fookes, my noble friend Lord Hutton and others that other areas will also need this detail. I refer in particular to Part 4 which, essentially, is simply the granting of powers to Ministers to do things by regulation. If we see those regulations not, we know not what those things are. So I encourage the Minister to draw those together before we get much further.
I have many questions for the Minister, but this is in fact an attempt to be helpful. If some of them can get dispatched, we will not need to spend too long in Committee, and at the moment we have only four days in Grand Committee.
Let me look at the main provisions of the Bill. First, on CDC schemes—I will try to learn to call them CMPs but I am not there yet—Labour broadly welcomes the proposals and my noble friends Lord McKenzie of Luton and Lord Hain have made the case for the Royal Mail scheme. But we are also concerned to see protections for existing public sector DB schemes—a point referred to by the noble Lord, Lord Vaux, and others.
My noble friend Lady Drake raised the crucial issue of the sustainability requirement and of the potential difference between the way in which that may operate here and the way it operates in master trusts. I will be interested to hear the Minister’s response on how that will work in CDCs.
A number of noble Lords made reference to the fact that, although a CDC scheme may give a better pension than the alternatives available, of course it is not guaranteed. So I look forward to the Minister telling us how workers will properly be informed about the risks and potential changes in what is coming their way.
The noble Baronesses, Lady Noakes and Lady Altmann, expressed concerns about the way in which pension freedoms operating in CDC might impact back on the scheme and the shared risk of those remaining in the scheme. I am also interested in how that might affect the person wanting to move out because, as far as I can see, there is no requirement for someone to take advice when transferring out of a CDC scheme. Why not?
I read somewhere that Julian Barker, the DB lead at DWP, said at a meeting in the other place that the Government intend to introduce a £30,000 advice threshold similar to the one that operates in DB transfers some time in the future. Is that definitely happening and, if so, at what point in the future might we look forward to it? Will the FCA be responsible for creating new rules for financial advice on CDCs in that context?
Let me turn now to the pensions dashboard. The case for a dashboard was made by many noble Lords, including the noble Lords, Lord Flight, Lord Young of Cookham, and Lord Freeman. The big question is who is going to run it or them? My noble friend Lady Drake made a strong case for this, because my understanding of the Bill is not simply that there will be many dashboards—many flowers will bloom, one of which will be bloomed out of the Money and Pension Service—but that there is no requirement that I can see that there should be a public-good dashboard. Can the Minister tell us about that? It seems obvious that that should be the place to start, but it seems that there is not even a requirement there should be one. I may have misread this, and I would welcome the Minister’s clarification. However, that is my reading of the impact assessment.
If that is the case, are the Government seriously planning, as my noble friend Lady Drake said, to compel all pension schemes to release data on £7 trillion of assets and 22 million people, and then tell those people that they can access their own data only in a commercial setting? We do not know how many dashboards there will be. Can the Minister tell us how many have been tested? We have heard concerns about how the dashboards will be used in commercial settings. How are the Government going to protect consumers against the misuse of commercial dashboards by providers when the Bill does not contain, as my noble friends Lord Hutton and Lady Donaghy pointed out, even a legal duty on operators to act in the best interests of savers?
I shall listen carefully to the Minister’s response to my noble friend Lady Drake, who said that transactional dashboards specifically should not be allowed without further legislation. Imagine the position of the Government if a misselling scandal were to ensue in a market created by the Government having compelled the release of data on individual pensions. If that happens, we will not be talking PPI; Ministers will not simply have failed to stop a scandal, they will have legislated to create it. So I ask the Minister to think carefully before moving any further down this road.
There were a number of questions about other issues such as data quality, as raised by my noble friend Lady Donaghy. Some interesting points were made by the noble Lord, Lord Young of Cookham, about identification and access by widows and widowers. I will be interested to hear the Minister’s response.
I have a few other questions. How much transparency will there be around the FCA’s criteria and process for authorising dashboards? Who will oversee dashboard complaints? Will it be the Financial Ombudsman Service or somebody else? There are clearly already demands for more information on the dashboards, whether from the noble Baroness, Lady Altmann, on other savings holdings, or the points made by the noble Baroness, Lady Hayman, and my noble friend Lady Jones of Whitchurch, about the crucial information relating to the climate emergency the savers will want to see. What are the Government doing to plan for those developments.
On the powers of the Pensions Regulator, my noble friend Lady Drake again made a clear assessment. The two questions are: first, are the regulator’s powers currently being used adequately and appropriately; and, secondly, does it need more powers? Those are the two things to hold on to. We have had pushes from both sides—from those who think there are not enough powers and from those who think the powers are too strong—but I take the view that, if you read the reports from the Select Committees on BHS and Carillion, it is hard to conclude that the chief danger facing the pension sector is an over-zealously interventionist regulator. So we should look carefully at how we decide to get that balance right as we move forward.
Having said that, Committee here will be a good point to probe some of the questions about drafting and scope. There are some important questions. Is there a risk that the Bill as drafted could criminalise minor actions or ordinary business activities? Could it catch third parties such as banks and trade unions who interact with the sponsoring employer? Could it even, in theory, catch government entities that contract with a private pension scheme? We will need to explore those questions in Committee.
The Bill also proposes that the regulator will additionally be able to issue a contribution notice in new circumstances where an act or failure to act materially reduced the resources of the employer or materially reduced the debt likely to be recovered from an employer in the event of an immediate insolvency. One can see in recent history where the inspiration for those came from, of course, but contribution notices have rarely been issued. Do Ministers expect that these changes will increase the likelihood of the regulator using the moral hazard powers. Will these new triggers for contribution notices be easier to activate, as it is currently a long and developed process with many stages?
The Bill also creates new duties on employers and others to notify the regulator about certain events relating to the sponsoring employer of a scheme—the noble Lord, Lord Vaux, mentioned this—and there are certainly questions to be asked about what those circumstances are. We will want to understand that more in Committee in order to get a sense of the range of circumstances and what it is intended to be, while understanding that it is impossible to nail everything down, even in regulations.
As the Bill substantially increases the role and powers of the regulator, what is the Government’s thinking about whether it will need additional resources to enable it to do its job? We need to make sure that it is able proactively and effectively to use the powers it has been given to implement the law and ensure that it is enforced.
The killer question is this: are the Government confident that this new legislation plugs the holes in the regulator’s powers that were highlighted by the failures of BHS and Carillion? The Minister should think carefully, because that is one of the questions they have to answer, otherwise they have failed.
Finally, some broader points were raised in the debate. Auto-enrolment was raised by my noble friends Lady Drake and Lady Donaghy, the noble Baroness, Lady Janke, and others. I would be interested to hear why the Bill has not addressed issues such as minimum contribution rates, age thresholds, income thresholds or the extension of auto-enrolment to the self-employed.
My noble friend Lady Bryan of Partick made another passionate plea for the WASPI women born in the 1950s who lost out so much when the state pension age was equalised so sharply. My noble friend Lady Drake raised the important issue of the lack of a credit for carers in auto-enrolment. I will be interested to hear the Minister’s reply. My noble friends Lady Warwick of Undercliffe and Lord McKenzie of Luton raised the important issue of the role of superfund consolidators. As noble Lords will know, they offer to take over DB schemes, thereby relieving the sponsoring employer of any future responsibility, but at a cheaper price than entering the more secure insurance buyout market. That of course poses a risk of regulator arbitrage. Can the Minister update the House on the Government’s current thinking on DB scheme consolidation? This is an issue now and it will become more so.
My noble friend Lady Donaghy, the noble Viscount, Lord Eccles, and others talked about wider issues around the changing nature of the pensions landscape: inequality, the climate emergency and other issues and the way future policy is shaped. I thought the noble Viscount’s comments about the 100-year time span and his future matrimonial plans were interesting. It is a reasonable guide to what we are thinking about and how challenging it is. Have the Government given thought to the best way to shape pensions policy going forward, given how long-term it is? Is a pensions commission the way forward, or are there other ways in which they should do it? I will be interested in their thinking.
We have much to explore in Committee, and I urge the Minister to come armed with detail. Concerns were expressed in the House last week that the Government had refused to engage with any amendments to the EU withdrawal Bill. We all hope that that was a Brexit thing and that now we are on to other legislation we will not see a similar response. It really matters because this is precisely the sort of legislation on which this House adds real value. There is broad agreement on the principles, but there are huge dangers lurking in the detail. That is what we are for. It is almost the definition of a revising Chamber such as this. Those dangers have to be flushed out before the Bill is sent to the other place. So I urge the Government to listen as they may find that, once again, in those circumstances, this House serves not only to protect consumers but to protect the Government from themselves. I look forward to the Minister’s reply.
Baroness Stedman-Scott
My Lords, this has been an excellent debate with excellent contributions. I thank noble Lords for the time they have spent preparing and delivering those contributions. I thank everybody who has taken part. It has been encouraging to hear the positive responses to the measures this Bill proposes. Noble Lords have certainly laid down the challenges we need to address.
The noble Baroness, Lady Sherlock, asked me about our confidence in the Bill. We will have confidence in it if we all work together and turn every stone to make it fit for purpose. I pledge that the Government will do that, and I see no dissention from us working together to achieve that.
I shall deal first with delegated powers and the commitment I made to your Lordships that we will bring forward some examples in relation to Part 1. I do not use the word “trepidation” in conjunction with my noble friend Lady Fookes—it is quite the other way round—but I have her point about Part 3 and the point made by the noble Baroness, Lady Sherlock, about Part 4. We have a wonderful Bill team who are working incredibly hard, and if they tell me they will have them, they will have them.
I understand the concerns raised by some noble Lords in this debate that there are important legal principles at stake before the proposed delegated powers can be exercised properly. In many instances the Government have promised to consult further on the technical substance, particularly in relation in Part 1. There are also instances where there may be a statutory requirement to consult because of a connection to existing legislation. Where there is an intention, promise or legal requirement to consult on the substance of secondary legislation, the legal position is clear: the Government cannot prejudge the outcome. In opening this debate, I said that I have listened to what noble Lords have been telling me, and we are preparing illustrative regulations relating to Part 1 which will be available before Committee. I also pledge to meet noble Lords before Committee to discuss them and all the questions that I will not have time to answer. Noble Lords can see that I have them, so I am not trying to get out of doing the job.
I want to put to bed very quickly the question asked by the noble Baroness, Lady Bryan, about whether we have any plans to increase the state pension age to 75. This is not government policy. The recent independent report recommending raising the state pension age to 75 is not a government report. I hope that gives her comfort.
The multiple dashboard point was raised by numerous noble Lords. The noble Lord, Lord McKenzie, made the point that there should be a single, government-run, non-commercial dashboard to protect consumer interests. We agree that there should be a dashboard that has no commercial aspect. The Money and Pensions Service has made a commitment to deliver such a dashboard.
The noble Lord, Lord McKenzie, asked whether the CDC is just a backdoor to allow employers to close defined pension schemes and impose collective pensions. CDC schemes are unlikely to work well unless the employer and employees are comfortable with the approach. I am sure that employers with open defined benefit schemes are well aware of that. The CBI’s response to our consultation on CDC makes interesting reading. It said that CDC has advantages for both employers and employees and welcomes the opportunity that CDC presents to help fill the gap between defined benefit and current defined contribution schemes.
The noble Lord, Lord McKenzie, was very busy in this debate. He asked why we have not implemented the 2015 Act. Our approach to CDC schemes has developed since, and after much scrutiny we concluded that new primary legislation is necessary to ensure that we get the CDC exactly right for the United Kingdom.
The noble Lord, Lord McKenzie, and the noble Baroness, Lady Warwick, asked why our superfund is not in the Bill. Developing the new regulatory framework for superfunds is a complex task and we are working hard across government and with relevant stakeholders to build consensus on the right approach. We aim to publish shortly our response to the consultation which will set out in more detail our proposals for a future legislative framework. Once this work is completed, we will legislate as soon as we can.
The noble Lords, Lord Sharkey, Lord McKenzie and Lord Vaux, and the noble Baronesses, Lady Donaghy and Lady Janke, raised intergenerational fairness. Fairness between age cohorts has been one of our key considerations from the beginning of our work on CDC schemes. That is why we intend to bring forward scheme rule requirements using regulations under Clause 18. This will ensure that all members, whether active, deferred or pensioner, will share the effects of investment outperformance and underperformance in the same way every year. Should a scheme’s rules not be compliant, it will not be authorised to operate by the regulator.
The noble Lord, Lord McKenzie, and my noble friend Lady Noakes asked how many employers are considering CDCs. It is true that only one company is, namely Royal Mail. However, others are interested. We want to make sure that CDCs work before any future increase.
The noble Lord, Lord McKenzie, asked about automatic enrolment and what the Government are going about the gender pensions gap. Automatic enrolment has been a great success and is already having an impact on the gender pensions gap. Participation in pension saving among eligible women in the private sector has risen from 40% in 2012 to 85% in 2018, which is equal to the figure for men. We have made great progress on that.
Baroness Drake
The Minister is accurate. I do not disagree with her description of what is happening with women in the eligible population for auto-enrolment, but it is the millions not in the eligible population for auto-enrolment whom we are particularly concerned about and whom those figures do not address.
Baroness Stedman-Scott
The noble Baroness, Lady Drake, is absolutely correct and I am glad that she pointed out the difference to me. I would like to meet her before Committee to address that issue, if she is happy to do so.
The noble Lord, Lord McKenzie, asked why the Government have not legislated for the measures in the 2017 automatic enrolment review in this Bill. The Government have set out their ambition to lower the age at which people are automatically enrolled from 22 to 18 and to abolish the AE lower earnings limit in the mid-2020s. Our approach will be to expand the coverage and increase the amounts put into retirement savings by millions of working people, focusing on younger people and lower earners.
The noble Baroness, Lady Donaghy, and the noble Lord, Lord McKenzie, raised the subject of the self-employed. The 2017 automatic enrolment review concluded that the current automatic enrolment framework is not suitable for the self-employed. They are a highly diverse group and one solution will not necessarily fit all. The Government have committed to carrying out research trials to form the evidence base and future policy.
The noble Lord, Lord Sharkey, asked what the Government are doing to tackle investment scams—an issue raised by other noble Lords. These scams are outrageous. The Government are committed to raising awareness about pensions scams to help protect consumers. As part of this, the Financial Conduct Authority launched its ScamSmart campaign to raise awareness of the steps that people can take to avoid investment scams. During the campaign, 173,000 users visited the ScamSmart site, and 376 users were warned about an unauthorised firm.
The noble Lord, Lord Sharkey, raised the need for a stronger nudge towards guidance, as provided for in Sections 18 and 19 of the Financial Guidance and Claims Act 2018. In that Act, we committed to test different approaches to providing a stronger nudge towards Pension Wise guidance. Pension Wise began this work on Royal Assent of the Act and it was picked up at the launch of the Money and Pensions Service. Trials commenced in October 2019. We are on course for those trials to finish and for qualitative work to be undertaken ready for the publication of the evaluation report in the summer.
Many noble Lords raised the question of whether there should be one dashboard or multiple dashboards, and the views on that were mixed. My noble friend Lady Fookes asked why there should not be just one, but I was interested to hear the noble Lord, Lord Sharkey, say that multiple dashboards will give consumers more choice in where they access pension information. Multiple dashboards will help to meet the varied needs of the 24.5 million people with pensions and wealth. I am sure that this is a topic on which we will have extensive discussions prior to and during Committee.
The noble Lord, Lord Vaux, made the point that the payment of dividends will not be a notifiable event. It would be disproportionate to require every dividend payment to be notified to the regulator. Hindering dividend payments could affect pension schemes, as many are shareholders in companies with DB schemes.
The noble Lord also raised the Dutch scheme. Despite communication issues in Holland, for generations the Dutch scheme worked as though it were a DB scheme. Where adjustments needed to be made, these came as a surprise. We will ensure that in communications to members, particularly at key points throughout a member’s pension scheme journey—on joining and annually, and before and during retirement—CDC schemes are clear and transparent that benefit values may go down as well as up.
The noble Lord, Lord Vaux, asked what safeguards there are to ensure that transfer values are fair. The cash equivalent transfer value represents the actual calculated cash value of providing members’ benefits within the scheme. Legislation provides a framework for the calculation of transfer values that trustees must follow.
The noble Lord also asked why companies should not be stopped from paying dividends if their pension schemes are in deficit. We do not believe that it is sensible to stop companies paying dividends to shareholders, even when a scheme is in funding deficit. Government intervention to block dividend payments could discourage investors and weaken the business, further reducing the security of the defined benefit scheme.
The noble Lords, Lord Vaux and Lord Sharkey, and others raised a lot of questions on that subject. It is not that I am not trying to give an answer; it is just that I am unable to do so at the moment, but I will get back to them.
My noble friend Lady Altmann asked what the sanctions will be for pension scheme providers who do not comply with compulsion. If a pension scheme provider fails to comply, it might be subject to penalties, including fines. The regulator will have a range of powers, including issuing compliance notices, penalty notices and fines.
My noble friend also raised the question of simpler annual benefit statements. The industry delivery group will consider the outcome of the consultation on simpler statements when making recommendations on the information to be included on dashboards.
I pay tribute to my noble friend Lady Altmann, whose tenacity on net pay allowance and tax relief is legendary. She has taught me everything that I know about it. That was a matter raised also by the noble Lord, Lord McKenzie. I am not trying to get out of anything here but it is a matter for the Treasury. However, the Government recognise the different impacts of the two systems. To date, it has not been possible to identify any straightforward or proportionate means to align the effects of net pay and relief at source. However, as announced in our manifesto, the Government will conduct a comprehensive review of how to fix this. We say that we will do it.
My noble friend Lady Altmann asked whether the new scheme’s funding requirements support the plumbing pension scheme. I am afraid that I am not able to give a response to that at the moment but I would love to meet her and give her the information that she requires, as well as making it available to other noble Lords.
I am taking a moment to look through my responses in an attempt to be fair to all noble Lords, although I do not think that I am doing a great job.
The noble Baroness, Lady Drake, raised the important point of carer’s credit and the family carer top-up. The Government recognise the valuable role of carers and the fact that they are disproportionately women. The Government Equalities Office gender equality road map, published in July 2019, set out plans to support carers. They included helping people to return to work after taking time out for caring. We are working closely with colleagues in the Money and Pensions Service to empower people to take informed decisions about saving throughout their lives. I am sure that we will revisit this very soon.
We have talked about the gender pay gap—a matter raised by the noble Baronesses, Lady Drake and Lady Bryan. As I said, automatic enrolment has helped lots of women—I have given the statistics. We want to empower them to take informed decisions about saving throughout their life, but we have made progress in bridging the gap.
The noble Baroness, Lady Drake, talked about the consumer protection regime. The Government recognise that the regulation of dashboard providers is critical to maintaining public confidence. My department has been working with HM Treasury and the FCA to decide how best to ensure that the regulatory regime is appropriate and robust.
The noble Baroness, Lady Drake, also raised the important issue of the security of data on pension dashboards. Ensuring the security of data is key to establishing consumer confidence in the dashboards. The Government are committed to ensuring that the infrastructure includes a level of identity assurance that satisfies the good practice established for national cybersecurity.
The noble Baroness, Lady Drake, and my noble friend Lady Noakes raised the subject of the Pensions Regulator. They questioned the impact of the new criminal offences and wondered whether their scope was too wide. We do not want to stop legitimate business activity, such as lenders taking security for normal financing activities. The Government are clear that businesses must be allowed to make the right decisions to allow them to develop and grow.
The majority of employers want to do right by their scheme. However, we must ensure that sufficient safeguards are in place to protect members’ pensions from the minority who are willing to put them at risk—I mention no names. The Government are committed to the Money and Pensions Service providing a dashboard, and MaPS committed to providing a dashboard in its 2019-20 business plan.
I turn to the contribution of my noble friend Lord Young. His powers of foresight are legendary; I am envious, and I am sure that many in both Houses would like to have them. The same is true of his oratory powers; he is very eloquent and his Front-Bench contributions are much missed in this House. We will meet before Committee. Time is really getting on now. I will respond directly to my noble friend Lord Young on the points he raised, and will have an answer to the point raised by my noble friend Lord Flight on equity release.
My noble friend Lady Noakes asked whether there are adequate appeal processes. The answer is yes and I would be very happy to talk her through those at a later time. Her description of a “half-baked dashboard” is interesting. We undertook a significant consultation and got more than 120 responses. These were published in April 2019 and were taken into account during the development of the legislation. We will continue to seek all views as we develop regulations.
The noble Baroness, Lady Donaghy, raised a point about holders of multiple part-time jobs. Currently, where an individual does not earn more than £10,000 per annum in a single job but earns more than the lower limit of the automatic enrolment qualifying earnings band, they can opt in to a scheme in one job and receive the mandatory pension contribution from their employer on earnings over that level.
The noble Baronesses, Lady Hayman and Lady Jones of Whitchurch, talked about climate change. This is a subject close to our hearts and I will meet with them both to talk in more detail. The Government are absolutely committed to tackling climate change and recognise the concerns that have been raised. We have already introduced legislation to require pension schemes to state their policy. In building on this, the DWP continues to work with the industry.
On dashboards, we expect that initially there will be no more information than is already available; to start with, simple information will become available. The delivery group may make recommendations for adding more detailed information as the needs and interactions of users develop.
Baroness Neville-Rolfe
Before the Minister sits down, would she be willing to talk to us a little more about the detail of the subordinate legislation on dashboards? She kindly said that she would do that on the first part of the Bill, but several noble Lords are interested in the subordinate legislation on the dashboard.
Baroness Stedman-Scott
Of course, I will do that as soon as possible. This is an important Bill with a far-reaching impact on people. We will all work together in the House to get the legislation as we want it. I extend my invitation once again to all noble Lords who may wish to discuss any further issues before Committee. Our door is always open. I thank noble Lords for their contributions today. I commend the Bill to the House and ask that it be given a Second Reading.
Pension Schemes Bill [HL]
Monday 24th February 2020
(4 years, 9 months ago)
Grand CommitteeRead Full debate Pension Schemes Act 2021 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 4-II Second marshalled list for Grand Committee - (24 Feb 2020)
The Deputy Chairman of Committees (Lord Geddes) (Con)
My Lords, I remind the Grand Committee that if there is a Division in the Chamber while we are sitting—and I am told that may possibly happen later in the afternoon—this Committee will adjourn as soon as the Division Bells are rung and resume 10 minutes thereafter.
Lord McKenzie of Luton
“(c) the impact of a collective money purchase scheme on private and public sector defined benefit schemes.”
Lord McKenzie of Luton (Lab)
My Lords, in moving Amendment 1 I will speak also to Amendment 34. The latter seeks to insert into the regulations’ objectives the promotion of DB schemes. Amendment 1 adds as one of the things that TPR may take into account when considering an application for a collective money purchase scheme the potential impact of such a scheme on the DB landscape. Together, the amendments are a peg on which to hang a discussion about the position of DB schemes and their future, especially outside the private sector, and to see what more might be done to sustain them for future accrual.
As the White Paper reminds us, DB schemes currently have 10.5 million members, with £1.5 trillion under management—a not insignificant component of the pensions landscape. Notwithstanding this, DB schemes continue to close to future accrual or membership. Hitherto, the alternative has been some DC scheme, and now there is the prospect of CDC schemes in the future.
In times past, DB schemes were the stalwarts of the occupational pension system. Things looked good, with seeming scope for regular improvements in benefits and with surpluses and contribution holidays available. Indeed, were there not concerns at the Treasury about the system being used for tax shelters? These halcyon days have diminished through a combination of factors: more realistic actuarial assumptions; increasing longevity of members; impacts of inflation; falling asset prices; and, probably, less effective collective bargaining.
Much of the content of the Bill is about maintaining and building confidence in the DB system, but with a stronger regulator, and improving scheme funding rules. We support this approach. It is a pity that the Bill did not include a framework for consolidation but we note that this is to come. Perhaps the Minister will give us a timeline on that.
Although DC schemes remove longevity risks from employers, they are generally characterised as having lower contribution rates, doing nothing for our chronic undersaving. The Minister in the other place has declared that he does not want to see the advent of CDC as being a channel to further closures of DB schemes. In particular, he clarified that the Bill’s proposals do not provide a back door to converting DB rights into CDC rights and are not intended to encourage public service and/or DB schemes to convert their accrued benefits.
Can the Minister say how this intention is manifesting itself in the Bill? The data that have been presented to us show that CDC schemes can generate a pension income significantly above that of a DC arrangement, but of course this is not guaranteed. The question arises as to whether the lure of higher returns could be a catalyst to more DB schemes closing to future accrual. There are restrictions that make this difficult, at least at the moment—single or associated company arrangements being but one. Can the Minister say what mechanisms might be contemplated to deflect such moves, if it is the business of government to do so?
The briefing makes it clear that an employer remains within its rights to close an existing DB scheme to new accruals and to offer pensions on a different basis going forward. We know that it has become common for employers to close DB schemes and to open DC schemes in their place, but the briefing note says that CDC schemes should be seen in this context, as a new option for employers looking to develop their pension offering. Closing DB schemes could indeed be such a channel. I beg to move.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Stedman-Scott) (Con)
I thank the noble Lord, Lord McKenzie, and the noble Baroness, Lady Sherlock, for tabling these amendments. Taken together, they seem to explore the Government’s response to the continuing decline of defined benefit pension provision in the UK. I will address the specifics of these amendments but, first, it may help if I talk about the Government’s approach to workplace pensions in general.
The Government’s priority is to promote pension savings for later life through workplace pensions. However, it is for employers to decide what form of provision to make. This is part of their remuneration strategy to recruit and retain quality employees. The Government’s role is not to tell employers what sort of pension to provide, but to promote workplace pensions and to set some minimum standards. That is why we require employers to automatically enrol all eligible employees into a qualifying workplace pension scheme and to make a minimum contribution to that scheme.
The majority of defined benefit schemes are now closed and, as a result, the defined benefit landscape is changing. Most schemes are maturing with fewer contributing members and more receiving pension benefits. The Government’s 2017 Green Paper and 2018 White Paper did not seek to prevent changes to the pension landscape, but to protect the interests of the large number of members who will still rely on defined benefit schemes for their retirement income. That is what the scheme funding measures in this Bill do.
Before the introduction of automatic enrolment in 2012, the decline in defined benefit pensions was not matched by increases in other types of pension. Overall, therefore, pension participation was in decline. Automatic enrolment has been hugely successful: over 10 million people have been automatically enrolled into a workplace pension and the decline in participation has reversed. The number of eligible employees participating in a workplace pension increased from 10.7 million in 2012 to 18.7 million in 2018.
Amendment 1 seeks to put a duty on the Pensions Regulator to take into account the impact on defined benefit schemes when considering an application for authorisation of collective money purchase schemes, also known as collective defined contribution—CDC—schemes. Given the term CDC is widely understood, I shall use it throughout these debates. While the Government do not think they should tell employers what sort of pension they should provide, beyond setting some minimum standards, they want to foster innovation, so that employers have real choices in the type of pension they offer.
I know that concern has been raised that CDC schemes will replace defined benefit schemes. The noble Lord, Lord McKenzie, raised this at Second Reading. I want to be clear that the Government do not see CDC schemes as a replacement for defined benefit schemes.
Royal Mail, the employer actively looking to set up a CDC scheme, does not believe that either. Indeed, it has always seen its CDC scheme as an alternative to its individual defined contribution schemes. To manage cost and risk, employers are moving away from defined benefit schemes towards individual defined contribution schemes. CDC schemes should be seen in this context. For example, Royal Mail has been working on a CDC scheme in partnership with the Communication Workers Union because both sides felt that it served Royal Mail employees better than an individual defined contribution scheme. I am sure that noble Lords will recognise what a positive message this sends about CDC schemes.
Royal Mail is not alone. There is growing evidence that many employers with defined contribution schemes want to provide their employees with a pension scheme that provides an income in retirement. CDC schemes are a new opportunity for employers and employees to choose a pension scheme that works for both. I point out that the Bill includes clear safeguards for existing defined benefit pensions: Clause 3 prohibits public service pension schemes being CDC schemes, and Clause 24 prohibits accrued defined benefits being converted into CDC benefits. Therefore, accrued defined benefit pensions cannot be put at risk by the existence of CDC pensions.
I understand the desire to ensure that members in good-quality defined benefit schemes continue to have access to guarantees from their employer, but the amendment could have unintended consequences for members. If the amendment meant that a CDC scheme could not be authorised, it seems likely that the employer would close its defined benefit scheme and offer an individual defined contribution scheme instead. It is important that the decision on whether to authorise a CDC scheme is based on the criteria and information relating to that scheme. It would not be fair on employers or employees to cloud the issue by linking the authorisation to consideration of other types of schemes. Requiring the regulator to make judgments about different types of schemes would also have implications for its role.
Amendment 34 provides for a new objective for the Pensions Regulator: to promote the membership of defined benefit schemes. The regulator exists to protect workplace pensions in the UK. It makes sure that employers put staff into a pension scheme and pay money into that scheme, and that workplace pension schemes are run properly. It does not matter whether members are in a defined benefit scheme, a defined contribution scheme or a CDC scheme—the regulator’s role is to protect their scheme.
As I said in my introduction, the Government’s priority is to promote pension savings for later life and set minimum standards for employer-provided workplace pensions. The Pensions Regulator is required to ensure that those minimum standards are met. The Government do not consider it appropriate to task the regulator with promoting particular types of pension schemes. This could undermine its role as the regulator of workplace pensions in the UK generally. It is for employers to decide what type of pension they provide; employers who provide defined benefit pensions need to be genuinely able to afford the costs and bear the risk. Promoting defined benefit pensions to employers which may be unable to do this would conflict with the regulator’s other objectives, such as protecting members’ accrued benefits and minimising the risk of calls on the Pension Protection Fund.
The noble Lord, Lord McKenzie, asked why superfunds are not in the Bill. Developing a new regulatory framework for them is a complex task. We are working hard across government and with relevant stakeholders to build consensus on the right approach. We aim to publish our response to the consultation shortly; it will set out in more detail our proposals for a future legislative framework. Once that it is complete, we will look to legislate as soon as we can.
I hope that the noble Lord, Lord McKenzie, and the noble Baroness, Lady Sherlock, recognise that the Government’s approach is sensible and proportionate. I urge the noble Lord to withdraw the amendment.
Lord McKenzie of Luton
I thank the Minister for that full reply. We never intended to press the amendments anyway. As I said at the start, it is an opportunity to have a discussion about where the Government are going, particularly on DB schemes.
I am still a little unclear. I quoted one of the briefing papers which the Government provided in preparing for this debate. It referred to a new option for employers looking to develop their pension offering going forward, which seems inconsistent with what we had understood to be the commitment made earlier by the Minister: that the Government do not want CDCs to undermine the existing DB regime. There seems a risk of doing that, and that in many ways was the tenor of the reply she gave: it is not up to the Government, it is up to employers. Of course we accept that there is a role for employers, but is there not an obligation to work with employers to ensure that the best type of arrangement is available? Historically, that has been DB schemes.
Is not a test for this the extent to which we are saving enough as a nation? We do not save only through pensions but saving through pensions is clearly a very important part, particularly as the Minister instanced the auto-enrolment provisions, which we agree have been a huge success. One might just reflect for future policy that they were conceived under a Labour Government, with the legislation prepared under a coalition Government and introduced under a Tory Government. Perhaps there is an example in pensions policy of how we might better work together on other matters.
I will summarise my concerns. It is good that CDC schemes are available to provide, generally, a better return than can come from a straight DC scheme. It is not all upside, as we shall discuss in other amendments, but it is important that we do not lose sight of the benefits available under a DB regime which, apart from other things, had contribution levels way above pretty much anything that arises under a DC scheme. That should concern us all: the level of saving that is taking place.
Having said that, I do not know whether the Minister wants to come back.
Baroness Stedman-Scott
I thank the noble Lord for the observations he has made. I am thrilled that noble Lords agree that auto-enrolment has been a great success and a great way for people to save for their retirement. The role of government in all this is to encourage saving through automatic enrolment, pensions and other savings vehicles. The noble Lord has raised some valid points. I will take them back to officials and, if we need to write to him or meet him to talk about them further, that is what we will do.
Lord McKenzie of Luton
I thank the Minister for that. I stress, in agreeing about the success of auto-enrolment, that it was started off by a raw junior Minister in the DWP getting that early legislation through.
Lord Sharkey
“( ) that the scheme provides for intergenerational fairness among its members, specifically in connection with the amount of benefits paid to pensioners, proposed adjustments to annual benefits and cash equivalent values provided to members wishing to transfer out of the scheme.”
Lord Sharkey (LD)
My Lords, this is a probing amendment to allow discussion of the intergenerational fairness of CDC schemes. The Government’s excellent policy brief notes say on page 9 that concern about intergenerational fairness was raised by many respondents to their consultation on collective money purchase schemes. They then say explicitly that they recognise that younger members in CDC schemes
“may get less value from flat-rate contributions … if they decide to”
leave the scheme and transform their credits into a cash equivalent. The Royal Mail CDC scheme proposed here is such a flat-rate contribution scheme.
The Government clearly accept the possibility of less favourable treatment of the young, but both the likely scale of this or proposals for its mitigation are not an obvious feature of the Bill or its associated documents. The Government say that they will ensure that
“both benefits in accrual and pensions in payment”
must be adjusted
“to preserve the collective nature”
of the scheme. They go on to talk about sharing the current effects of investment being out and under-performance. This seems a little vague in a vital area. The details will presumably surface in an unamendable SI generated by Clause 18(4), to which we will return later. It also seems not to address the question directly. The question really resolves into this: “What protection or protective mechanism is there for young members against older members expensively cashing in?” An alternative way of putting this is to say what detriment younger members could suffer, or what limit will be put on such suffering, under the scheme. This is surely vital information for anyone trying to understand the likely risks and returns.
The situation here is that many of those consulted raised concerns about intergenerational fairness and the Government admit that it is a possibility. The Government have chosen to press ahead without either quantification of the possible disbenefits to younger members or a clear mechanism for reducing or limiting any disbenefits. This is not only unsatisfactory in its own right; it runs counter to the Government’s repeated acknowledgement that communicating the key elements of the scheme clearly and understandably is vital to its success.
There is a connection, of course, between intergenerational fairness and capital buffers. We will debate capital buffers later but it is worth noting the actual connection here. In an analysis in late 2018 of the DWP’s proposal for the CDC scheme, AJ Bell noted:
“It’s clear from the DWP’s preference not to allow so-called ‘capital buffers’—where funds are built up in reserve to make payouts more predictable—and the proposed removal of any trustee discretion in adjusting benefit levels that concerns about intergenerational fairness in CDC are front-and-centre of ministerial minds.”
It went on:
“And by suggesting any outperformance or underperformance should be reflected in the benefits paid to all members—including those already receiving their pensions—the DWP leaves us in little doubt it will not allow schemes to be skewed in favour of one cohort of members over another. This fairness will, however, potentially make outcomes in CDC less predictable and raises the spectre of pension cuts should investments consistently underperform over … time. The DWP itself notes any reductions in benefits will not be well received, and so clear communication of this—not just upfront but on an ongoing basis —will be absolutely essential.”
We will turn to that later in our discussions. AJ Bell concluded:
“Simply referring disgruntled members to a complex set of scheme rules they signed up to blindly years ago won’t be good enough. Getting these communications right will arguably be the biggest challenger for employers who choose to go down the CDC route.”
The Government, in their Royal Mail CDC proposals, choose mechanisms for intergenerational fairness over benefit stability. This may well be entirely the right choice but it is very hard to tell, since the mechanism for bringing about this fairness is not explicit and no quantification is yet possible. Equally, it is not clear what benefit variations are likely without the smoothing potential of a capital buffer. More clarity is surely needed before employees are asked to sign up to buffers, or no buffers, and on the optimum position. Is the choice really between intergenerational fairness and stability? Is that not a false dichotomy and is there not a middle position combining elements of both, which is likely to be more appealing than the Government’s decision in this Bill not to allow capital buffers as an aid to benefit stability?
Our amendment tries to push the Government a little into being more explicit and much clearer. It adds one further condition to the list of authorisation criteria in Clause 9(3): that
“the scheme provides for intergenerational fairness among its members”
in specified areas.
The objective of the amendment is, of course, to allow discussion of the whole issue of intergenerational fairness, but also to suggest a non-prescriptive way of ensuring that the issue is properly and explicitly addressed in scheme design and to allow discussion of the right balance between intergenerational fairness and benefit stability.
I very much look forward to Members’ contributions and the Minister’s reply. I beg to move.
Lord Vaux of Harrowden (CB)
My Lords, I rise to support Amendments 2 and 7 and speak to my Amendment 6.
Intergenerational fairness is probably the single biggest issue that is generally raised about CDC schemes. The noble Lord, Lord Sharkey, has set the case out well. As an extreme example, if returns were zero or negative but the trustees wished to continue paying the target level of benefits to existing pensioners, the scheme would become in effect a Ponzi scheme, with payments to existing pensioners wholly dependent on a steady stream of new joiners. That is an extreme example, and to call CDCs Ponzi schemes, as some commentators have done, is overstating the situation. However, at a less extreme level, if we look at what is currently happening in the Netherlands, schemes have recently been able to avoid, temporarily, making cuts in benefits by the Government temporarily lowering the minimum funding requirement. While this has avoided immediate pension cuts, primarily for political reasons, it quite clearly pushes the risk on to the younger generation as benefits are paid out at a higher rate than they should be. That is a real and live example of how intergenerational unfairness can and does arise in CDC schemes. It is therefore essential that this enabling Bill deals explicitly with this issue. CDC schemes will fail if such unfairness is allowed to occur or is seen to be a risk.
I support Amendment 2, which requires schemes to provide for intergenerational fairness among members as a prerequisite for gaining authorisation. I also support Amendment 7, which introduces the concept of intergenerational fairness when transfer values are calculated.
Amendment 6 is very simple. It requires that the scheme must have rules to ensure fairness among all members when setting benefits. I have deliberately left that quite wide. I have not referred only to intergenerational fairness because I would like also to cover fairness within generations. For example, in the event that someone makes a transfer out of the scheme, it could impact intergenerationally and also intragenerationally if the transfer valuation is too high.
Royal Mail kindly contacted me before this debate to explain that its proposed scheme has intergenerational safeguards in place, which is good to hear. However, this Bill relates not just to the Royal Mail scheme, but to other schemes in future. Just because Royal Mail may comply does not remove the need to ensure that fairness is very clearly built into the legislation. It is a critical issue.
It is probably arguable whether Amendment 6 is required if Amendment 2 is accepted, although I see no downside, and considerable merit, in making explicit that a scheme must have rules to ensure fairness when the rate or amount of benefits is determined, along with the other rules already set out in Clause 18.
As an aside, any changes made in this part will need to be reflected in the Northern Ireland part.
The Government have recognised the concerns around intergenerational fairness inherent in CDC schemes, so I hope that the Minister will consider these amendments seriously. This is too important a risk not to be dealt with in the Bill.
Baroness Altmann (Con)
My Lords, I support all three amendments. I have added my name to Amendment 2 —so excellently moved by the noble Lord, Lord Sharkey —which intends that any CDC scheme that is applying for authorisation must have a considered strategy for the long-term intergenerational fairness considerations that we have just discussed. The scheme would need not just buffers—we will talk about buffers in the next group—these would also be required against scheme failure and scheme wind-up. In this case I would prefer to think of these as risk margins, to recognise the long-term risks to remaining members, most particularly if scheme members transfer out. That is the particular aim of my Amendment 7, which would also impose on the scheme, when calculating benefits, a requirement to consider how it will recognise the risks in future years if somebody cashes in the pension today.
The cash equivalent transfer value is not really a benefit under the scheme. If the member is in poor health, for example, they will be selecting against the scheme, because the scheme will assume a certain life expectancy. Some will have less and some more, but if all those who have lower life expectancy transfer out at full value, then clearly the pensions in payment are too high. If they take money when markets are performing well, they may receive more than if they had waited longer and there was a market correction, so the remaining members, again, will bear the cost.
Given that a CDC scheme is designed specifically to pay a pension rather than a lump sum as an alternative, without the same draconian guarantee requirements on employers, to the defined benefit system that we have had traditionally in this country—which as the noble Lord, Lord McKenzie, rightly says, is the gold standard—we would not want this to be at the detriment of defined benefit but rather as an alternative to defined contribution. However, those members who transfer out are not placing their trust in the scheme; they are not saying, “I want my pension to come from the scheme,” and they are leaving the remaining members to bear an extra risk. I remind noble Lords that we have seen this in defined benefit schemes with the minimum funding requirement, and also with the rules around scheme surpluses. In the short term it was judged that an amount in the scheme was sufficient to pay a specific level of pension over the long term and it turned out that that was not the case, because assumptions were incorrect, markets changed or demography changed. Therefore, it is wholly inadequate to assume that whatever is happening today should be reflected, for example, in cash equivalent transfer values.
As the noble Lord, Lord Vaux, said, it is not just intergenerational fairness; it will select against today’s pensioners, potentially, because if over the next couple of years markets are weak, pensions will need to be reduced more to reflect people who transferred out at what seemed to be fair value two years previously. I hope my noble friend will consider the thrust of these amendments and perhaps look at whether we can introduce some requirements for schemes when members transfer out or when market values are judged to be at a certain level. Can we insert some risk margins that will protect members who rely on this scheme for their lifetime pension in the future?
Baroness Bowles of Berkhamsted (LD)
My Lords, like others, I speak in favour of all three amendments. In fact, I signed Amendments 6 and 7 but too late for it to show on the Marshalled List in respect of Amendment 7. I was one of the many noble Lords who mentioned intergenerational fairness, and fairness more generally, at Second Reading because, as has been explained, a significant number of members, particularly older members but not necessarily just them, transfer out after some good times for investments in the investment cycle. That leaves others bearing the brunt of later down cycles, hence the Ponzi analogy. I am actually not quite sure what “fairness among all members” actually means—it is difficult because of, for example, the different longevities between men and women—but I signed Amendment 6 because that was the closest thing to saying, “You’ve got to look widely at everything.”
I have come to the conclusion that the only way in which you can have fairness is to have some kind of buffer, which we will come to later on, or some kind of risk margin as proposed by the noble Baroness, Lady Altmann, or maybe both. In the interests of fairness, those who are transferring out should have to take their share of the risk; otherwise, if you are a good market-watcher you could perhaps spot your moment to make your move, and then that is perhaps unfair on the rest.
I, along with others, think that something must be enabled for these measures to be required. It is nice to know that something is already envisaged for the scheme, but there needs to be something for every scheme. There should at least be a requirement for that, and actually I think there should be a permission for things such as buffers and risk margins, rather than a prohibition.
Baroness Janke (LD)
My Lords, I too signed Amendment 2, which my noble friend Lord Sharkey so ably introduced. I will be brief because I think all the arguments have been very well covered. The only thing that I would add is that the importance of transparency in a scheme such as this seems fundamental. I know we are talking about communications and ensuring that members are fully aware of what they are signing up to, both the benefits and the disbenefits later on, but, as part of the arguments that have been put forward in favour of this group of amendments, there is the whole issue of explanation and ensuring that members are fully aware of their position under this type of scheme. I particularly support the idea that in order for a scheme to be registered, the explicit prerequisite is to show what the strategy is to address the whole issue of intergenerational fairness. I know we will be talking about capital buffers later on, but the amendments address the interests of transparency and fairness and the welfare of all members of the scheme, and I support them.
Lord Flight (Con)
My Lords, it will be very important to address these issues because I suspect that CDCs will become very popular among the younger generation as they have considerable attractions. I add only that the principle of building up of reserve seems to be one way of evening out fairness.
Lord McKenzie of Luton
This has been a good debate. I think we are minded to support this measure. I am not very clear in my mind as to precisely how Royal Mail is tackling this issue at the moment, and if the Minister were able to deal with that in her response that would be a help. One thing that has come through from the Government’s own thinking about this is that wherever we end up on it, there must be specific rules. This should not be just a matter of trustees’ discretion; it should be clearly set out in the rules. I shall wait to hear what the Minister has to say.
Baroness Stedman-Scott
I thank noble Lords for tabling these amendments linked to fairness. Concerns about fairness often arise in respect of CDC. I fully understand noble Lords’ interest in this important matter. I share their commitment to ensuring that members of CDC schemes are treated fairly. However, I do not agree that the amendments proposed are necessary to protect members.
Ensuring that members are treated fairly has been a central part of our work on CDC since we began. We have been mindful of the problems that other countries have experienced—for example, in their approach to adjusting benefits—and we have learned from them. Envisaged regulations under Clause 18 will mean that scheme rules will require that there is no difference in treatment between different cohorts or age groups of scheme members when calculating benefits and applying benefit adjustments. If they are not compliant, the scheme will not be authorised.
Noble Lords have previously expressed concern that a significant number of older members might choose to leave a CDC scheme shortly before retirement and that this may pose a risk to younger members. Noble Lords will note that one of the authorisation criteria in Clause 12 relates to the soundness of the scheme design. It is intended to protect members from being enrolled in ill-considered and poorly designed schemes which are unlikely to remain viable over the long term.
It is important that due consideration is given by employers to a scheme’s viability at the design stage, including to how the benefits aspired to will be affected by significant potential events, whether this is a reduction in investment returns or in membership. Envisaged regulations to support the design requirement will aim to ensure that sufficient evidence is provided to satisfy the regulator that appropriate stress testing of the scheme’s design has been undertaken and that a suitable strategy is in place for monitoring and reacting to threats to a scheme’s viability. These are complex matters, so we will consult thoroughly on what the regulations should require in this respect and more widely. We want to ensure that the scheme design is subject to appropriate scrutiny by the regulator at the initial application stage and on an ongoing basis. I am happy to discuss the scheme design requirements in more detail when we reach the relevant clauses.
My noble friend Lady Altmann mentioned cash equivalent transfer values. We propose that a member’s transfer value will be calculated by reference to the present value of the assets currently held that are needed to pay the anticipated pension whenever that is due. That means that, if every member chose to leave at the same time, they would get the present value of their anticipated pension. Nobody would receive anything that was due to anyone else, as the valuation process means that the assets and the cost of all the anticipated pensions should always be in balance. It also means that a member transferring and a member staying always keep the present value of their rights in the scheme and nobody receives anything more than is due to them from the scheme, whether they stay or go.
The noble Lord, Lord Sharkey, asked about the impact of cross-subsidisation on younger members in CDC schemes. Such members may get less value from flat-rate contributions if they decide to transfer out of the scheme before retirement. It is important to remember that pension schemes are long-term saving vehicles, designed to deliver an income in retirement. Our focus is on the long-term benefit of a CDC pension scheme for the scheme members. While CDC benefits are money purchase benefits, a CDC scheme’s purpose is to provide a variable income for life in retirement for its members and not a transferable cash sum.
Baroness Bowles of Berkhamsted
I would like to intervene at this point because a lot has been spoken about. When there is a calculation of the percentage of the value of the assets for an individual transferring out, which is done on various actuarial calculations, will those actuarial calculations be able to take into account long-term market risk so that there is an element of the fact that if you are withdrawing at a time of high markets, you may be getting more, as I said, than would have been your long-term due? If there is no such mechanism, have we learned nothing from mutual funds running on net-asset value, where there are runs and the people who are slowest to move and get their money out are the ones who are trapped with low value? We have invented things such as gating mechanisms to cope with that. There is potentially such a thing as a run on a pension fund, so how will we guard against that?
Baroness Stedman-Scott
The noble Baroness is renowned for her forensic abilities. I am advised that we will need to write to her on that particular question. In fact, we are meeting this week, and I hope we can get her an answer that is accurate and share it with other noble Lords, if that is acceptable.
I recognise and share noble Lords’ concerns. I assure your Lordships that the Government are not oblivious to the potential risk in CDC schemes. I hope my explanation has reassured your Lordships that our proposed legislative framework is designed to ensure that both employers and trustees are alive to these threats when designing their CDC schemes, and that the Pensions Regulator is able to undertake appropriate scrutiny both before and after granting authorisation. With that, I urge the noble Lord to withdraw his amendment.
Lord Sharkey
My Lords, I am grateful for the Minister’s explanation and for her invitation to discuss the issue further. I will definitely take her up on that.
At Second Reading, I talked a lot about the huge reliance in the Bill on secondary legislation and the difficulty that it presents for Parliament to assess such things as intergenerational fairness provisions, as we simply do not know the detail of the mechanism. The Minister explained that it is envisaged that legislation under Clause 18, which means secondary legislation, will set out how intergenerational fairness will be built into the schemes. I am sure that that is everyone’s intention but it will be by secondary legislation and, realistically speaking, Parliament itself will not have an opportunity to make changes to secondary legislation. It would be much better in the case of intergenerational fairness, and when it comes to buffers, to have this in the Bill, given that I think all of us in this Room acknowledge the tremendous importance of getting this matter right. Getting it right via secondary legislation is entirely possible, of course, but it rather excludes us and Parliament from a detailed examination of what this vital mechanism is. I urge the Minister to think about trying to accelerate the process of defining the mechanism so that we get a chance to look at it before we have finished our proceedings on the Bill. Having said all that, I beg leave to withdraw the amendment.
Lord McKenzie of Luton
Lord McKenzie of Luton
My Lords, I move Amendment 3 on behalf of my noble friend Lady Drake, whose expertise noble Lords will see shining through this presentation. Collective money purchase schemes will be a new model of pension provision in the UK landscape. A key function of the legislation and the associated regulation that authorises and supports these new schemes is to understand the risks that members of the schemes may face, and put in place measures that seek to mitigate those risks. We just heard a strong example of that. One risk is that, for some reason, a collective money purchase scheme becomes financially unsustainable. One can speculate on the possible reasons: the main employer might become insolvent, decline in size or withdraw from the scheme, thereby cutting off the future supply of contributing members. That could undermine the shared-risk approach in a CMP scheme. Alternatively, some catastrophic administrative or governance failure could lead the regulator to rescind the scheme’s authorisation. The resolution of such failures will incur significant costs.
The Bill as drafted follows in significant part the authorisation and supervision regime put in place for master trusts. Clause 31 identifies such risks to the sustainability of a money purchase scheme, as I referenced; these are referred to as triggering events. Clause 34 refers to the continuity options that must be taken should a triggering event occur, such as the wind-up and transfer of assets to another scheme, resolution of the event or converting to a closed scheme. It is arguable that the resolution of such triggering events is more complex for a collective money purchase scheme than a master trust because of the existence of pensioners and pooling arrangements in CMP schemes, which are potentially more costly to resolve.
Where such a triggering event occurs, a provision replicates what exists in the master trust legislation: a ban on increasing members’ charges, thus protecting the member from bearing the cost of sorting out that triggering event. None the less, the cost of resolving a triggering event and pursuing one of the continuity options must be met. The Bill is unclear on the source of funding to meet those costs. My noble friend’s concern, which I share, is that the Bill as drafted means that the only source of funding within a CMP scheme to resolve a triggering event will come from the members’ themselves, albeit that these funds are built up in advance from their savings. None the less, the members are funding the risk of scheme failure.
The Pension Schemes Act 2017 was a response to the exponential growth in the minimally regulated master trust market. A key risk, which was a matter of considerable debate in the House during the Act’s passage, was that in the event that a master trust failed and costs crystallised, they should not be met from members’ savings. The 2017 Act introduced a financial sustainability requirement: that a buffer of financial resources had to be in place as the line of defence to protect members’ money from being drained when a triggering event occurred and had to be resolve; and that in the event of a triggering, such resources should be sufficient to meet the costs of continuing to run the scheme for a period of between six months and two years. Those responsible for setting up the master trust had, in some way, to share in the responsibility of providing for the financial buffer, which would be available in the event of a scheme failing.
Baroness Stedman-Scott
I thank noble Lords for tabling the amendments. I turn first to the proposed amendments to Clause 14. The fundamental aims of the financial sustainability requirement are to avoid disruption to members through CDC schemes failing because of inadequate financial planning or resources and to ensure that, if a scheme experiences a triggering event, the costs of dealing with that and continuing to run on the scheme for an appropriate time can be dealt with. These costs may include costs of transfer and wind-up, if that arises.
As these will be new schemes, it is possible that the up-front costs of establishing and running a CDC scheme may not be covered in full by the charges paid by members. Similarly, if a scheme experiences a triggering event, it might also find that it has insufficient resources to meet the cost of resolving that event without further recourse to members’ funds. The financial sustainability requirement is intended to protect against these risks.
It is envisaged that there will be a variety of mechanisms for financing these costs. As the noble Lord, Lord McKenzie, identified, those are likely to involve support from establishing and connected employers. We will consult on this matter before bringing forward regulations, but a range of options is likely to be available—for example, an amount held in escrow or contingent assets.
Envisaged regulations made under Clause 14(3) will ensure that the regulator has sufficient evidence to satisfy itself that the financial sustainability criterion is met and that members are protected. We intend that these regulations will require evidence of any financial commitment by the establishing employer or connected employers and that the scheme has access to the financial resources it needs, including in the event of employer insolvency. If the regulator is not satisfied that the scheme is financially sustainable, the scheme will not be authorised to operate by the regulator, so it is in an employer’s interest to ensure that its scheme meets the envisaged requirements. We do not intend to require CDC schemes to hold a minimum level of capital to meet relevant cost. If authorisation is to work effectively, the Pensions Regulator must be able to consider the risks posed by each scheme to determine whether adequate mitigations are in place. I believe that that is a fairer and more effective approach.
I turn to my noble friend Lady Altmann’s amendment. It would add to the illustrative list of what regulations may require the regulator to consider when deciding whether the processes used to run the scheme are sufficient to ensure it is run effectively. I appreciate the importance of good systems—
Baroness Altmann
I thank my noble friend. Before we finish on this topic, I hear what is being said but what I was trying to achieve with Amendment 5 was to avoid repeating the mistakes already extant in automatic enrolment schemes. We are setting up a brand-new system, and there seems to be nothing in the current processes which would require checks on data accuracy. The processes mentioned in Clause 16 include records management, in subsection (4)(d), while subsection (4)(b) recommends standards for IT systems’ “quality”. However, there are no processes to verify on an ongoing basis a regular audit of whether the data are correct. We know that data are currently incorrect in a large number of auto-enrolment schemes. Even the modern ones are full of errors.
I am trying to introduce something that would help us learn from experience and avoid repeating the kind of mistakes that we know have arisen. They are not intentional mistakes, but if we put in place right from the start processes which require data audits and, potentially, capital buffers as well, against mistakes that have not been foreseen, we will set up a more robust system for the longer term.
Baroness Stedman-Scott
I thank my noble friend for her intervention. My understanding is that CDC schemes are obviously new and will not carry any legacy data issues, which should lower the initial risk. The focus will be on not cleaning old data but establishing strong processes for loading, managing and maintaining data, with regular checks to ensure that quality is maintained. If that does not answer my noble friend’s point in the way she would like we can deal with it when we meet later in the week, if that is acceptable.
I appreciate the importance of good systems and processes. However, the proposed addition to the illustrative list is unnecessary, as we already envisage that appropriate requirements relating to the accuracy of member data and record keeping will be included in regulations. Schedule 5 of the illustrative CDC regulations provides an early indication of our thinking in respect of member records. However, we will consult to ensure that what is included in the regulations is appropriate and that sufficient scrutiny is applied. We also want to ensure that any requirements are proportionate.
In conclusion, I hope that my statements today and the illustrative regulations deliver sufficient reassurance of our commitment to ensuring that CDC schemes are financially sustainable and that systems and processes for member data are sufficient and effective. With that, I ask the noble Lord to withdraw his amendment.
Lord Sharkey
I should like to ask one or two questions about the buffer concept. It seemed to me that a lot of what was being described was the equivalent of a buffer in some ways, but it was not entirely clear how it would be produced, brought forward and exercised. It was not entirely clear to me whether the members of any proposed CDC scheme would be given a choice or say in whether the scheme should go ahead without buffers, as the RM scheme will, or whether it should include buffers. It seems to me that there is merit in consulting the workforce about which they prefer.
In paragraph 1.3 of the consultation response the Government said:
“We do not want to preclude or legislate against buffers in CDC schemes—there are perfectly good reasons why employers and workforces may wish to provide for a scheme that mitigates volatility in this way, and we agree that a buffered scheme could be appropriate in some circumstances.”
Those circumstances might very well include avoiding frequent and disconcerting changes in benefits but also the provision of wind-up or restructuring costs, even if that does somewhat impact intergenerational fairness. My request is for clarity about this cloud of assets or obligations that might substitute in some way for capital. I am not clear about how that will happen. It would be good idea to make sure that in any future schemes the workforce is consulted about whether or not they prefer a buffer.
Baroness Sherlock (Lab)
May I, too, seek clarification? I was not entirely sure what the Minister was saying about where the money could come from for a buffer. I think I understood her to say that the regulator would not approve a scheme unless the sustainability criteria had been met and that they could be met only if an adequate amount of money was placed in, for example, escrow. Is she saying that a scheme would be approved only if the regulator was satisfied that enough money had been provided up front by the sponsoring employer to fund the continuity options in the event of a triggering event? If so, why does she not simply accept this amendment? That is all it says.
Baroness Stedman-Scott
I shall turn first to the point raised by the noble Lord, Lord Sharkey. The funding of future inflation increases provides the headroom funding that is required. The answer to the question asked by the noble Baroness, Lady Sherlock, is yes, the money would be in an escrow account if needed.
Baroness Sherlock
So could it never be the case that in the event of a triggering event, such as a wind-up, an employer pulling out or an employer downsizing, money would have to come from members’ contributions to fund the continuity option? I am sorry to push this, but this kind of clarity is important.
Baroness Stedman-Scott
Noble Lords must forgive me for turning to my friends. This is my first Bill. The answer to that question is no, it should not be.
Baroness Bowles of Berkhamsted
Now I am confused. In the previous group, when we were talking in anticipation about buffers and intergenerational fairness, the Minister said that there would be headroom funding. I understood that to be up front, getting the scheme up and running, but the Minister then said that that was going to be spent. I do not think she said what it was going to be spent on, or have I got the wrong end of the stick?
Baroness Sherlock
I think this is a language question. The problem that my noble friend Lady Drake raised at Second Reading and which we are trying to raise here is not about a capital buffer to deal with the intergenerational questions of benefits and payments at a time. It was the equivalent in master trust regulations where the sponsoring employer has to put money up front in a safe place so that if things go wrong and the scheme collapses the fallout can be funded without raiding members’ benefits. I think the noble Baroness, Lady Bowles, is describing something slightly different.
Baroness Altmann
I hope I can intervene helpfully. This is allied to the issue of data. If a scheme has to wind up, the biggest cost is the administration, and the likelihood of a scheme with poor data records needing to take money from members’ pensions to meet the very high costs of administration when a scheme is failing is much greater. That goes back to the original reason for suggesting that we need a buffer that can cater for the disaster scenario. It is like an insurance policy so that if things have gone horribly wrong with that scheme, members do not potentially end up with no pension because there is something that we have set up from the beginning that can help fund the costs involved and there are systems and processes to check regularly that data are correct along the way which would mitigate the costs of going back over many years and trying to resurrect records.
Baroness Stedman-Scott
Let me try to be helpful and to placate noble Lords on this: money needed to wind up should come from the employer. A scheme would not be authorised if it did not have this financial sustainability from the employer. Is that helpful?
Lord Sharkey
But the scheme does not include a buffer and I am still not clear about the money. If it is going to come from the employer, where does it say that they have to do that? All we are talking about is a notion of fairness, but people may disagree about what that means.
Baroness Stedman-Scott
I think the original question was around the consultation we are going to do on this. This will be resolved in the consultation.
Baroness Neville-Rolfe (Con)
I think this shows that it is important that we understand what the statutory instruments in this area are going to look like. It will obviously lead to a clearer conversation if the Government are able to move on that. The second thing is that, in my experience, things do not necessarily go the way you expect. When I sought my pension estimate before I retired, I ended up a year later getting a less generous pension than I had anticipated, perhaps because things had changed on the underlying demographics—health or whatever. We have to be quite careful to take account of the complexity of these things in the sorts of SIs that we make. Clearly, we need to consult on them for that very reason.
Baroness Sherlock
On a final point of clarification, if I have heard the Minister correctly—and I will read the record—I think she is trying to reassure us that she will consult and that this will be dealt with in regulations. The problem is that Clause 14(4)(b) states that regulations may include provision,
“specifying requirements to be met by the scheme relating to its financing, such as requirements,”
et cetera. All this amendment does is insert the words, “or by an employer”, because of the concern that the Bill may allow regulations to be made requiring the scheme to put money in. We want to be sure that the Bill will require the employer, rather than the scheme, to provide the money. That is why the amendment is written as it is, accepting that the Government will have to work out what is in the regulations and then what the regulator actually did as a result. Are the Government confident that the wording of the Bill will allow them to place a requirement on the sponsoring employer to do what the Minister has described?
Baroness Stedman-Scott
I am advised that we are confident that that will be the case.
Baroness Altmann
In that case, I seek clarification on what would happen if the employer became insolvent. There would still be the same problem that members’ pots would be needed to cover the costs of wind up, because they could not be got from the employer. If there is not a capital buffer up front and we rely on waiting to recover it from the employer, we may still end up with the same kinds of errors that we had in defined benefit schemes, where there was nobody to get the money from and the members ended up with potentially no pension.
Baroness Donaghy (Lab)
In the absence of knowledge in this area I have had to resort to listening to the debate. I think the consultation is important. We need to be clear what the headroom is, what the buffer is and whether the headroom is to take account of inflation, as the Minister says. Taking account of inflation has nothing to do with sustainability, emergency action or catastrophes of other kinds, so we need clarity about, first, what questions are asked in the consultation and, secondly, what responsibility is taken.
It is all very well saying that the regulator will look at this and make sure it is sustainable, but I am not sure that the history of the Pensions Regulator gives me a good night’s sleep. I apologise if I have got it wrong, but there seems to me to be a bit of confusion about what this headroom or buffer is for, who takes responsibility for it and how the Pensions Regulator will keep a look out. It is not clear to me that statutory instruments will do it. However, if the Minister is confident that they will, we need to see them.
Baroness Stedman-Scott
Our job is to give noble Lords comfort and to clarify matters, which we must do. I am advised that if there were to be an insolvency of an employer, that would be anticipated up front when the scheme was established and some provision would have to be made for the risk of it happening. It would of course be part of the ongoing monitoring.
With regard to the helpful suggestion from the noble Baroness, Lady Donaghy, about the questions in the consultation, I might be getting myself into trouble—I am very good at that—but maybe we could write to noble Lords who have taken part in this debate and ask for their opinions about what questions should be included.
Apart from those matters, if there are any other points that I have missed out, or if I have not done as good a job as I should have, we will write to all noble Lords to clarify.
Baroness Sherlock
Would the Minister be kind enough to write in any case, clarifying the helpful points that she has made here? They came in bits, so it might be useful to have a note setting them all out together, if that would be okay.
Lord Sharkey
Lord Sharkey
My Lords, I shall speak also to Amendment 14 as well as to my clause stand part Motion.
Amendment 18 is a probing amendment whose purpose is to enable discussion of the powers given to the Secretary of State to make regulations altering various key aspects of the scheme. Clauses 18(4) to (8) set out what those powers are. The Government’s policy brief discusses Clause 18(4), and it is worth quoting what it says:
“Concern has been expressed that the Government could therefore use regulations to make changes to the basic principles underpinning a CDC scheme’s financial model, potentially leaving it financially unviable.”
It goes on:
“Concern has also been expressed that changes to the regulations under this clause could have the effect of re-designing an existing collective money purchase scheme—potentially years down the line—by overriding what the scheme rules say about the methods and assumptions to be used in calculating benefits. If this happened, it could undermine the actuarial modelling on which the initial design was based and change the deal offered to members when joining the scheme. It can also affect the intergenerational balance of the scheme.”
The Government’s response to this very serious set of concerns is in three parts, none of which seems to be particularly compelling. The first is to deny that any of this is the purpose of the power to make regulations, but Mandy Rice-Davies would have known to how to respond to that. The second is to say that the Government will expect Parliament to reject any attempt by a future Government to use them in such a way, but these powers will be exercised by secondary legislation so how will Parliament stop or modify that? What precedents can the Minister point to there? The third response by the Government in support of these powers is that they will consult before using them. None of these arguments strikes me as particularly convincing. The powers granted are enormously wide and unconstrained. Their existence would certainly not add to confidence in the stability of the scheme.
There is surely a more proportionate way of doing what is required. The Government say that without these powers, there is a risk that they would not be able to stop schemes operating on principles that run contrary to the basic principles underlying the provisions in this part of the Bill. If that is the case, surely it would be simpler and proportionate to set out in the Bill these basic principles and that compliance with them as a condition of the scheme’s authorisation. I look forward to the Minister’s response to that proposal. If the Government insist on proceeding with these wide and unconstrained delegated powers, I am sure that the House will want to return to the issue later in our discussions.
I turn to Amendment 14. The Government’s policy brief describes Clause 47 as allowing the Secretary of State to make regulations using the affirmative procedure to remove the restriction on CDC schemes for single employers or connected employers. This would open CDC schemes to multiple employers and master trusts. The DPRRC and the Constitution Committee have both examined the powers in the clause, and the Constitution Committee agrees with the DPRRC that the power granted in it is inappropriate. It notes that the clause is skeletal and contains a broad Henry VIII power. In paragraph 28 of its report on the Bill, the DPRRC states:
“The fact that the Bill currently prohibits multiple-employer collective money purchase schemes suggests that such schemes may give rise to significantly different regulatory issues from those presented by single employer … schemes which are currently allowed under the Bill. This is … supported by the fact that clause 47(3) to (5) gives the Secretary of State such wide powers to make changes to the provisions that govern single employer schemes”.
In the very next paragraph of its report, the committee says:
“Given this background, we consider it is inappropriate to leave the provisions for regulating multiple-employer collective money purchase scheme to subordinate legislation; and, therefore, that the delegation of powers by clause 47 is inappropriate”.
Subsection (5), the subject of my amendment, is a naked Henry VIII power, including as it does the delegated powers to
“(a) modify a provision of this Part, or any other enactment, as it applies to relevant schemes; (b) amend, repeal or revoke a provision of this Part or any other enactment.”
This kind of unfettered licence to amend, repeal or revoke primary legislation by statutory instrument has always been unattractive to this House. My amendment proposes to remove subsection (5) but I ask the Minister to consider withdrawing the whole clause. As the DPRRC and the Constitution Committee have said, if we want to legislate for multiple employer CDC schemes then it should be via primary legislation, not via the use of secondary legislation and Henry VIII powers.
I have also given notice of my intention to oppose the Motion that Clause 51 stands part of the Bill. I have done this so that we may ask the Government about their use of delegated legislation in Part 1. Clause 51 contains very wide-ranging powers, which
“may be used … to make different provision for different purposes; … to make provision in relation to all or only some of the purposes for which it may be used … confer a discretion on a person … make consequential, supplementary or incidental provision … make transitional, transitory or saving provision”.
The last two are probably okay—they seem boilerplate, to have common-sense meanings and to be properly restricted—but the first three powers are very wide. What exactly is it to confer discretion on a person? What does that allow in practice and what limitations are there to it? It is rather attractive but, I would be grateful if the Minister could explicitly answer those three questions when she replies, as well as explaining why the first two very wide powers are needed at all.
The Government have attempted some kind of explanation of Clause 51 on page 13 of their policy briefing note. It states:
“Clause 51 … (2) allows the regulations made under Part 1 to make different provisions for different purposes.”
That is not an explanation; it simply repeats the text of the Bill. I take it that what is meant is that the regulation-making powers set out in Part 1, in their proper context and given their proper purpose, may be amended to encompass different purposes in any way the Government might choose. Why is that necessary? The Government try to explain by way of example. They say:
“This will allow us to make different regulations to provide for different CDC scheme structures if necessary. They cite by way of example Clause 51(2) would allow us to introduce a different regulatory framework for the way in which multi-employer CDCs must calculate and adjust benefit values compared to single-employer CDC schemes should that prove necessary.”
This power already explicitly exists in Clause 47(3) to (5), which we have already discussed. As we have noted, both the Constitution Committee and the DPRRC thought these powers inappropriate. If they were inappropriate in Clause 47, they are no less inappropriate in Clause 51.
Baroness Janke
My Lords, I support the amendment. My noble friend Lord Sharkey raised this matter at Second Reading and in subsequent briefings. I alluded to transparency earlier; there is also the issue of accountability. We have heard about the recommendations of the DPRRC. I note that the Constitution Committee agrees with the DPRRC that the use of Henry VIII powers is inappropriate in this Bill, regrets the inclusion of skeletal provision and notes that
“complexity is not an excuse for taking powers in lieu of policy development”.
It is an august committee, so we should treat its recommendations seriously. I support the amendments and would like to the hear the Minister’s response to the recommendations of the DPRRC.
Viscount Eccles (Con)
My Lords, perhaps I might make a general comment. I support the way in which the noble Lord, Lord Sharkey, introduced his amendment. This is a problem with framework Bills. Why do we have framework Bills? It is because we do not know the answers to the problems posed, in this case by a particular kind of pension scheme. The results, if the Bill goes ahead as it is, will be quite worrying. I would not wish to be a trustee of this pension scheme. Why not? Because I would not have any powers. At any time, my efforts to play a proper role as a trustee of this pension scheme could be upscuttled by the Government changing their mind and introducing another piece of secondary legislation. All the fundamentals of this pension scheme—particularly in Clause 18, which the noble Lord referred to—are entirely in the hands of the Government of the day.
We have talked about all sorts of things that I am also thinking about from the point of view of the trustee. As a trustee, it would be my responsibility to try to ensure I had some sort of capital buffer, if I needed it. I would have to talk to the employer in a way that would give me some chance of success. With the Bill as it is now, the position of trustees is impossible or near to it.
Lord McKenzie of Luton
The noble Lord, Lord Sharkey, has made a powerful case on these provisions and we look to support him. There must at least be a strong reason to say why they cannot be pared down and need to be as wide as they are. If there is an argument for them, at least they should be pared down. In so far as whether this is doable—the noble Lord said he is not sure what the answer is—in some of these areas, I am not sure that we know what the question is, which is deeply worrying. These things need to be sorted out because, as they stand, they are going to undermine a scheme that generally has a lot of support, particularly our support, in principle. I would like to get it back on track, so that we can deal with it, deliver it and not be waylaid by these very real concerns over delegated powers.
Baroness Stedman-Scott
My Lords, I recognise the expressed concerns over the regulation-making powers in Part 1 of the Bill and how they might be used. There has also been comment on the principles underlying the choice of negative or affirmative procedure for some of the regulations. This is why we have shared illustrative draft regulations to help noble Lords understand how we intend to use these powers, but the secondary legislation to be made under the proposed delegated powers can be laid before this House in final form only after Royal Assent, in accordance with the procedures set by Parliament. This House will have the opportunity then to scrutinise the secondary legislation.
There are important legal principles at stake before the proposed delegated powers can be exercised properly. In many instances, the Government will wish or have promised to consult further on the technical substance, particularly in Part 1. There are instances where there may be a statutory requirement to consult because of a connection to existing legislation. There are instances where there may be a need to await the outcome of consultation being undertaken by the regulator or where consultation is needed with professional bodies. Finally, there are instances where proposed delegated powers are sought to enable the Government to react to future developments.
Where there is an intention, promise or legal requirement to consult on the substance of secondary legislation, the legal position is clear that the Government cannot prejudge the outcome. Had the Government purported to draft all the secondary legislation at the same time as drafting the Bill, that would have entailed, inevitably, prejudging the substance without the benefit of any necessary consultation or consideration of the eventual wishes of Parliament. Likewise, it is more appropriate to consult once the Bill is passed, so as not to prejudge the intentions of Parliament.
Those are the points of principle. I will now deal with the point that the provisions intended for future secondary legislation could, nevertheless, be written into the Bill, at the inevitable cost of delaying introduction. This approach is consistent with the approach to previous pension schemes Bills, recent examples being the Pension Schemes Act 2017 and the Pension Schemes Act 2015. As with those Acts, the provisions in the Bill embody the fundamental policy.
Provisions of a more technical nature, or which are by their nature liable to change, are delegated to secondary legislation. This staged approach has two benefits. First, it enables flexibility to ensure that the legal framework remains appropriately tailored to developments in the pensions industry. Secondly, it provides legal certainty more quickly and enables those affected to prepare for changes to the law. This is important for the pensions industry.
I note that comment has been made on the propriety of affirmative procedure on first use only. I take this opportunity to make it clear that the Government do not accept that the practice of specifying an affirmative procedure on first use is licence to use those provisions inappropriately at a future stage. The reason for affirmative on first use then negative is that a decision on when the scheme design is sound will be critical to the effective running of the scheme and to safeguarding members. Therefore, it is important that when first determining these matters the regulations are subject to full debate. Further use of the powers is likely to be limited to adapting matters the regulator will be required to take into account in the light of operational experience, so the negative procedure would be appropriate.
With respect, this House is called to scrutinise the scope of the proposed delegated powers and the parliamentary oversight of those powers. The Government can, of course, give this House assurance as to their future intentions in using these delegated powers. To assist the House, the Government have produced illustrative regulations relating to Part 1. I hope this illustrates both the way delegated powers in that part are intended to be used and the limitations in pre-empting their use.
Clause 18 provides for CDC schemes to be required to have rules for how the current value of CDC scheme members’ benefits must be calculated and adjusted each year and for powers for government to make provision about those rules. It is therefore a very important clause for ensuring that all members of CDC schemes are protected from inappropriate calculation methods, with all benefits calculated equitably, with no differentiation on the basis of age, gender and so forth.
The amendment moved by the noble Lord, Lord Sharkey, would significantly reduce the Government’s ability to ensure that all members of CDC schemes are treated fairly. For example, scheme rules could discriminate against certain members on the basis of age, and the Government would have limited powers to react swiftly to stop this unfairness.
Lord Vaux of Harrowden
I have a question regarding the first-time affirmative point. I think the Minister said that the second use on the negative basis is likely to be limited to the uses that she talked about, but she did not say that it would be used only in those circumstances. Obviously, this could go on beyond the current Government. If she is not prepared to remove the first-time affirmative aspect, would she at least be prepared to consider limiting those secondary usages to the limited situation that she has described?
Baroness Stedman-Scott
I thank the noble Lord for that important point, which we will certainly consider.
Lord Sharkey
Before I come to the meat of the matter, may I ask what it means to “confer discretion” on a person?
Baroness Stedman-Scott
It would be very helpful if the noble Lord would repeat that for my officials.
Lord Sharkey
I am delighted to repeat it. What does it mean to “confer discretion” on a person?
Lord Sharkey
If that is what it means, and I am sure it does, then we are giving the absolute, unrestricted authority for delegation of any power to anybody at all. That seems to me to be slightly wider than is normal.
I shall move on. I will have to read tomorrow’s Hansard very carefully to understand exactly what the Minister said, but there were several points that struck me as really quite controversial. One of those is about Clause 51. The Minister said, and she is obviously entirely correct, that you cannot set up a multi-employer CDC scheme by regulation if you remove Clause 51. Yes, that was the point of my amendment: it seemed wrong to introduce multi-employer CDC schemes by regulation. That is also exactly what the DPRRC said. It is wrong, or inappropriate, to do it that way: that was the whole point of my amendment. I do not think it is a substantive response to that to say, “Well, if we accept it, we cannot do it.” That was the point of the amendment.
I thought I also heard the Minister say that one of my amendments—I cannot now remember which—would adversely affect the ability to reduce intergenerational fairness because it would remove a delegated power. I am not at all certain, having thought about it, that it would have that effect, but in any case we have already heard very strong arguments for intergenerational fairness mechanisms being in the Bill. I did not hear in the Minister’s reply a lengthy argument against the view of the DPRRC that the powers in Clause 47 are inappropriate. I understand their absence is inconvenient, but it does not address the central argument put forward by the DPRRC that it is inappropriate to create these new schemes entirely by regulation.
To make a general comment about the framework Bill, a lot of what is going on seems to be effectively cutting Parliament out of meaningful participation in critical aspects of scheme design. I understand that there is a need for a strong element of a framework Bill when you are dealing with these kinds of pensions, but it seems wrong to deploy them so widely that Parliament itself is effectively cut out of the process. Parliament is cut out. No matter how many times we mention secondary legislation in this debate, it is clearly the case that we cannot amend and do not reject secondary legislation. It is difficult to see exactly what our participation in secondary legislation would amount to. Having said all that, I beg leave to withdraw the amendment.
Lord Young of Cookham
“( ) If the trustees receive an application under section 95 relating to money purchase benefits that are collective money purchase benefits, the trustees must check that the member or survivor has received appropriate independent advice before—(a) converting any of the benefits into different benefits that are flexible benefits under the scheme;(b) making a transfer payment in respect of any of the benefits with a view to acquiring a right or entitlement to flexible benefits for the member or survivor under another pension scheme;(c) paying a lump sum that would be an uncrystallised funds pension lump sum in respect of any of the benefits.( ) The Secretary of State may by regulations make provision about—(a) what the trustees or managers must do to check that a member or survivor has received appropriate independent advice for the purposes of this section, and(b) when the check must be carried out.”
Lord Young of Cookham (Con)
My Lords, Amendment 9, which is tabled in my name and that of my noble friend Lady Altmann, seeks to give protection to beneficiaries of CDCs who want to transfer out. Basically, it extends the protection that already exists in statute for DB beneficiaries to beneficiaries of CDCs, which we are discussing this afternoon.
As the law stands, that protection does not apply to the beneficiaries of the schemes we are talking about, so I have done a cut-and-paste job, lifting a chunk of legislation and applying it to CDCs. I welcome the steps the Government are already taking to stop people being misled into giving up rights under pension schemes—they have banned cold calling for example—but there are still too many abuses out there and there is a risk of people being approached and encouraged to forgo the benefits they have accrued under a CDC scheme for something that may not be worth quite so much.
I found the meetings that the Minister held with officials and Members of your Lordships’ House enormously helpful. This issue was raised. If I remember correctly, two arguments were given for not doing what I propose now. One was that it will take time to build up a transfer value of £30,000, which is the trigger level at which you have to get independent financial advice. In other words, people who are subscribing to these schemes would not be able to build up £30,000-worth of assets very quickly so there would be time to introduce a scheme. The other argument was that we are talking about a new type of scheme and therefore independent financial advisers may need time to develop the relevant portfolio of skills to give relevant advice to those who are thinking of transferring.
I do not find either of those arguments convincing, particularly as it would be possible for people to transfer into, for example, the Royal Mail scheme. Like other noble Lords, I got a letter from Royal Mail:
“Dear Lord Young … If you have any questions or would like to discuss the issues raised during the debate at Second Reading, please do not hesitate to contact me.”
I contacted Royal Mail and asked whether it is envisaged that those who join Royal Mail after the scheme has started and have a pension pot from their earlier employment will be able to buy into the CDC scheme. The answer—it is now “Dear George” rather than “Dear Lord Young” as the relationship warms—was:
“In answer to your question, yes, the rules of our CDC scheme will allow members to transfer in (“buy in”) and provide themselves with additional benefits under the two parts of the scheme, (a CDC pension and a defined benefit lump sum on retirement).”
So it could be the case that quite soon after the Bill becomes an Act and Royal Mail goes ahead somebody who joins Royal Mail and after a few months or a year decides to transfer out may have a pot worth more than £30,000, but at the moment they will not have to seek any independent financial advice before taking that decision, putting them in a different category from other beneficiaries.
The other argument was that this is a different product and therefore different skills will be needed to give advice to a beneficiary about whether it is worthwhile transferring out. It is a different product, but I wonder whether it is so different that IFAs will not be able to give independent advice to an individual looking on the one hand at the advantages of remaining within a particular CDC scheme and on the other hand at the possible advantages of transferring out. Given that CDC schemes exist in other countries and that there has been a debate about CDCs for some time in this country, I would have thought it perfectly possible to require people to take that advice.
I was reading the briefing from the RSA, which drew my attention to the fact that:
“There is a provision in the Bill to allow the Regulator to temporarily ‘pause’ the transfer option, which mitigates the risk of large-scale transfers out of the system due to misinformation.”
There is indeed a provision in the Bill. It is tucked away in Clause 44 under a pause order. It seems very cumbersome. This clause enables the Pensions Regulator to pause certain activities once a collective money purchase scheme has experienced a triggering event, and one of the things that a pause order can then do is stop a scheme making transfers out of the scheme. I am not sure that is what we want. It involves the Pensions Regulator and is essentially reactive, whereas we need something proactive, which happens automatically and in advance. I did not find that provision in Clause 44 an adequate response to a problem that may affect just one or two individuals in a CDC scheme, and will therefore not engage the attention of the Pensions Regulator, because there is nothing systemically wrong with the way the CDC scheme is being run.
There is an issue here. It may arise slightly more quickly than was originally envisaged. The solution I have may not be perfect, but it is a little better than the pause order, the triggering events and the provision in Clause 44. I beg to move.
Baroness Altmann
I support my noble friend’s proposed amendment. He has raised an important issue here. Once again, it is about pre-empting a problem that we have seen elsewhere and not importing it into brand-new legislation. The pause order and triggering events that might permit some protection against people transferring out inappropriately will arise only if the scheme is in trouble and the regulator has already picked that up. That will be a number of steps down the line.
I wholeheartedly agree with what my noble friend said. Before transferring out of a defined benefit scheme, one is required to take advice if one is losing a meaningful lifelong potential income—not guaranteed, but potential. That protects members and potentially the scheme. If there are risk margins in transfer values, members should also have somebody talk them through what they might imply for them. Given that the aim of the CDC scheme is to deliver a lifetime pension, having the same requirement for advice as we already have in defined benefit schemes does not seem overly draconian. I am not saying this is necessarily the right wording or optimal route for a CDC scheme, but the aim of this amendment to protect members has merit. I would be grateful if my noble friend and the department might consider introducing it.
Viscount Eccles
My Lords, I say in support that, if I were a trustee of a pension scheme, and one, two or more people wanted to transfer out, I would be extremely unhappy if they had not taken independent financial advice. I would see that as a necessary condition of coming to the deal that we were possibly coming to.
Lord McKenzie of Luton
My Lords, we should thank the noble Lord, Lord Young, for bringing this amendment which, as he said, mirrors other aspects of pensions legislation. I was unclear whether this sits alongside the pause and triggering events or would supersede it. I hope the former, as it would be the quickest and easiest way to deal with it. Intrinsic to the wording are challenges that have been met in other pension environments about how to deal with or define “advice”, “adequate” and all that, but it is not beyond the wit of noble Lords to cover that off.
Baroness Stedman-Scott
My Lords, this amendment would mean that a member of a CDC scheme would be unable to transfer their share of the collective assets to another pension scheme, with a view to acquiring flexible benefits or accessing them flexibly under the pension freedoms where this was permitted by scheme rules, unless they had taken regulated advice. I welcome the interest of the noble Lord, Lord Young, and that of my noble friend Lady Altmann, in this area and agree that taking advice can play an important part in helping to ensure pension scheme savers make informed decisions about their pension savings. This includes whether to access them flexibly under pension freedoms or transfer their savings to another pension scheme, with a view to acquiring flexible benefits.
This is why we introduced the advice requirement under the Pension Schemes Act 2015 for members with safeguarded benefits. These are benefits, for example defined benefits, that contain a promise about the rate or amount of pension income that the member will receive in retirement. The advice requirement ensures that members with safeguarded benefits worth more than £30,000 must take regulated advice before they can flexibly access their benefits under the pension freedoms or transfer their pension savings to another pension scheme, with a view to acquiring flexible benefits.
Pensions transfer advice is highly specialised, involving a full assessment of a member’s financial circumstances and a personal recommendation. This helps the member to understand the potential implications of surrendering benefits, where the amount of pension that the person will receive under the scheme is guaranteed by the employer. Pensions transfer advice can be offered only by advisers whose firms have the relevant permissions set out by the Financial Conduct Authority, along with professional indemnity insurance. This comes at a premium, because it is restricted to those prepared to take on the business, and can be expensive. By setting a financial level at which the requirement is triggered in relation to safeguarded benefits, we have sought to ensure that it is applied proportionately. It may not be cost effective for members with smaller amounts of pensions savings to take and pay for such advice.
It is also worth noting that collective money purchase benefits, as a subset of money purchase benefits, are “flexible benefits” for the purposes of the provisions of the Pension Schemes Act 2015. As such, a CDC scheme could decide to allow members to access their share of the collective assets flexibly under the pension freedoms. Before such an option is offered in the scheme’s rules, we intend for trustees to consider fully the potential impact this might have on other scheme members and on the ongoing viability and sustainability of the scheme. For example, if significant numbers of members crystallise all or some of their benefits shortly before retirement, this might impact the scheme’s viability. As part of the authorisation regime, the Pensions Regulator must be satisfied that a scheme’s design is sound, and that such impacts have been considered and appropriately planned for, so that the scheme design meets the authorisation requirements.
We envisage that regulations in support of the scheme design criterion will require evidence that there has been appropriate consideration of risks relating to pension flexibilities, and that action has been taken to mitigate such risks. The ongoing requirement for review of the scheme’s viability report should ensure the scheme monitors any impacts arising from pension flexibilities. These are complex matters; accordingly, we will need to consult thoroughly on what the regulations might require in this respect.
CDC provision is new and the nature of CDC benefits is very different from defined benefits, to which the existing advice requirement relates. As I have explained, pension transfer advice is highly specialised. As CDC schemes are new and only one employer has so far committed to establishing such a scheme, it will likely take time—until more CDC schemes are in place—before advisers consider entering this new market. It will also take time for advisers to develop the necessary expertise to offer appropriate and effective transfer advice to members of CDC schemes. We would need to work closely with the Financial Conduct Authority, which will regulate these potential advisers, to determine what effective or quality advice might look like.
As I have said, CDC is a new provision. Even if we were to set a level—for example, £30,000—at which a requirement could apply, it may take time for members’ funds to grow to this level. I can assure the Committee that my officials will monitor this situation as these new CDC schemes bed in. Once it is clearer that an advice requirement for CDC schemes is warranted, for example because members’ funds have grown significantly, we will still need to work out what the appropriate financial level is for triggering the advice requirement in CDC schemes and how that requirement would work best in practice. At that time, we will engage with the industry and stakeholders to work out these details, and we will then consult on the proposal that has been developed. Subject to the outcome of that consultation, we will seek to legislate to implement the requirements.
In the meantime, we will require CDC schemes to provide their members with appropriate information to help them to understand how their scheme works. For example, we would want the communication that the trustees send to a member who has applied for a transfer to contain the estimated value of their share of the collective assets and to outline the potential implications of transferring out of the CDC scheme before normal retirement age. Member communications at joining and near retirement will also signpost CDC scheme members to the guidance that is available from the Money and Pensions Service. The Money and Pensions Service is responsible for providing guidance to people with pensions, and that will include members of CDC schemes.
I hope my explanations have reassured noble Lords that until a CDC advice requirement is needed, members with collective money purchase benefits will still have access to information and guidance to help them to make informed choices. For the reasons that I have set out, I urge my noble friend to withdraw his amendment.
Lord Young of Cookham
My Lords, we are inching towards the solution that I was after. I think I heard my noble friend say that she did not rule out legislation in due course, once the necessary skills had been acquired.
I would like to pick up one or two points. At one point, I think my noble friend said it might not be cost effective to have advice for smaller amounts. The amount that I envisaged was exactly the same amount that is already required to get independent financial advice for a defined-benefit scheme, so if it is cost effective for a defined-benefit scheme beneficiary to get advice for an amount over £30,000 then I would argue that it is the same for someone with collective contributions.
I heard what my noble friend said about safeguarding the interests of other scheme members but that is not actually the point I was making. I understand that the trustees will want to look at the impact on other scheme members if a large number withdraw, but that is not quite the same as making sure that those who withdraw have had access to the right advice. I think she also drew a distinction between benefits that are safeguarded because they are defined benefits and benefits under this scheme, which are not safeguarded. Legally she is of course perfectly correct, but in effect one hopes that there will not be that much difference between the level of benefits that you get from the scheme that we are discussing and the level that you get from a DB scheme.
I look forward to the regulations that my noble friend referred to. I was reassured by what my noble friends Lord Eccles and Lady Altmann said about the role of trustees. At the moment, under Clause 25(2), all they can do is hold things up for three weeks. However, if trustees take the advice of my noble friend Lord Eccles and take steps to ensure that people have taken the necessary advice before they transfer out, that is the way to go. As I said, I am grateful to my noble friend for her response. We are moving in the right direction and I beg leave to withdraw the amendment.
Lord Hutton of Furness
“Duty to notify the Pensions Regulator: fit and proper persons requirement
(1) The trustees of an authorised collective money purchase scheme must notify the Pensions Regulator within two weeks of a person assuming a role listed in paragraphs (b) to (e) of section 11(2).(2) The Pensions Regulator must— (a) assess whether the person in respect of whom notice is given under subsection (1) is a fit and proper person to act in the relevant capacity, and(b) if it is not satisfied that the person is a fit and proper person to act in that capacity, consider whether to withdraw the scheme’s authorisation in accordance with section 30.”
Lord Hutton of Furness
My Lords, the provisions in the Bill dealing with the authorisation of CDCs are based on the equivalent provisions of the 2015 Act. We all know that those provisions have not been brought into effect and we therefore have no firm evidence as to whether they are robust, but there is a genuine problem with the way in which they are designed to work.
The powers conferred on the regulator appear to be confined to the initial authorisation of a collective money purchase scheme—I am talking specifically about the fit and proper persons test. The powers given to the regulator by Clause 11 are tied specifically to Clause 9, which, as noble Lords will see, is about the decision on the initial application to authorise a collective money purchase scheme. What is going to happen if, as inevitably will happen at some future date once the scheme has been authorised, there is a change in the trustee membership of the scheme, or if any of the other persons referred to in Clause 9 change? It is not at all clear that the Pensions Regulator at that subsequent point has the power to determine whether that person is a fit and proper person to act in any of the capacities referred to in Clauses 9 and 11.
The regulator has the power in Clause 30 to withdraw authorisation from a collective money purchase scheme if he or she regards the authorisation criteria as not being met. That might include, for example, that a trustee or any other person is not considered to be a fit and proper person. Clause 29 allows the regulator to issue risk notices if there is a prospect of the authorisation criteria being breached—that, again, might include that one of those persons is a not a fit and proper person. However, the power of the regulator at that point is to withdraw authorisation for a collective money purchase scheme; it is not to make a determination about whether anyone is a fit and proper person. It is really a sort of nuclear option, which is to withdraw authorisation from the entire scheme. That clearly cannot be appropriate; it would not be in the best interests of the scheme members.
I acknowledge that my amendment is almost certainly imperfect—let us get that issue out of the way—but it is designed simply to allow us to have a discussion. I hope that the Minister can reassure me that I am completely off beam, but is it not better to have it made explicit in the Bill that it is in respect not just of the initial application that such judgments have to be made about fit and proper persons but of each subsequent appointment?
Lord McKenzie of Luton
My Lords, I have put my name to this amendment for the clear reasons that have just been stated. There should be a continuing obligation to make such a judgment, because, between decisions and determinations, many sorts of things could happen to the individual involved. Be it an annual event or a one-time event, there needs to be an ongoing obligation for a judgment to be made.
Baroness Bowles of Berkhamsted
There is nothing that needs to be added; it has already been said. I just want it to be noted that I, too, support the principle behind the amendment.
Baroness Stedman-Scott
I thank noble Lords for raising these amendments that relate to events which can occur in an authorised CDC scheme and which must be notified to the Pensions Regulator. The amendment in the names of the noble Lords, Lord Hutton and Lord McKenzie, would require the trustees of an authorised CDC scheme to notify the regulator where a person assumed a role that was subject to the fit and proper persons assessment. This notification would be required within two weeks of the change. The regulator would be required to assess whether the new person met the fit and proper persons requirement. Where it was not satisfied, the amendment would require it to consider withdrawing authorisation from the scheme.
The fit and proper persons requirement is set out in Clause 11 and is one of the authorisation criteria. The aim is to ensure that only suitable people are involved with a CDC scheme in order to protect the interests of members. It is also worth noting that the Bill already includes a power in Clause 30 for the regulator to withdraw a scheme’s authorisation if it is not satisfied that the authorisation criteria are met. The regulator will need to be satisfied that this is the case on an ongoing basis, including that the fit and proper persons requirement continues to be met. Some events would still warrant consideration by the Pensions Regulator because they could affect the ability of an authorised CDC scheme to continue to meet the authorisation criteria.
Clause 28 covers such “significant events”, which must be notified
“as soon as reasonably practicable”
to the Pensions Regulator. The draft illustrative regulations that we shared with noble Lords, and which have been placed in the House Library, provide an indicative list of potential significant events. Noble Lords may be reassured to know that the event in their amendment is contained in the illustrative regulations. We will work with the Pensions Regulator and others to develop the CDC significant events; we will also consult on the draft regulations in due course.
Amendment 11, tabled by the noble Lord, Lord Sharkey, would mean that the decision of any employer or relevant former employer
“to withdraw from the scheme”
would automatically be considered a triggering event. It may be helpful to point out that the triggering events listed in Clause 31 are already intended to capture withdrawal events that pose a significant risk to the future of a CDC scheme. For example, the withdrawal by the employer from a single employer-established CDC scheme or the largest employer in a connected employer scheme may trigger the winding up of a scheme. The withdrawal may also have arisen as a result of employer insolvency. In this scenario, it is clear that such a decision could risk destabilising the scheme. As such, it should be treated as a triggering event and be subject to greater scrutiny and oversight by the Pensions Regulator to ensure that the trustees are taking all necessary steps to address the issue and protect members.
Not every withdrawal of an employer, however, may pose such a significant threat to the scheme. For example, the impact of a small connected employer deciding to withdraw from a CDC scheme may be minimal on the viability and sustainability of the scheme; it may not warrant a decision to wind up the scheme as a whole. Such an event would be more appropriately dealt with as a significant event. We intend that such events should still be reflected in the continuity strategy, so that the regulator is aware that this risk has been considered and planned for.
We propose that regulations would provide for such events to be a significant event, which would need to be notified to the regulator. Such a notification will allow the regulator to engage with the trustees to ascertain the impact on the scheme’s viability and continuity, and whether this should lead to a formal triggering event or other regulatory action. This approach allows the regulator to retain appropriate oversight of withdrawal decisions and resulting actions, while providing some flexibility and proportionality in approach where the withdrawal of the employer is not expected to impact significantly on the scheme. I am also pleased to advise the Committee that the regulator will engage with the scheme to look at the options before withdrawing authorisation. For the reasons I have set out, I urge the noble Lord to withdraw his amendment.
Lord Sharkey
I thank the Minister for her comprehensive explanation of why it may not be necessary to add what I proposed. However, I am uncertain on one thing about triggering events. It concerns the fifth of the triggering events which we have been talking about. I could not find anywhere in the Bill what the trustees must do in the event of an Item 5 triggering event apart from notifying the Pensions Regulator that such an event had occurred. I acknowledge that I may have simply missed it but I would be grateful if the Minister could say what the trustees are supposed to do after an Item 5 triggering event. What actually gets triggered?
Baroness Stedman-Scott
I thank the noble Lord for his question. I am advised that we will write to him with the answer.
Lord Hutton of Furness
My Lords, I am grateful to the Minister for her response but something is still not clear to me. She says that there is a continuing power on the Pensions Regulator’s part to vet all appointments that fall under Clause 9. I cannot find that continuing authority; I do not know where it is in the Bill. If she could, at some future point, alert me to what provision of the Bill covers that ongoing authority on the regulator’s part to make appointments, I would be grateful.
The second interesting point is that the Minister referred to Clause 28 as if it had some relevance to the point covered by my amendment. There is no definition of “significant event” in the Bill; it will be set out in future regulations. My concern may well be addressed if the Minister were to confirm that any new appointments of trustees or other persons listed in Clause 9 falls within the definition of “significant events”.
I know that my final point goes beyond my amendments; I hope that I am allowed to make it. On the assumption that the Bill becomes law—I very much hope that it does—it is striking that we have a specific set of provisions for how trustees for these collective money purchase schemes are to be appointed; they must be fit and proper persons, for example. But if one looks at the appointment process for other pension schemes, such as defined contribution and defined benefit schemes, there is no parallel provision. Under the Pensions Act 2004, those trustees must have some knowledge of pensions law and of their own scheme, but there is no equivalent provision for the appointment of trustees to other pension schemes. I wonder whether it is justifiable to have this particular provision relating just to these new pension schemes—perhaps it is—but not to have a parallel provision for other trustee and significant appointments to DB and DC schemes.
My only request to the Minister at this point—we may come back to it—is that this may be an appropriate time for us to take a wider look at overall pension scheme governance. In my view, there is nothing more important to the health and well-being of a pension scheme than the quality of the governance in place to oversee it. If it is appropriate for trustee and other appointments to these new pension schemes, of which I am very supportive, to be subject to this process, there is a convincing case, too, for an equivalent provision for defined contribution and defined benefit schemes.
Lord Flight
The noble Lord is absolutely right. It is extraordinary that one group has a lot of requirements when another has none. Historically—let us say 30 years ago—trustees of pension schemes were often not remunerated. Someone applying to be a CDC trustee today would not think of taking on the responsibilities unless they were remunerated.
Baroness Stedman-Scott
On the first point made by the noble Lord, Lord Hutton, we will write to clarify things. We have not listed “significant events” in the Bill because if members are to be protected, it is important that such events can be adapted to emerging threats as well as lessons learned through live running. We want to ensure that these events are appropriate and reflect the specific risks that may be posed by CDC schemes. We will consult with the regulator and others before laying any regulations before Parliament. We will consider the noble Lord’s final point—it was well made—about pension scheme guidance in terms of the new CDC scheme and existing schemes and come back to him on it.
“( ) require information to be made available to the Pensions Regulator relating to actions taken by the scheme to ensure diversity considerations are taken into account in the recruitment of the trustee board with regard to—(i) age;(ii) gender; and(iii) ethnicity.”Member’s explanatory statement
This amendment will require pension schemes to make available information on the diversity of the trustee board to the Pensions Regulator.
Baroness Bennett of Manor Castle (GP)
I ask your Lordships to note that this is the first time I have tabled an amendment in Committee, so please forgive any infelicities in my procedural approach. I would appreciate any nudges in the right direction, should I need any. In speaking to this and other amendments bearing my name, I note the assistance and initiative of the campaign group ShareAction, which has helped with what I am about to say and the amendments.
The noble Baroness, Lady Altmann, said earlier that in setting up CDCs we are starting with a blank slate. We are starting in the modern era. This is the chance to do things right. Many of your Lordships are aware of the numerous studies showing that more diverse groups of decision-makers make better decisions. If the trustee boards of the CDCs reflect the diversity of the wider groups of people they represent, their collective life experiences will improve their capacity to understand the unique challenges faced by different pension scheme members. Pension outcomes are affected by issues such as gender, ethnicity and, as we referred to in an earlier amendment, generational equity. I am sure there is a great deal of expertise on pensions in this Room. Many noble Lords will know that the gender pension gap is currently 40%—twice the gender pay gap.
I warn your Lordships that this amendment is very modest compared with many that I may put before the House. It is not calling for mandatory diversity rules. If we were talking about the composition of major company boards, I have long been a campaigner for mandatory rules on gender diversity on those. These are measures aimed to ensure that CDC trustee boards are fit for the modern era and that they have at least considered these issues of diversity that we know are so crucial to good decision-making. These are a new type of pension scheme. Let us make sure they are fit for this century. I beg to move.
Baroness Sherlock
My Lords, I thank the noble Baroness, Lady Bennett of Manor Castle, for raising this issue and for starting so gently with us—we look forward to seeing where she will take us in future. We do not get much excitement on pensions Bills, so we are looking forward to her giving us some.
I am glad that the noble Baroness raised diversity, because it is something that we are certainly concerned about, as most people interested in pensions should be. She is not alone in raising these concerns; the Pensions Regulator raised them, too. It published a consultation document last year on the future of trusteeship and governance, in which it made a strong case for the need to improve diversity in pension boards. It made many of the points that the noble Baroness raised about the size of the gender pensions gap, but it also flagged up the gap that those who are disabled or from a black, Asian and minority ethnic background have poorer pension outcomes than other workers.
A lack of diversity on pension scheme boards has long been acknowledged as a problem. The 2016 PLSA annual survey found that, on average, schemes had more than 83% male trustees, with one-quarter of trustee boards being all-male. We are not talking about these things not being entirely balanced. If in this day and age a quarter of trustee boards are all-male, something needs addressing.
The idea behind the noble Baroness’s Amendment 12 is that schemes should report on the action that they are taking to address diversity. It does not even mandate an outcome; it asks simply, “What are you doing about it?” In fact, TPR put that option in its consultation document. It said in response to the consultation that opinion was divided, pretty much down the middle, with half the people thinking that this was a good idea and the other half thinking that it was a bad idea. Therefore, it decided not to do it.
Obviously, I could make an alternative argument based on those same facts, but I just want to ask the Minister: if not this, then what and when? The back-up position from TPR was that it was going to have an industry working group to look at improving the diversity of scheme boards. Will that go ahead? If so, has it launched or when will it launch? Crucially, how will we know whether it works? What would success look like? If we are not going to ask people even to report on the actions they are taking, we would want to know that the alternative will make a difference. If TPR and the noble Baroness, Lady Bennett, are of one mind in saying not only that the lack of diversity is a problem but that more diverse boards make better decisions—and they are making decisions about diverse scheme membership—this is an issue on which the Government have to take some kind of action. So if not this, then what?
Baroness Stedman-Scott
My Lords, the two amendments tabled by the noble Baroness, Lady Bennett, to Clauses 46 and 119, both relate to issues of diversity and protected characteristics.
I will speak first to Amendment 12. I note that the aim of Clause 46, which contains requirements relating to the publication of information concerning CDC schemes, is to drive transparency about how they operate. The noble Baroness’s amendment would require CDC schemes to provide diversity information to the Pensions Regulator on what actions the scheme has taken to ensure diversity with regard to age, gender and ethnicity in its trustee recruitment. As we heard from the contributions, particularly that of the noble Baroness, Lady Sherlock, there is work to be done on this.
We recognise the importance of diversity in trustee boards, not just for CDC schemes, but across all trust-based schemes. Indeed, the Pensions Regulator has recently published its response on the future of trusteeship consultation, which considered specifically whether there should be a requirement for pension schemes to report to the regulator what actions they are taking to ensure diversity on their board of trustees.
The response to the consultation advised that there was a lack of consensus on this issue, as has been referred to, with some respondents in favour of it and others suggesting that there were initiatives already in place or that such a reporting regime would place an unnecessary additional burden on schemes. The noble Baroness, Lady Sherlock, asked, “If not this, then what?” I can tell her only that the regulator concluded that
“it would be beneficial to create an industry working group”
to further investigate raising the profile of this important issue, with a view to developing additional guidance and supporting material to help improve the diversity of trustee boards. So, I think that will happen. As I am sure noble Lords will appreciate, I would not want to pre-empt this significant work, but we will keep it under review and consider it further as it progresses.
The Government’s focus on the trustee landscape, including for CDCs, is to ensure that trustees meet standards of honesty, integrity and knowledge appropriate to their role. I think that employers and members participating in these schemes would reasonably expect that to be the case.
Together with Clause 9, Clause 11 means that the Pensions Regulator must be satisfied that the persons involved in the CDC scheme are fit and proper persons to act in relation to it. If the regulator is not satisfied, authorisation of a CDC scheme cannot be granted. We recognise that if we want to engender confidence in CDC, and ensure that the interests of members are protected, it is vital that the schemes be managed by appropriate individuals.
On Amendment 15, relating to pensions dashboards, again the Government recognise the importance of diversity on trustee boards. However, we have had to consider what information to prioritise as being required from day one. As we set out in the Government’s response to the consultation on pensions dashboards, the intention is to start with the provision of basic pensions information. This initial information is intended to help consumers plan for their retirement, in line with our primary policy objectives.
The success of dashboards is predicated on there being a good level of coverage across pension schemes. Achieving good coverage is a complex task. There are over 40,000 pension schemes, with data varying in quality and stored to different standards. The Government expect that it will take three to four years for there to be adequate coverage, with pension schemes initially providing simple levels of information. Increasing the amount and complexity of information required from pension schemes in the early stages may significantly delay delivery. The development of dashboards will be iterative, and we will continue to consider what information is placed on them following their initial delivery to the public.
TPR has not launched the working group yet, and its timescale is not confirmed, but we will monitor the situation. For the reasons that I have given, I hope that the noble Baroness will withdraw her amendment, but I am sure that she will never let up on her campaign.
Baroness Bennett of Manor Castle
I thank the Minister for her response. She referred to the fit and proper persons test. I am not a legal expert, but my understanding is that the test looks at people as individuals, with the Pensions Regulator being asked to judge them as such. So far as I can see, there is no requirement on the Pensions Regulator to look at the group and ask, “Is this group appropriate to represent this body?”
On the Minister’s point about an industry working group, these can be a very good thing; however, they can also be an alternative to action. This subject has been widely researched and there is a great deal of knowledge about it, so I am not sure why we need a working group rather than action.
The Minister referred to putting high-priority information on the dashboard. I strongly suggest that what I have proposed should be high-priority information when pension participants are making decisions. However, for the moment, I beg leave to withdraw the amendment.
Lord Vaux of Harrowden
“( ) Regulations under subsection (1) must ensure that any information published relating to the scheme must clearly and prominently state that benefits that may be payable under the scheme are only targets and not guaranteed, and that benefits paid may vary, increasing or decreasing from time to time.”
Lord Vaux of Harrowden
I hope the Committee does not mind if I start by saying that my name is pronounced “Vaux”. I blame the noble Lord, Lord Brougham and Vaux, for the misunderstanding.
Amendment 13 is very straightforward and, I hope, not too controversial. We have already had discussions today on the importance of communication regarding CDC schemes. CDCs are often described as being somewhere in between defined benefit schemes and defined contribution schemes. That is an important misunderstanding; they are not. They are defined contribution schemes, with none of the guarantees of any level of outcome that a defined benefit scheme provides. We have heard comments today about accrued benefits and about transfer values being calculated based on target benefits payable. All these things are more like defined benefit schemes but, in reality, do not relate to CDC schemes.
Given that the schemes provide these target outcomes, there is a real risk that employees signing up will not fully understand the reality that they are taking all the investment risk and the employer is taking none. In particular, unlike with a DB scheme or an annuity under a DC scheme, the amount of pension can and does vary year on year, up or down, after it has started to be paid. This is again a very important difference from a defined benefit scheme or an annuity under a defined contribution scheme.
The experience in the Netherlands in 2012-13 shows how this can come as a surprise. People were deeply shocked when their pensions were cut in actual terms by up to 7%. Very few Dutch schemes have managed to keep up with inflation over recent years, and further cuts are expected in the coming years despite having been postponed this year by government jiggery-pokery. This has seriously undermined faith in the schemes because people expected to be paid a consistent, inflation-linked pension under them, and they have been shocked. If we are to avoid a similar loss of face, it is essential that the risks are made very clear in any publication issued by the schemes. That needs to cover all interactions: when people are considering whether to sign up; whenever statements and other communications are sent to members; when people are nearing retirement and deciding what to do; and, as pensioners, as time goes on. Most commentators on the Dutch situation highlight that the proper communication of risk is one of the biggest clear lessons that we should learn from the Dutch experience in setting up our own similar schemes.
The Minister said at Second Reading, and she has repeated today, that the Government will ensure that in communications to members, particularly at key points throughout a member’s pension scheme journey, CDC schemes are clear and transparent that benefit values may go up as well as down—or down as well as up, actually. However, that does not seem to be a requirement in the Bill. The regulations about publications in Clause 46(2) do not seem to facilitate that, and I cannot find it anywhere else. Clause 46(2) says that the regulations may, among other things,
“require the trustees to publish a document specified or described in the regulations … require information or a document to be made available free of charge … require information or a document to be provided to a person in a form or by means specified or described in the regulations … require or permit information specified or described in the regulations to be excluded from a document when it is published in accordance with the regulations.”
Nowhere does it talk about the importance of communicating risk. Amendment 13 would simply make the clear communication of the risks—just as the Minister has said will happen—a legal requirement. I very much hope that the Government can accept this really very simple proposal.
Lord Hutton of Furness
The noble Lord, Lord Vaux, has drawn attention to an important issue. The wording of Clause 15, which deals with communication requirements that the Pensions Regulator has to be satisfied with, is all about the systems and processes of communication. I accept that that is important but so is the content of the communication. The issue of risk, and who carries the principal burden of risk in a collective defined-contribution scheme, is central. Anyone who has followed what happened in the Netherlands a few years ago will be aware of the enormous sense of disappointment, anger and, I think, surprise that many of the scheme members felt when their pensions in benefit were reduced. No one thought that was possible but of course it was, because, at the end of the day, collective money purchase schemes are, as the noble Lord said, collective defined contribution schemes. The risk is entirely on the scheme member; it is not on the employer at all. No guaranteed promises are being made to scheme members about what their retirement benefits will be.
The issue of the content of the communications that the scheme must make available to its members is just as important as the systems and process of communication. It is a mistake in the Bill for the emphasis to be placed on just the systems and processes, as it is, with no acknowledgement of the importance of the content.
Baroness Altmann
My Lords, I added my name to the amendment moved comprehensively by the noble Lord, Lord Vaux. I want to add a few points.
As many of us said at Second Reading, communication is one of the key issues of this type of pension scheme, especially in a country that is used to traditional defined benefit schemes, which were thought to offer guaranteed pensions—and have done so in most cases. This is completely different. Indeed, it relates to the idea of capital buffers and some kind of insurance. If there are no buffers and there is no insurance and things go wrong, it is entirely possible that the member will get no pension from this type of pension scheme. Will that concept of risk be explained to members? Will it be explained to members who may, as my noble friend Lord Young said, be transferring into a CDC scheme?
The aim of this scheme is to offer lower-cost administration and better returns on the investment than an individual defined contribution scheme because of the economies of scale and access to a wider range of assets—perhaps also with more individualised professional management of the scheme as a whole—and to offer better income prospects than what an individual would achieve through buying their own annuity, with all the risk and profit margins involved in that transaction. Communication to the members that this does not guarantee a pension and that there are no pension rights in this CDC scheme will be crucial. Explaining to members, who will be contributing their own resources, what this means—not least to Royal Mail members, whose guaranteed defined benefit scheme was ultimately picked up by the taxpayer and then moved into a new type of defined benefit scheme that was considered unaffordable by the new body and is being replaced by this scheme—needs to be an integral part of establishing the scheme.
I thank the noble Lord, Lord Vaux, for raising this important issue. I hope that my noble friend will take it on board.
Baroness Bowles of Berkhamsted
My Lords, I should have added my name to this amendment; I apologise for not getting around to it. It is important, as has been explained.
Another question triggered in my mind is: what information relating to the lifetime allowance will be provided for the member? You get information from a defined benefit scheme; you know what you are expected to get—though, as we know from the NHS, you can get into difficulties if, suddenly, you are earning a little too much. If you pay into personal pensions, or whatever they are called nowadays, you get a number for the pounds that you are likely to have as a transfer value, but what will you get here, especially as you will perhaps be at risk? For example, you may think, “Well, I’d quite like to run a personal pension alongside this just in case.” How are you going to calculate whether you are at risk of breaching the lifetime allowance? If you did breach it and then got a tax charge, but then the scheme started to pay you less pension for whatever reason, would you get that tax charge back?
Lord McKenzie of Luton
My Lords, I agree entirely with what has been said about the need to communicate and the basis on which to do so. I simply raise that, in 2018, we had extensive discussions on the Financial Guidance and Claims Bill, as it then was. A key point was the lack of full understanding of financial matters of the general public. I have forgotten the statistics, but there was a House of Lords review of financial inclusion, and its conclusions were stark. This is not a reason not to communicate; it is a reason to communicate even more intensively. In how we communicate, we need an understanding of how people might receive these messages and we should not assume they can operate in an environment like this—as many, we know, cannot.
Baroness Stedman-Scott
My Lords, I agree that, for CDC schemes to be a success, a high degree of transparency and effective communications are key. If we want to foster member trust in this new provision in the UK, the full scope of risk and benefits of collective schemes must be clearly communicated to members and others, particularly highlighting the nature of benefits, their potential fluctuations and that they are targeted. I mentioned this at Second Reading.
I have already shared with noble Lords a draft illustrative statutory instrument. Paragraph 32 gives examples of the documents and information we plan to require CDC schemes to publish. This includes documents that relate to target benefits, including the actuarial valuation and a statement informing members and prospective members that benefits may be adjusted based on the actuarial valuation and are not guaranteed. We will also require CDC schemes to publish their scheme rules, which will include details of benefit design.
In addition to those regulations under Clause 46, the existing disclosure requirements under Section 113 of the Pension Schemes Act 1993 that currently apply to money purchase occupational pension schemes will apply to CDC schemes, as they are a subset of money purchase benefits. This covers targeted individual member information, and we intend to amend the existing disclosure regulations under Section 113 of that Act to ensure that, for CDC schemes, such information includes key risk messages about benefit fluctuation; for instance, providing full details regarding the possibility of benefit fluctuation at the point of joining in scheme information; emphasising that benefits can change in the member’s annual benefit statement for active and deferred members; being clear that benefits can change during retirement in retirement information packs; and notifying members in advance of any change to their rate of benefit during retirement.
I appreciate the intention behind the noble Lord’s suggestion but, if this amendment stands, all documents and information published would need to include a risk warning message, which would not be relevant in all circumstances; for example, in the scheme’s statement of investment principles. I suspect this would also not meet the noble Lord’s intention that such messages be included in other important communications also made under existing powers. I believe that the best way to approach these concerns is to set out the required information in regulations, as I have indicated, as this would allow the Government to work with the pensions industry to ensure that relevant targeted messages are developed for each relevant document or piece of information.
Lord Vaux of Harrowden
I thank the Minister for her answer. I do not think that we are a million miles apart—the intentions are the same.
I still struggle to see how the Bill relates to what she is telling us because I do not think the regulations that it refers to do what she is suggesting they should. I urge her to take a closer look at that.
Also, because the communication of risk in this situation is so fundamental, there is a benefit in placing in the Bill the obligation to make sure that that communication is made properly to members and potential members, taking the point made by the noble Lord, Lord McKenzie. There is an argument for it appearing in the Bill, even if not in the wording that I have provided—I am happy to look at any other form of wording—but something must make it clear that it is necessary for that risk to be communicated properly to members, prospective members and pensioners.
On the basis of what the Minister said, I beg leave to withdraw the amendment.
Baroness Stedman-Scott
“22_ The Pensions Act 2014 is amended as follows. 23_ In section 54(2) (regulations subject to affirmative procedure), omit the “or” after paragraph (e) and at the end of paragraph (f) insert “, or(g) the first regulations under paragraph 1 or 3 of that Schedule that make provision in relation to collective money purchase schemes within the meaning of Part 1 of the Pension Schemes Act 2020 (see section 1 of that Act).”24_(1) Schedule 18 (power to restrict charges or impose requirements in relation to schemes) is amended as follows.(2) In paragraph 1(1) (power to restrict charges), in each of paragraphs (a) and (b), for “a member” substitute “members”.(3) In paragraph 4 (interpretation), after sub-paragraph (2) insert—“(3) Where a pension scheme is divided into sections, each section that is a collective money purchase scheme for the purposes of Part 1 of the Pension Schemes Act 2020 (see section 1(2)(b) of that Act) is to be treated for the purposes of this Schedule as a separate scheme.””Member’s explanatory statement
This amendment ensures that regulations under Schedule 18 to the Pensions Act 2014 may be made in relation to collective money purchase schemes. The first such regulations will be subject to the affirmative procedure. The power to make regulations in relation to other types of scheme is unaffected.
Baroness Stedman-Scott
My Lords, we are committed to protecting members of workplace pension schemes from unfair charges. This is why we introduced a 0.75% cap on charges in the default funds of money purchase schemes used for automatic enrolment. This cap, which received cross-party support, has proved successful, with average charges in schemes used for automatic enrolment reducing by a significant margin. We want to ensure that members of collective money purchase schemes in Great Britain and Northern Ireland can be similarly protected, which is why we are tabling these amendments.
Our response to the consultation on delivering CDC schemes confirmed our intention to implement an annual CDC charge cap set at 0.75% of the value of the whole CDC fund, or an equivalent combination charge. The response also confirmed our intention that the scope of the CDC cap will be the same as the existing charge cap. Unlike the existing charge cap, which applies at member level, our intention is that the CDC charge cap will apply across the whole of the fund. This reflects the collective nature of these schemes and means that the CDC charge cap will apply to all members in the collective money purchase scheme, including pensioner members. Again, this reflects the collective nature of the schemes and the fact that the same fund will provide members with a variable pension income in retirement. We want to ensure that members of CDC schemes also benefit from other existing charge control measures, such as the member-borne commission ban and the early exit charge cap.
I will speak first to Amendment 15, which will amend the Pensions Act 2014 to ensure that the powers in that Act, under which we are able to provide for a charge cap and other charge control measures, can also be used in the case of collective money purchase schemes in Great Britain. We are amending paragraph 1 of Schedule 18 to that Act, which provides a power to prohibit by regulations certain charges in relevant schemes. This is to make clear that regulations under this power can also be made in relation to collective money purchase schemes. As with the existing default fund charge cap for DC schemes, it is appropriate to use regulations to define the details of the cap and how it will apply. We will of course engage with the regulator and stakeholders in developing these details and will then consult on the draft regulations. We aim to align the application of the CDC charge cap with that of the existing charge as far as possible.
It is entirely appropriate that members of collective money purchase schemes benefit from similar charge control protections that apply to members of individual money purchase schemes. This amendment makes clear that regulations made under the powers in Schedule 18 to the Pensions Act 2014 can provide for controls on the charges borne by members in collective money purchase schemes. The amendment to paragraph 1 of Schedule 18 to the Pensions Act 2014 means that where a scheme which provides CDC benefits has more than one section, each section offering CDC benefits will be treated as a separate scheme for the purposes of the charge cap provisions. This is consistent with other provisions about how sections of schemes offering CDC benefits are to be treated and ensures that sections offering CDC benefits do not cross-subsidise other sections of the scheme.
The amendment to Section 54 of the Pensions Act 2014 means that the first regulations under paragraphs 1 or 3 of Schedule 18 made in relation to CDC schemes will be made by the affirmative resolution procedure. Section 54 already provides for the first regulations under these paragraphs to be made by the affirmative procedure, but regulations have already been made under these paragraphs. We wish to ensure that the first regulations made in relation to charge caps for CDC schemes have the same level of parliamentary scrutiny as those regulations did. Turning briefly to Amendment 16, this makes corresponding changes to Northern Ireland legislation to provide for a charge cap for CDC schemes in Northern Ireland. This will ensure parity of member protection for members of CDC schemes across the UK. I beg to move.
Baroness Bowles of Berkhamsted
My Lords, I have no objection to making things the same everywhere, but last time I came across this 0.75% cap I did not ask a question, so I will now. What exactly does it cover? Compared to some SIPP investor platforms and so forth, it seems rather high. Does it cover all the trading charges as well? You can get 0.15% from Vanguard, 0.25% from AJ Bell and up to 0.45% with all your trading charges covered from Hargreaves Lansdown. I could go on. If you go to some of the insurance companies —I will go on—they tend to be greedier, up to 0.3%, but that is far short of 0.75%, so what is this paying for?
Baroness Altmann
I shall raise similar points. Will ask my noble friend say how the 0.75% charge cap was arrived at, given that the purpose of the CDC scheme, as I understood it, is to provide members better value than if they had their own defined contribution fund and to benefit from the economies of scale of collective management and administration, which clearly should be much lower per member than an individual defined contribution scheme?
Another point my noble friend mentioned is that that there should be no exit penalty. If that were the case, the issue we were discussing earlier about potentially reducing or applying a risk margin to transfer values would become impossible. Intergenerational fairness, which we were concerned about in our earlier discussions in Committee, may be undermined if there is an express prohibition on what may be called an exit penalty, but which to others is a risk margin or buffer against future market dislocations or changed assumptions.
Baroness Stedman-Scott
The noble Baroness, Lady Bowles, asked what the cap covers. This is defined in the regulations, and we will send details to all Members of the Committee. We will consult on 0.75% and the final level of the cap, as part of the regulations, so there will be more opportunity for noble Lords to influence that. The noble Baroness, Lady Altmann, raised the exit penalty. I will have to write to her on that.
Baroness Stedman-Scott
“22_ The Pensions Act (Northern Ireland) 2015 (c. 5 (N.I.)) is amended as follows.23_ In section 51(4) (regulations subject to confirmatory procedure), omit the “or” after paragraph (e) and at the end of paragraph (f) insert “, or(g) the first regulations under paragraph 1 or 3 of that Schedule that make provision in relation to collective money purchase schemes within the meaning of Part 2 of the Pension Schemes Act 2020 (see section 52 of that Act).”24_(1) Schedule 18 (power to restrict charges or impose requirements in relation to schemes) is amended as follows.(2) In paragraph 1(1) (power to restrict charges), in each of paragraphs (a) and (b), for “a member” substitute “members”.(3) In paragraph 4 (interpretation), after sub-paragraph (2) insert—“(3) Where a pension scheme is divided into sections, each section that is a collective money purchase scheme for the purposes of Part 2 of the Pension Schemes Act 2020 (see section 52(2)(b) of that Act) is to be treated for the purposes of this Schedule as a separate scheme.””Member’s explanatory statement
This amendment ensures that regulations under Schedule 18 to the Pensions Act (Northern Ireland) 2015 may be made in relation to collective money purchase schemes. The first such regulations will be subject to the confirmatory procedure. The power to make regulations in relation to other types of scheme is unaffected.
Baroness Bowles of Berkhamsted
My Lords, this important group of amendments deals with the definitions of new criminal offences and new regulatory fines, and with the defences to the criminal offences. I will also speak to my Amendments 18 and 22 as well as to Amendments 23 to 26 in the name of the noble Lord, Lord Hutton.
Amendments 17 and 22 are probing amendments. They would require that, for the criminal offences of avoidance of employer debt and risking accrued scheme benefits, the person has to have behaved wilfully, recklessly or unscrupulously. I want to say a few words about each of those terms, which is where the probing comes in.
I do not think that “wilfully” changes much in the sense of the clauses because later, in subsection (2)(b) of the respective new sections, it is stated that the person intended the actual course of conduct to have such an effect. It could be argued that the wording of the subsections further highlights the necessity for a greater understanding of the consequences but, in my view, the insertion of “wilfully” would make those subsections redundant. My Amendment 18 and Amendment 24, tabled by the noble Lord, Lord Hutton—to which I have put my name—would delete those subsections.
It gets a little more complicated when it comes to considering “recklessly” but it is important to consider that term because, as several noble Lords pointed out at Second Reading, the Government consulted on “wilfully” and “recklessly”. As I see it, “recklessly” does not require the same degree of intent as to outcome, so it broadens the scope. It implies a lack of due diligence or a high degree of negligence. One could perhaps express it almost as wilfully negligent—that is, not bothering to have proper checks in place and caring even less.
These are egregious matters we are considering, when pensions are put at risk either deliberately, without caring or for ulterior motives. To my mind, it would be unthinkable to allow unscrupulous individuals to get off the hook of criminal charges with the defence of “I didn’t know” because they had not made, and had no intention of making, the right kind of checks. “Recklessly” is not the same as “accidentally” or “incidentally”; “recklessly” is “I don’t care” and it should be covered. It should not require that the precise end effect was intended, which is why both subsections (2)(b) in the offences, which say that the person intended the actual course of conduct to have such an effect, need to be deleted because they would negate recklessness as an offence.
Of course, having appropriate checks and procedures in place would be an obvious defence, just as they are in the various “failure to prevent” types of offences that have come into being, such as for bribery and money laundering.
Now I come to probing the third term: “unscrupulously”. This may not be a normal legal term, but everyone knows what it means. It is used in describing the objectives of those whom it is wished to catch. It is used about the new offences—starting at the bottom of page 7 of the Explanatory Notes, which state:
“They will provide additional deterrents for unscrupulous behaviours and will enable the Regulator to punish abuse and wrongdoing within the occupational pensions industry appropriately.”
That is exactly what we want to be able to do: punish unscrupulous behaviours.
Compared with some of our Commonwealth colleagues, we in this country are rather a soft touch. Australia has an offence of unconscionable conduct in commerce. It works under common law and shows that expressions describing bad behaviour do not need to be shunned in legislation. Yes, it is a catch-all phrase, but we should be starting to give it serious thought when it accurately describes the underlying behaviour.
As a little thought experiment, what happens if we apply the three words “wilfully”, “recklessly” and “unscrupulously” to driving fast in a 30mph zone? What would we get? “Wilfully” means that there was an intention to drive faster. “Recklessly” might mean not bothering to look or have regard to surroundings or missing the sign. What might be “unscrupulous”? I have had some fun thinking about this. Here are a few possibilities: blanking out your number plate with a fancy gizmo or having false number plates; getting a friend to remove the 30mph sign; or perhaps making someone else the fall guy, saying that you were not the one driving. These may be wilful acts but while it is questionable whether they are specifically wilful at the time of the actual offence or what the precise intended effect was, they are certainly unscrupulous.
I turn briefly to the amendments in the name of the noble Lord, Lord Hutton. I apologise for going ahead of the mover but there are words in common. In his amendments, “wilfully” and “recklessly” are used in a slightly different place but what I have said about their meaning also applies. There is also the consequence of needing to delete the subsection reciting intent.
Amendments 23 and 25 are applied to deal with the criminal offence and civil fine relating to putting accrued scheme benefits at risk. The wording
“detrimentally affects in a material way”
appears and has caused some concerns, which were referenced at Second Reading. I think that the positioning of the wording works well and support the addition of those words to the fine offence. Obviously, it is possible to merge the noble Lord’s proposal and my own with regard to the criminal offence of risking the accrued scheme benefits.
More broadly, it seems that “wilfully” or “recklessly” could be usefully incorporated into the financial penalty on avoidance of employer debt, so that it was in all four of the new offences, including the two criminal ones and the new fines. Then there would be no playing off about different meanings. But I will listen carefully to the Committee, particularly to see whether the noble Lord, Lord Hutton, has a different nuance to mine.
The other amendments in this group, tabled by the noble Baronesses, Lady Noakes, Lady Neville-Rolfe and Lady Sherlock, relate to defences and call for guidance. I sympathise with the general intent but have some reservations; however, I will speak to them later when we have heard from the movers, as their wording is not interconnected like my amendments and those of the noble Lord, Lord Hutton. I beg to move.
Baroness Neville-Rolfe
My Lords, I refer to my entry in the register of interests and shall speak to Amendments 19 to 21, which are grouped with those of the noble Baroness, Lady Bowles. My amendments are also in the name of my noble friend Lady Noakes, who sadly cannot be in her place today. We are concerned that the powers in Clause 107 may be drawn too widely. This is a concern shared by a number of those involved in the pensions sector—indeed, it was touched on by the noble Baroness, Lady Drake, a great expert in pensions matters, at Second Reading.
In the same debate my noble friend the Minister helpfully said that the intention of the clause was,
“to punish those who wilfully or recklessly harm their pension scheme”.—[Official Report, 28/1/20; col. 1353.]
In the light of that, it seems that the criminal offence is really aimed at parties whose conduct is extreme and lies outside the range of ordinary reasonable conduct. If so, we believe that the thought could be captured better by applying the offence only where,
“no reasonable person having regard to all of their duties and all relevant circumstances”,
would have acted as they did. The change from “reasonable excuse” to “no reasonable person”, as in Amendment 19, may not sound like much of a change; however, I assure noble Lords that it is important. I am advised that a substantial body of case law makes it clear that the two are very different. The former potentially creates a fine objective judgment, while the latter recognises that there is a range of conduct that can be seen as reasonable. Our Amendment 20 proposes for consideration today a list of factors that could be taken into account by the courts.
Finally, Amendment 21 proposes an exemption, drawing on an idea in the Pensions Act 2004. It would provide a system of binding comfort that could be given by the regulator or the Pension Protection Fund. Given the gravity of the criminal offences those involved in the pension world will potentially face as a result of the Bill, there seems to be a strong case for examining this. We want good, honest people to be involved in the sector and not deterred from any involvement. These amendments deal with new Section 58A of the Pensions Act 2004, but obviously if the argument were accepted by the Government, a similar change would be needed to new Section 58B.
In responding to these amendments, would the Minister —I think it will be the deputy Leader—give more detail and further examples of the harms we are trying to remedy in this part of the Bill? Much mention was made at Second Reading of BHS and Carillion, but these companies had unique factors that went way beyond pensions. The impact assessment assumes up to five cases every year. Is there other evidence in recent years that justifies criminal penalties and these estimates?
In closing, I shall make a wider point. We need to get this legislation right, and we have been trying to do that today, because the costs of getting it wrong, and the inevitable legal costs, will fall on pension schemes and therefore leave less for the very pensioners we are trying to help with the Bill. The new criminal offences appear to cover not only the employer but trustees, advisers, third parties and possibly the regulator. They could embrace routine debt funding necessary for a viable business, or changes to investment strategy designed by trustees to improve their fund. The perverse effect of getting the arrangements wrong—this is a theme I always return to—could be cost and delay, which might be problematic in a tight financial situation and push more businesses into the Pension Protection Fund, which is exactly what we all want to avoid. It could also deter trustees from taking on the responsibility for pension funds. My noble friend Lord Eccles, who I am sorry to see is not in his place, made this point in relation to the wider regulation-making power in Clause 51, although I very much understand the difficulties that my noble friend faces in this area.
Lord Hutton of Furness
My Lords, I shall speak to my Amendments 23, 24, 25 and 26. It was clear at Second Reading and has been again today that most Members of your Lordships’ House accept the need for this new criminal offence: I certainly do. Recent events have confirmed that there is a gap in the law and we should try to fill it—that is our responsibility. However, when it comes to the creation of new criminal offences, there are always some important questions to be clear about, from the beginning. Who are we aiming this new criminal offence at? Have we got that right, and are we clear, in the way the offence has been drafted, that we are catching or bringing within the net of this new offence those people and those people alone?
We need to be clear who can prosecute. It is interesting to look at the origins of this offence, and the way it came about in the consultations. It is clear in the Green Paper and the White Paper that the Government, rightly, had in mind that the Pensions Regulator would be the prosecuting authority. That is not the case in the Bill, where we have the rather unsatisfactory state of affairs that not just the Pensions Regulator but the Secretary of State and the Director of Public Prosecutions can prosecute. As I said at Second Reading, that does not clearly set out where the prosecuting authority lies, which is why I support Amendment 35, tabled by my noble friend Lady Sherlock.
There is a parallel here with other offences. This is a new offence, complicated in nature and unclear in its precise scope. When Parliament is creating new offences such as this, it has a responsibility to the general population—and, in this case, to those concerned with the governance of pension schemes—to help them understand what is covered by this new legislation and what actions people need to take to make sure they stay on the right side of the law. Amendment 35 would help us clarify some of those issues.
There is a general problem with the way this clause has been drafted, which has been a familiar theme of the comments of the noble Baronesses, Lady Neville-Rolfe and Lady Bowles. I support much of what they said. I am concerned that this offence, in its current form, is drafted too widely. When it was envisaged, and the Government did their consultation, it was going to be an offence to catch the behaviour of unscrupulous employers or directors of companies. That is the origin of this offence. We do not need to go into the detail of the case, but we all know what we are talking about.
It is clear, from a cursory reading of this clause, that this offence would cover more than just employers and company directors. It could cover scheme trustees, actuaries or advisers, or pretty much anyone in a position to give advice on the management of a pension scheme. I genuinely doubt that was the intention of the Government when they consulted on this clause. They have made this provision too broad in scope. They should have another look at the way that this clause has been drafted.
They should definitely have another look at who the prosecuting authority should be. Generally, in our system, it is very unusual for the Secretary of State to be able to bring a criminal prosecution against another person. There may be one or two examples I am not aware of, but I am sure the Minister is well advised about how many situations there are in which the Secretary of State has such a power. Generally, it is best to leave criminal prosecutions in the hands of criminal prosecutors. With the best will in the world, and the high regard I have for the Secretary of State, she is not a criminal prosecutor. I would not want her to be in the position of being advised to bring a prosecution. I would like the Minister to set out how that process would work within the department. It would be unusual. As a Secretary of State, I was never advised to bring a criminal prosecution. Particularly if the DPP and the Pensions Regulator both decided not to bring a charge, it would be extraordinary for the Secretary of State to be able to carry on with a criminal prosecution none the less.
The third question about criminal offences is pertinent to this offence. What is the penalty for the wrongdoing that we have in mind? To go back again to the Green and White Papers, the origin of this offence was the behaviour of unscrupulous employers, who deliberately put at risk scheme members being able to acquire their scheme benefits. By its very nature, that is a serious offence and the draft statute we are discussing has a sentence of up to seven years’ imprisonment for such an offence. Bring that on. That is an appropriate statutory offence.
What I do not understand about this offence, in what would be new Section 58B(9)(b) of the statute, is that it could be tried either way. It could be tried on indictment, where the statutory sentence of imprisonment would kick in, or it could be tried on a summary conviction. But by its very nature a summary trial implies that an offence is not as serious as a charge that can be brought before a jury in a Crown Court. For the life of me, I cannot understand why this offence has mutated into a serious and a less serious offence at the same time. That is incomprehensible to me. This is a serious offence that should be tried on indictment by an appropriate criminal prosecutor.
I am afraid that in my humble view this clause needs a complete rethink. It is too wide of the mark and obtuse in what it is covering, and the sentencing arrangements are indecipherable; they are an inherent set of contradictions. This should be an offence triable on indictment only, period, because we are talking about serious offences.
The noble Baronesses, Lady Neville-Rolfe and Lady Bowles, both referred to the wording used to describe this offence. I have simply tried to bring into the Bill the wording that the Government themselves consulted on when the offence was being talked about and conceived. It was about wilful or reckless behaviour; in fact, I think the Government used the phrase “grossly reckless behaviour” in their consultation. In the way that this offence has been drafted, I absolutely accept that the Government are trying to ensure that the offence is based on wilful or reckless behaviour, but there is almost an obligation on the Government when they have consulted on a particular offence to stick as closely as possible to how that consultation was done, developed and extended, and to bring forward legislation that as closely as possible represents that offence in any new legislation. I think there is a way that the Government could do that. My amendment is one simple way of doing it, although there may be a better way. I think it is incumbent on the Government to try as far as possible to stick to what they consulted on, but there is a very real danger that this clause will not do that. I hope the Minister will be able to offer me and other Members of the Committee some reassurance that the Government might be willing to have another think about the nature of this new offence.
Baroness Bowles of Berkhamsted
My Lords, I am sorry to rise again but I did warn the Committee. I agree that it is necessary to look again at the precise wording. I do not think that “recklessly” is covered, and it should be. It may well be a solution to remove trustees from the scope.
I want to address the concerns I have about defining “reasonable excuses”. Sometimes you can end up forcing unintended interpretations that can work both ways, either giving loopholes to bad behaviour or unintentionally limiting the scope of excuses. That means, if you like, it can work for the prosecution or the defence, but it means you do not get what you thought you had got. If anything is specified or picked out as an example, it needs to be clear that it may not be binding in all circumstances and that the examples are not an exhaustive list, so that if something else is brought forward as a defence it is legitimate for it to be considered.
There are certainly regulators that have fallen into the trap of too many guidelines. The FRC was criticised in the Kingman report for the detrimental effect on reporting and audit of too many guidelines, resulting in boilerplate recitations rather than thoughtfulness. In this subject, we are also interested in thoughtfulness and people thinking about what they are doing. We debated the FCA report into GRG in the Chamber on 27 June last year, and the FRC gave a line-by-line report of how its published interpretation of “fit and proper” had greatly narrowed what in my personal experience was always held out to be a wide-in-scope basic test. It was even described to me by some people as our version of “unconscionable conduct” in that bad conduct would not be fit and proper and that was the way in which we went about getting bad behaviour. However, in the GRG case and the report from the FRC we found that not to be the truth because of the guidelines and training that were put around those words. So what we do here needs to be done with care.
Concerning Amendments 19 and 20, it should not be a reasonable excuse to do something just because someone else has or might have done it. That is an excuse for a race to the bottom and to disengage from responsibility. It is reasonable to have regard to market practice but the competitive urge to do what others do or to push it a bit further has to be resisted—such behaviour was among the causes of the financial crisis.
I fully accept that there are difficult matters to balance for business; these are in part explored in later amendments relating to dividends. Perhaps the law has not been clear enough so far about what are the right priorities; in the past, pensions have been put at the bottom of the pile, with deficits paid down slowly and surpluses raided and holidays taken rather more eagerly, with a lax attitude when the company is generally well capitalised. That has been the wrong message. I believe it is now the right time to clarify that obligations rank ahead of options in the balance of legitimate interests and call on capital.
Baroness Sherlock
My Lords, I will speak to Amendment 35 in my name and respond to the debate on the other amendments. In doing so, I remind the Committee of an historic remunerated interest as the former senior independent director of the Financial Ombudsman Service.
At the outset, I say that we on these Benches place a high priority on ensuring that the regulator has the powers and sanctions that it needs to tackle bad behaviour in the operation of pension schemes. I agree with the noble Baroness, Lady Bowles: conduct that puts at risk the assets that people have worked for all their lives is serious behaviour indeed. It can have a dramatic effect on the lives of millions of people and push them, in the end, into a retirement based in penury rather than the security that they could have reasonably expected. Of course, allied to that is a public policy interest: it may discourage people from saving if they do not feel that the vehicles are secure and that their money will be safe. So we welcome the introduction of the new offences and the focus on preventing bad behaviour and stepping in before the consequences get too serious or, even, the situation becomes irrecoverable.
In the Committee, at Second Reading and outside, I have heard some concerns about the Bill’s drafting, especially around what reasonable behaviour is and what conduct causes material detriment. The noble Baroness, Lady Bowles, expressed that point well. I accept that there is a balance at stake here and that the drafting must strike a balance. It is right to expect those charged with managing or overseeing pension funds to do so with appropriate skill and knowledge, and with care and integrity. However, I am also conscious that the Government would not want inadvertently to discourage good, capable people from, for example, serving as pension scheme trustees if they feared the unforeseen consequences of making reasonable judgments in good faith; nor would they want to foster unhelpful levels or types of risk aversion.
There is a need to have more clarity, for Parliament and the sector, as to how these provisions will operate in practice. Reading the impact assessment, it seems clear that the Government expect the criminal offences in particular to catch hardly anybody. It is based on one person a year being convicted, so the clear expectation in the minds of those drafting this is to have a nod that a safety net will go out—unless I have misunderstood, in which case please correct me.
Amendments 17 and 22 propose the formulation “wilfully, recklessly or unscrupulously”. I do not need to revisit this but I would be interested to know whether the Minister agrees with the noble Baroness, Lady Bowles, in her probing approach on what that phrase means. Also, why did Ministers decide not to go with “wilfully” or “recklessly”? What did they think was changing between that and the formulation that they used in the Bill in the end?
The amendments tabled by the noble Baronesses, Lady Neville-Rolfe and Lady Noakes, are interesting. I hear that the noble Baroness, Lady Neville-Rolfe, regards the current reasonable test as being too low. Many people would regard the test that no reasonable person would do something as very high indeed. I wonder whether the Minister has a sense of how easy it would be for anyone to be convicted on a test of that nature. That is the judgment.
Earl Howe (Con)
My Lords, this is quite a large group of amendments, all having as their subject matter Clause 107. I want to do justice to them so I therefore hope the Committee will forgive me if my reply is somewhat longer than might be welcome or the norm.
Let me briefly set out what this clause seeks to do. Clause 107 introduces two new criminal offences into the Pensions Act 2004, in new Sections 58A and 58B, and provision in new Sections 58C and 58D for mirroring financial penalties. These provisions strengthen the deterrent and punishment for certain conduct which puts pension schemes at risk. My noble friend Lady Neville-Rolfe and the noble Lord, Lord Hutton, asked what sorts of acts we are targeting. The types of acts that could fall within the criminal offences—and which, incidentally, the Pensions Regulator has previously encountered—are, for example, the sale of an employer with a defined benefit scheme without replacing an existing parental guarantee over the employer’s Section 75 debt, resulting in the loss of the guarantee, including failing to tell the trustees about the sale in advance. That might be one example.
A second example would be the purchase of a company, subsequent mismanagement of that company and extraction of value prior to it going into administration, while a third might be the stripping of assets from the employer, resulting in a substantial weakening of support for the scheme. I do not mean to suggest that that is an exclusive list, but I hope it gives the Committee a flavour of the actions that we are targeting.
If found guilty of an offence under these new sections, a person would be liable to a fine on summary conviction or, on conviction on indictment, a fine or imprisonment for up to seven years. Where a financial penalty is issued in respect of these provisions, the person may receive a penalty of up to £1 million. The noble Lord, Lord Hutton, asked me why we had drafted it so that the offence could be tried either way. I think that, in sum, the reason is that it gives the Pensions Regulator discretion to focus on all ranges of what might be considered bad behaviour or wilful or reckless behaviour, not just the most severe. It gives the regulator that flexibility.
I realise that Amendments 17 and 22 are probing amendments. They seek to probe whether and how far the two new offences should apply to any person whose conduct is within the scope of the offences, and they suggest that they might apply only to a person who wilfully, recklessly or unscrupulously does an act or engages in such conduct. I will say something about the words “wilfully” or “recklessly” in a moment, but is it is important first to understand that the new criminal offences and financial penalty provisions target conduct that avoids employer debt to pension schemes or risks accrued scheme benefits being paid. It is the conduct that we are focusing on here. It is an offence only if the person intended to harm the scheme or should have known that the conduct would have that effect and has no reasonable excuse for their actions.
In proposing these criminal offences, it is absolutely not the Government’s intention to interfere with routine business activities. The Pensions Regulator also continues to be responsible for making sure that employers balance the needs of their defined-benefit pension scheme with growing their business. However, it is important that where the elements of the offences are met, no matter who has committed them, the Pensions Regulator should be able to respond appropriately. Any restriction of the persons would create a loophole for these people to act in such a way.
Leading on from that, Amendment 18, tabled by the noble Baroness, Lady Bowles, seeks to remove the requirement in the new criminal offence in new Section 58A for the Pensions Regulator to prove that a person intended an act or course of conduct to have the effect stated in the offence. The amendment would significantly change the nature of the new offence. It would also duplicate many elements of the new offence contained in new Section 58B. In practical terms, new Section 58A as introduced applies only where wilful behaviours have occurred. That is evident as the section requires that
“the person intended the act or course of conduct”
to have the effect as set out. It is worth my adding that this offence also mirrors the existing main purpose test in the contribution notice regime and has been worded accordingly.
The noble Baroness made reference at Second Reading to the difficulty, in her view, of proving intent in the corporate environment. I have to say that I am not with her on that. Proving that a person’s behaviour was intentional is something that the regulator currently does under the main purpose test in the contribution notice regime, so we are confident that this should not be cause for concern.
In contrast to some of the earlier amendments, Amendments 23, 24, 25 and 26 would change the basis of the new criminal offence, as included in new Section 58B, making the scope of the activities caught by the offence wider than as set out in the Bill. Mirroring changes have also been made to the corresponding financial penalty provision, as included in new Section 58D. As introduced in the Bill, the basis of the test in these new sections is whether a person does an act or course of conduct which,
“detrimentally affects in a material way the likelihood of accrued scheme benefits being received”.
The test requires that the person knew or ought to have known that the act or course of conduct would have this effect. However, the amendments as tabled would mean that the test is met where a person,
“wilfully or recklessly puts at risk accrued scheme benefits being received”.
There are two main points I would like to address on these amendments and on why their wording is not appropriate. The first is a point of clarification around why we have not drafted the new offence and corresponding financial penalty in terms of the words “wilful” and “reckless” conduct. We have listened to feedback following consultation around the application of a test and we concluded that there would be too much uncertainty regarding what the words mean for us to legislate on this basis. Instead, the provisions have been drafted in such a way that it should be clear whether the test is met.
Secondly, changing the basis of the test to “puts at risk” could cause uncertainty within the industry. We consciously used the existing contribution notice tests as the basis for the new sanctions, as they target similar behaviours and are already familiar to the industry. By comparison, changing the basis of the test at new Sections 58B and 58D to “putting at risk” would create a new concept. Our view is that this would create uncertainty and a lack of clarity about the application of the new sanctions. In particular, changing the basis of the test could raise questions around the interpretation of the legislation, which the Bill, as introduced, already seeks to address.
It is clear that the types of conduct that either,
“detrimentally affects in a material way the likelihood of”,
benefits being received or, as per the amendment, “puts at risk” benefits being received, could be wide-ranging. This is why the Bill, as introduced, includes the concept of materiality, as a means to indicate that consideration will need to be given to the level of impact the conduct has on the likelihood of accrued scheme benefits being received. The concept “puts at risk” does not include any indication that the level of impact should be considered at all. Therefore, if the amendments were to be accepted, it could be argued that conduct that puts benefits at risk by even a fraction of a per cent could be in scope, which would go beyond the policy intention.
Amendments 19, 20 and 21 seek to provide further clarity around the way in which the reasonable excuse defence will work and to provide protection from prosecution if an act or course of conduct has been approved by the Pensions Regulator or the Pension Protection Fund. I believe that Amendments 19 and 20 are unnecessary and will set out why.
The existing phrase in the Bill “reasonable excuse”, which is to be removed by Amendment 19, has an inherently wide meaning in practice and could be interpreted to include the factors being presented in the amendment. It is therefore unnecessary to set out those factors. The factors that the prosecuting authority would consider when determining whether there is a reasonable excuse would depend on the individual circumstances of each case. Amendment 20 could, however, limit the factors the prosecuting authority and the courts could consider when determining whether there is a reasonable excuse and may potentially result in unintended consequences. For example, a person may have a reasonable excuse that does not fall into one of the factors to be considered. It is the age-old problem of including a list in legislation—a problem with which my noble friend is very familiar, I am sure.
Lord Hutton of Furness
I hear what the Minister says about prosecuting authorities but can he turn his remarks to the subject of why in those circumstances the Secretary of State should be considered a legitimate prosecuting authority? He has not mentioned that. I understand his points about the DPP and the Pensions Regulator but what about the Secretary of State?
Earl Howe
I was coming to that but I will deal with it now. The Secretary of State for Work and Pensions can institute proceedings for an offence under new Sections 58A and 58B in England and Wales only. This drafting mirrors the legislation of similar offences, such as insider dealing in the Criminal Justice Act 1993, as well as offences in the Financial Services and Markets Act 2000 and the Insolvency Act 1986, where the Treasury or the Insolvency Service could bring prosecutions.
The inclusion of the Secretary of State here enables the Government to ensure that the most serious conduct that harms pension schemes will remain punishable in the future. For example, if the ability of the regulator to bring about proceedings is hindered or the regulator ceases to exist—or exists in a different form—this provision could cut in. It is not envisaged that the Secretary of State will institute prosecutions where the Pensions Regulator or, where relevant, the Director of Public Prosecutions has decided against it. Further, where the power to institute prosecutions is exercised, the guidelines from the Code for Crown Prosecutors will apply.
Lord Hutton of Furness
Where will that be set out? If the Secretary of State will not prosecute in those circumstances, how will that be made clear?
Earl Howe
It will be made clear—in practice, if anything—but the Secretary of State will reserve the power for the rarest of occasions, I imagine, in the circumstances that I outlined. The normal course would be for the traditional prosecuting authorities to act. Only where the Secretary of State sees an egregious example of someone likely to get away without prosecution for reasons beyond the control of the prosecuting authorities will he or she step in. I cannot generalise about the circumstances. That power is there, as in the other Acts that I mentioned, very much as a long-stop provision.
Amendment 35, in the name of the noble Baroness, Lady Sherlock, proposes a new clause requiring the Pensions Regulator to publish guidance on how it intends to use the new criminal offences. We think this amendment is unnecessary. The Pensions Regulator already has a general prosecution policy in place which sets out the matters it considers when using its prosecution powers. The Pensions Regulator intends to issue further specific guidance explaining its approach to prosecuting the new offences under Part 3 of the Bill.
I fear there is also a practical difficulty, because it is unclear how the amendment could be implemented. The amendment would require the Pensions Regulator to publish guidance pertaining to the new offences at the point of Royal Assent. The problem with that is that the provisions in Part 3, which include the new criminal offences, are subject to changes up to the point of Royal Assent and it would be unwise to pre-empt the will of Parliament by preparing guidance based on draft provisions. It is expected that, following Royal Assent, the regulator will consult on the contents of the guidance for the new offences and expects to publish this guidance prior to commencement. It is clearly important that the industry’s views are sought on what is contained in the guidance, and the timing requirement proposed in this amendment would mean the regulator would consult before the offences are finally settled.
A further reason the amendment is unnecessary—indeed, I would say inappropriate—is due to the inclusion of the phrase
“guidance … concerning the operation of law”.
This phrase has a very specific meaning, and implies that the intention behind the amendment is that it will be for the Pensions Regulator to determine how the legislation should be interpreted. This is of course a matter for the courts, which will make the decision as to whether an offence has been committed in a particular case. Therefore, while the regulator’s guidance will provide assistance as to how the regulator intends to use the new criminal offences, it will not be definitive; nor could it or should it be, since something deemed to be reasonable in one case, for example, may not be reasonable in another. I should mention, for completeness, that there are a number of technical issues with all these amendments which could cause confusion. I shall not go into them here, but I can explain the details to noble Lords if necessary, outside the Committee.
My noble friend Lady Neville-Rolfe asked what kind of estimate we make of the number of people who might go to prison under these criminal offences. Clearly, irresponsible treatment of pension schemes is rare; however, it is important that where we have wilful or reckless behaviour, appropriate sanctions are available. The Pensions Regulator has successfully brought 16 convictions over the past two and a half years—it is of course for the courts to decide who gets convicted and what the penalty should be. I hope it is widely accepted that the Pensions Regulator must meet a higher threshold before a criminal prosecution can be commenced. As the Pensions Regulator has already commented, it would use these new powers only in the right circumstances.
The noble Lord, Lord Hutton, asked a further question about the words “any person” and what other legislation uses that phrase. It is the norm for criminal offences across the statute book to be drafted as applying to “any person” and I can give him examples—I would be happy to write to him.
It is clear that the majority of employers want to do right by their scheme. However, we must ensure that there are sufficient safeguards to protect members’ pensions from the minority who are prepared to put them at risk. If the category of persons whose conduct is within the scope of the offences as set out in Clause 107 were to be narrowed in the way that some of the amendments propose, we believe that the deterrent provided by the offences would be weakened, as indeed would the safeguards built into them. In contrast, making the scope of the activities caught by the offences wider, as separately proposed by other amendments, not only risks removing a key consideration of the level of impact of the conduct but also reduces safeguards. The Government have therefore sought to strike a balance to ensure that members’ benefits are protected while taking into account impacts on business.
I apologise again for speaking at such length, but I hope that the comments I have made will allow noble Lords to feel comfortable in not pressing their amendments.
Baroness Bowles of Berkhamsted
I thank the Minister for his comprehensive reply. I had intended to probe especially around the words “wilful” and “reckless”; I had a little add-on for fun. When I first thought of putting those words in after “person”, I rapidly came to the conclusion myself—I think the noble Baroness, Lady Stedman-Scott, was there—that in the end they did not make any difference. However, I am not actually sure that that is quite true with regard to the offence of the avoidance of employer debt. New subsection (2)(b) states
“the person intended the act or course of conduct to have such an effect”
but that has to be applied to the examples that might be targeted given by the Minister. In the case of sale of the employer and a parental guarantee not being replaced, that might be done through negligence rather than intent and then it would not be caught because the words “ought to have known” do not appear in the new Section 58A offence, although they do in the new Section 58B offence. So the Government have caught recklessness in new Section 58B but not in new Section 58A. Maybe the words “ought to have known” or something like them could be put there.
Baroness Bowles of Berkhamsted
I see. I do not see why we could not have them caught in both. Anyway, we have debated this long enough. I thank the Minister for his replies, and I beg leave to withdraw the amendment.
Pension Schemes Bill [HL]
Wednesday 26th February 2020
(4 years, 9 months ago)
Grand CommitteeRead Full debate Pension Schemes Act 2021 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 4-II Second marshalled list for Grand Committee - (24 Feb 2020)
The Deputy Chairman of Committees (Baroness McIntosh of Hudnall) (Lab)
My Lords, good afternoon. I remind the Committee that, in the event of a Division in the Chamber, the Committee will adjourn at the sound of the Division Bell and resume after 10 minutes.
Clause 109: Duty to give notices and statements to the Regulator in respect of certain events
Amendment 27
Lord Vaux of Harrowden
“( ) In particular, the declaration of a dividend by the employer is a notifiable event for the purposes of subsection (1) if—(a) the value of the assets of the scheme is less than the amount of the liabilities of the scheme,(b) the amount of the dividend exceeds the annual deficit repair contribution, and(c) the amount of the annual deficit repair contribution is less than 20% of the difference between the value of the assets of the scheme and the amount of the liabilities of the scheme.”
Lord Vaux of Harrowden (CB)
My Lords, I hope that this was worth the wait.
Clause 109 allows the Government to prescribe certain events as notifiable events, which must be notified to the regulator in advance of their happening, along with an explanation of how any impact of such an event to the detriment of the scheme is to be mitigated.
Let me start with some general points. Clause 109 is very vague. It does not describe what such notifiable events will be, leaving them to be prescribed at a future date—more delegated powers, if you like. The government briefing paper indicates that they intend such events to include:
“(1) Sale of a material proportion of the business or assets of a scheme employer … (2) Granting of security on a debt to give it priority over debt to the scheme.”
We discussed at length on Monday the level of delegated powers in this Bill, and this is basically another one. However, in the other cases, the delegated powers are there partly because the Government have not yet formulated what they want to do with those regulations or because some consultation is still to take place. Here, the Government know what they intend to do, so I respectfully suggest to the Minister that it would be better if these details could appear on the face of the Bill.
On the specifics of my Amendment 27, the amendment would add the payment of dividends as a notifiable event in certain circumstances. As I have mentioned, the Government intend to make the granting of security in preference to debts to a pension fund notifiable. Granting such security is simply committing to paying money out of the company that cannot then be used to fund the pension deficit, so I confess that I am rather at a loss to understand how this is materially different from paying an excessive dividend, which is the actual payment of money out of a sponsoring company that cannot then be used to pay down a fund deficit. Indeed, paying an excessive dividend is probably worse—once the money is gone, it is gone—yet it is intended that granting a security will be notifiable whereas paying an excessive dividend will not.
There are plenty of examples from the past where companies with large pension deficits failed after paying out excessive amounts to shareholders—Carillion and BHS being just the latest high-profile examples. This is not a theoretical risk; it has happened in the past and will likely happen again, unless we do something about it. We will all be open to criticism if we miss this opportunity to take action to prevent such looting in the future.
The Government argue that stopping a company from paying dividends might damage the company and therefore damage the pension scheme, and I agree. Preventing the payment of reasonable dividends could increase the cost of capital, make raising future finance more difficult and even destabilise the company, all of which would increase the pension fund risk. For most well-run companies with a clear deficit reduction plan, a reasonable dividend will do no material harm, and we should note that most dividends end up in pension funds anyway.
For this reason, while I fully support the intentions behind Amendment 84 in the name of the noble Lord, Lord Balfe, I think that we probably need to find a more balanced way to deal with the very real risk of excessive dividends. This is especially the case in the light of the increased penalties in the Bill. If trustees are asked to approve every dividend, they may simply decide that it is not worth their personal risk to approve any dividend.
As things stand at present, the regulator will not know about excessive dividends until after they have been paid, and even then the onus is on the regulator to spot them. Once paid, it is too late: money is gone and damage is done. It must therefore make sense for the regulator to be notified of excessive dividends in advance, when there is still the opportunity to do something about them.
Amendment 27 attempts to find a balance: it will not prevent normal, reasonable dividends that add no material risk to a pension scheme. It makes dividends notifiable in advance to the regulator, along with an explanation of how any risk would be mitigated, in certain limited circumstances. In defining those, I have tried to apply the concept that the regulator stated in its Annual Funding Statement March 2019, in which it raised concern about excessive dividends:
“Where dividends and other shareholder distributions exceed DRCs”—
deficit reduction contributions—
“we expect a strong funding target and recovery plans to be relatively short”.
Amendment 27 attempts to encapsulate that into the Bill. Dividends will be notifiable in advance if they do not meet the expectation stated by the regulator, if the fund is in deficit, if the dividend is greater than the deficit reduction contribution, and if the deficit repair period is more than five years. Other dividends would not need to be notified. As well as reducing the risk of excessive dividends, this might also have the additional benign effect of encouraging companies that want to pay larger dividends to reduce their deficits to avoid having to make notifications.
I am very open to discussion around alternative approaches to find the right balance. For example, one could potentially add other shareholder distributions, as opposed to just dividends, and the question of whether deficit repair period of five years is right is moot. But I believe strongly that we must take this opportunity to prevent future looting by shareholders of companies with pension scheme deficits. I hope that noble Lords and the Minister will agree that Amendment 27 represents a reasonable balance between, on the one hand, restricting a company’s ability to carry on normal business activities such as paying reasonable dividends and, on the other, reducing the possibility of another Carillion or BHS occurring. I hope that the Minister is able to consider it seriously. I beg to move.
Lord Balfe (Con)
My Lords, I apologise for not being here at Second Reading or at the beginning on Monday. The first absence was because I was in hospital; on Monday, I was also speaking in the other debate and so I was hopping between the two.
I have two amendments down, of which Amendment 84 is the first. It is in no way against the sentiment of the noble Lord, Lord Vaux—I obviously did not know that his amendment was going down. Amendment 84 constitutes 50% of a Private Member’s Bill that I tabled at the beginning of this Session—it is a straight take from that. I declare my interest as the president of the British Airline Pilots Association.
My amendment aims to deal with the problem that a lot of trade unionists perceive and has been expressed already—the Philip Green, BHS and Carillion problem. People who have worked very hard and built up pension entitlements see employers favouring dividends to shareholders over looking after the pension scheme that they have agreed to run for the people working for the company. In what one might call a rather crude way, because I did not know where to draw the line, I thought that the simplest thing would be to say that all dividends should be passed by the regulator.
Of course, we then come up against the fact that a number of trustee boards are effectively controlled by the companies. I therefore also put in that the Pensions Regulator would have an independent role anyway, because it would have to approve the dividends. Even if the trustees said, “We think that this is a jolly good thing”, the regulator might then say, “Yes, we agree”, or “No, we do not”. The Pensions Regulator would have a second look at it.
I will be the first to admit that this is not the most skilfully drafted amendment to set the world on fire, but it was put down for the purposes of generating a debate about a problem that needs addressing. That problem is the one already mentioned, of BHS and Carillion; in other words, the problem of irresponsible companies dealing—as many of those working for them would see it—in improper ways with the pension schemes.
There is a bit of danger that people—not in this Room, I am sure, but in society—will say, “Oh, the pension scheme doesn’t matter”. The pension scheme is the forgone wages of the workers; it is not something ethereal or charitable, or an extra on top. This is money that the company has agreed to pay to workers in return for the number of years that they work. It is their money, and companies should not be allowed to behave recklessly with it. That is what is behind this amendment.
As such, I commend it for noble Lords’ consideration, although I would be extremely surprised if the Minister were to get up and say, “Oh yes, that’s what we want”, and accepts it all.
Lord Sharkey (LD)
I would be surprised as well.
My Lords, I support the thinking behind both these amendments. I congratulate the noble Lords, Lord Vaux and Lord Balfe, on the excellent way in which they have been introduced. Both amendments allow timely discussion of what is a large, widespread and probably growing problem.
After the publication of TPR’s annual funding review in March 2019, the Investment & Pensions Europe magazine reported that TPR had
“vowed to engage with a number of schemes this year if recovery periods were considered to be ‘unacceptably long’, and warned trustee boards to expect communications in the coming months. … Consultancy firm Hymans Robertson estimated that one in five FTSE 350 companies with DB schemes were at risk of intervention from TPR.”
That is an alarmingly large number.
To understand what TPR means by “communications”, it helps to look at what TPR in its annual funding review states as the three key principles behind its expectations. The first is:
“Where dividends and other shareholder distributions exceed DRCs, we expect a strong funding target and recovery plans to be relatively short.”
The second is:
“If the employer is … weak”
or tending to weak,
“we expect DRCs to be larger than shareholder distributions unless the recovery plan is short and the funding target is strong.”
The third is:
“If the employer is weak and unable to support the scheme, we expect … shareholder distributions to have ceased.”
These are all fine principles—in principle. The real question is how, or whether, they are in fact working. How many FTSE 350 companies has TPR intervened on in the last 12 months, and on how many occasions has it advised against or prevented shareholder distributions? Perhaps the Minister could give us an assessment of TPR’s success in applying its three key principles.
Both amendments in this group offer a simpler and different approach to restrictions on shareholder distributions, but in contrasting strengths. Both have the merit, it seems to me, of making responsible behaviour by employers more likely, and that is no small thing if there are 70 FTSE 350 companies out there needing effective intervention to protect employees’ pension rights. I look forward to the Minister’s response.
Lord Flight (Con)
My Lords, I think we all understand the reason for these two amendments; whether one of these two or another amendment is to deal with the situation, it needs to be dealt with. I am slightly surprised that neither amendment would actually stop the payment of dividends. I think there is an argument that, where the finances obviously mean that a dividend cannot be afforded, the company should not be allowed to make a dividend payment. I am not sure that Amendment 27 or Amendment 84 addresses the issue as well as it might be addressed. The Government might have another look at what they want to achieve, which should be stopping payments of dividends where they cannot be afforded.
Baroness Bowles of Berkhamsted (LD)
My Lords, I signed the amendment of the noble Lord, Lord Vaux, and agree entirely with the principle of both these amendments. I was particularly drawn to the notion of having a threshold and notification, as provided by the amendment of the noble Lord, Lord Vaux. He circulated it for comment and therefore I signed it after some negotiations with him.
Put simply, if the deficit is large and the effort to close it is too small—smaller than the dividend—the payment of the dividend becomes a notifiable event. The sequel to that would surely be what the noble Lord, Lord Flight, has just pointed out: that it be looked at and perhaps in certain cases, though not all if there are other things that could be taken into account, the dividend payment be stopped. The point is that it is brought to the regulator’s notice, rather than the regulator potentially having to look at an awful lot of dividends and payments being made. Indeed, how will the regulator even find out about them? The amendment of the noble Lord, Lord Vaux, solves that little loop of how the regulator gets to know about them and has a reasonable number to look at rather than being overwhelmed.
In our negotiations, we tried to find a formula to keep the momentum going to close the gap, even within the five years, as a lot can go wrong in that period. I got as far as something like “the ratio of the dividend to deficit not being greater than the reciprocal of the remaining years and not conveniently commutative”. I concluded that, if I carried on in that way, I would have to put in a job application to Dominic Cummings.
More seriously—I refer here to the helpful meeting I had with the Minister and officials yesterday—I want to see some specific push in the Bill for the regulator to be tougher, including in setting the contribution schedule for paying down the deficits. As has already been explained by other noble Lords, TPR has come forward with a set of principles, but maybe it needs something to back them up and get them over the line in enforcing them.
In the meeting yesterday, it was pointed out that more powers are being given to the regulator in the Bill and that regulations will be forthcoming. That is well and good, but something has to make sure that the regulator is urged to use those powers and to be strong, especially in standing up to larger and more forceful companies and individuals. We know that the record there is not necessarily all that good. The policy impetus needs to come from government and Parliament; otherwise, there may be more power but no enforced policy shift.
We also know that boards will take advice on these kinds of matters and be told what the market norms are, or at least what other companies have done. If the dial is to be shifted, the advice has to be shifted. The way to ensure that advice is shifted is for there to be an indication of the policy in the Bill, because an adviser cannot go against that in their duty to advise the companies.
It was very good to hear that the new offences that we discussed on Monday—which seems a long time ago now—are wide enough to embrace advisers, but you have to get at what their duty is to those they are advising. There are lots of reasons to have something in the Bill to make sure that the principles already outlined by TPR have that backing to be enforced and have that effect. As I said on Monday, it should not be normal to accept overly long continuation of deficits just because a company is well capitalised.
There can be many claims on and reasons for that extra capitalisation—there may be lots of tentative reasons why they need it. There might be plans to spend it to buy another company. All kinds of things could be going on, and what looks like a good capital margin could actually be shoring up many other things as well as the pension deficit. What is the excuse to the Pensions Regulator? What excuse might be given to other sources? Some of the clever analysts may work out what is going on; the ordinary investor and the ordinary pensioner is unlikely to do so. Therefore, I support the principle of both the amendments: something should go in the Bill to push or shore up the Pensions Regulator in its actions.
Baroness Altmann (Con)
My Lords, I rise briefly—I have added my name to one of the amendments—to support the concept that has been so well explained already by noble Lords and to echo the warnings that this is a very important time in our defined benefit pension system, as we still have employers attached to schemes and, in some cases, members contributing. Some schemes are still not completely closed. Once a scheme has closed to new members, it will not be too long before it closes to new accruals and it will effectively be in run-off. While there are still employers with an interest in the scheme and before we get to the period, which will come in the next 10 years or so, when there is no economic interest between the employer and the scheme and it is seen merely as a major liability—with more and more companies looking for ways to get around the deficits—now is the time to be collecting as much money as possible.
Obviously, one does not want to damage the ongoing viability of the employer, but there needs to be more recognition of the fact that the pension scheme is a debtor of the company—not all companies see it in that way—and the choice between dividend payment and deficit funding should not be just between the interest of shareholders and the interest of pension scheme members. The pension deficit has people’s lives attached, so there is a higher importance here.
When one looks at the provisions of the Companies Act 2006, in particular with reference to Amendment 84, Section 830 says that a company should not be permitted to pay out a dividend if it has not made sufficient profit to cover its costs or if there are losses in the company. What is not explicit, but is made explicit in the amendment, which was originally part of my noble friend Lord Balfe’s Private Member’s Bill, is that the accounting measure of the pension deficit does not reflect the actuarial reality as estimated by a scheme actuary, or perhaps by trustees, of the true scale of the obligation—in other words, potential losses—that the company faces. Therefore, redefining the accounting measure and taking account of the actuarial measure would put the payment of dividend on a different plane. That is to be reflected in Section 830A, which would be added after Section 830, in terms of justification for payment of a dividend that might otherwise look viable.
Baroness Neville-Rolfe (Con)
My Lords, I look forward to hearing what my noble friend the Minister says about this and whether the sort of concerns that have been expressed are already dealt with somewhere else. A very good point has been made.
I want to ask a question on Amendment 27, in the name of the noble Lord, Lord Vaux. He talks about the value of the assets of the scheme, and my noble friend Lady Altmann made this point; there is a big difference between an actuarial valuation and an insurance valuation in a scheme. If you were to base this on an insurance valuation, you would catch quite a lot of pension schemes, including those which probably could pay some dividends. I was a little concerned about that, and I would like some clarification when we come to wind up on what is intended.
Baroness Drake (Lab)
My Lords, I support the principle behind Amendment 27, in the name of the noble Lord, Lord Vaux, but equally I have sympathy with the comments of the noble Lord, Lord Flight. When it comes to dividends, the mischief may be done regarding money leaving the sponsoring employer’s company before the regulator can mobilise its full armoury of powers. This is particularly true where the dividends are paid to parent companies overseas, where pursuing a legal route by the regulator may be difficult, even more so if we leave the EU, because jurisdictions will change—except possibly foreign-owned UK banks, where in fact the PRA has the power to intrude pre-emptively on dividends going over to the parent company. To that extent, there is an element of precedent, and the PRA would take into account the debt in the pension fund in considering the sustainability issue when it strikes a view on dividends paid to the parent company.
I give credit to the proactive approach that the regulator is now taking to red flag where there is a kind of big ratio between dividends and deficit payment. However, that must be retrospective. The issue is capturing that mischief at the point when the money leaves the company; I am particularly concerned about where it is a foreign-owned company. Therefore, if some way could be found—perhaps by the regulator working with the department—to embrace dividends in some way in the notifiable events regime, that would be helpful. It is a problem, and once the money is gone, it is difficult to chase it, particularly when you have to go to jurisdictions where the power of TPR may not be strong.
Baroness Sherlock (Lab)
My Lords, the Committee should thank the noble Lords, Lord Vaux and Lord Balfe, for having enabled this debate. One gets a high quality of debate on pension Bills; it is very well informed indeed.
We have been left with three questions. Is there a problem? Is it getting worse? And what are we going to do about it? I think there is a pretty much unanimous view around the Committee that we have a problem and that it is not going to disappear. As more DB schemes close, they will pay out more in pensioner payments, leaving them less to invest and reap returns, so they will start de-risking their remaining investments. This is the moment we have to address that.
We know that there is a problem. As my noble friend Lady Drake said at Second Reading, the Work and Pensions Select Committee report highlighted that half of FTSE 350 companies paid out 10 times more to shareholders than to their DB pension schemes. However, in some ways the key issue is the ratio, which was touched on by a couple of noble Lords. TPR certainly mentioned it in its annual funding statement, and it drilled down in its Tranche 14 Analysis for DB pension schemes, published last May. It looked at the FTSE 350 companies that sponsor DB schemes as the main or primary sponsoring employer and said that it found that
“The median ratio of dividends to DRCs”—
deficit repair contributions—
“has increased from 9.2:1 in 2012 to 14.2:1”,
in the latest figures available, so it has gone from nine to 14 between 2012 and last year. Clearly, this is going in the wrong direction. It noted:
“This is mainly driven by the significant increase in aggregate dividends over the period, without a similar increase in contributions.”
Therefore we have a problem. The regulator itself said in its last funding statement that it remains
“concerned about the disparity between dividend growth and stable DRCs”,
and it highlighted recent corporate failures. If the regulator is concerned, then the Minister should be concerned.
The Minister’s argument may be that the regulator already runs an internal control system, where it flags high dividend payments. A number of noble Lords, however, made the point that it is retrospective and that, depending on the valuation, it may not pick up all the areas where there is a problem. Noble Lords also cited TPR’s funding statement, which set out the key principles behind its expectations about what should happen when an employer is weak, the ratio is high, or the employer cannot support the scheme.
Can the Minister assure us that there are not more cases coming in with high ratios and long recovery plans? The TPR says it is going to stop that. Is it not a problem anymore, or is there a target for when it will not be? TPR could refuse to agree a funding strategy for a scheme in various ways but, as my noble friend Lady Drake pointed out so clearly, that is, first, retrospective; secondly, what happens if the money goes overseas? I would be grateful if the Minister could pick that up.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Stedman-Scott) (Con)
I thank the noble Lords for tabling these amendments and all noble Lords for their contributions to this debate. It would be helpful to consider these amendments together, as they seek to address the payment of dividends when a defined benefit pension scheme is in deficit. One amendment seeks to prevent the payment of a dividend unless signed off by the trustees and the regulator; the other would require the sponsoring employers of pension schemes to submit a notice and accompanying statement to the regulator and to trustees when the employer declares a dividend in certain circumstances.
I do not think that the amendment to the Companies Act would have the effect that I believe is intended, as there are various technical problems with it. I will not go into these now, as it is more important to address the principles. The Government agree that defined benefit pension schemes in deficit should get a fair proportion of the resources available to employers.
The Government believe that they are taking a proportionate approach. The problem is not the payment of dividends; it is that some companies do not pay enough into their defined benefit pension schemes as part of the recovery plan when the scheme is in deficit. We believe we can address this problem proportionately without inhibiting reasonable dividend payments, which are a legitimate and essential part of normal business activity. We inhibit investment in UK business at our peril. A strong, profitable employer is the best possible protection for pension scheme members.
In addition, I should point out that pension schemes are also major investors. They receive significant dividends, and inhibiting or blocking these payments would impact their income and funding position.
The Pensions Regulator can, and does, take action to ensure that sponsors treat their schemes fairly. For example, in one case, a defined benefit scheme is now better funded after an upfront payment of £10 million, a reduction in the recovery plan length from 13 to seven years, annual deficit recovery payments of £3.7 million and a commitment to stop dividend payments for six years.
Information about dividends paid by these companies may be needed, but this is already available for public companies and can be obtained for private ones. The regulator takes this into consideration when it is looking at risks to a pension scheme. It would be disproportionate and unnecessary to require the sponsoring employers of pension schemes to submit a notice and accompanying statement to the regulator when the employer declares a dividend. Provided that a suitable recovery plan is in place, and the employer has the resources to pay the additional deficit repair contributions agreed, the company should be able to choose what it does with the remainder of the distributable reserves—it is rightly subject to business priorities.
But we do need to do more to ensure that the regulator can take a tough line where needed. That is why we are taking a power in this Bill to set out more clearly in secondary legislation what is required for an appropriate recovery plan. The secondary legislation will be informed by the regulator’s consultation on its revised funding code, and will work in tandem with it. The code will set clear expectations on what is an acceptable recovery plan, include guidelines on recovery plan length and structure, and support the regulator in enforcing these standards.
I turn now to some of the specific questions raised. The noble Lord, Lord Vaux, asked why the requirement under new Section 69A for a notice and accompanying statement cannot be included the Bill. New Section 69A is intended to give the Pensions Regulator information about events that pose greatest risk to pension schemes. The range of events for which a notice and accompanying statement must be given will be varied and will likely change in time. As such, the Government consider this to be a matter that is appropriate for secondary legislation. By setting out the range of events that are subject to the notification requirement in regulations, this enables new events to be added, or existing events to be removed, in order to keep pace with changing business practices.
The noble Lord, Lord Vaux, asked: why do we not propose to require a notice and accompanying statement when a dividend is paid? Dividends paid by companies with a pension scheme surplus, or those where an appropriate recovery plan is in place and deficit repair contributions are being paid, are unlikely to have adverse impact on the scheme or require any mitigations. A notice and accompanying statement about dividend payments by these companies would be unnecessary, and handling this information would be an ineffective use of the Pensions Regulator’s resources. Instead, the regulator will focus on companies where schemes are in deficit and where an appropriate recovery plan is not in place. Information about dividends paid by these companies may be needed, but this is already available for public companies and can be obtained by private ones.
The noble Lord, Lord Vaux, asked: if dividends are not limited, is there not a risk that all the money will be gone before the needs of the scheme are considered? The trustee and sponsoring employer agree an appropriate funding target and deficit repair contributions to eliminate any deficit over an appropriate period. If an appropriate recovery plan is not in place, the regulator has powers to impose a schedule of contributions. Provided that an appropriate recovery plan is in place and the agreed deficit repair contributions are being paid, it is right that how other resources are used is a matter of business priorities. It would not be helpful or proportionate for the payment of dividends to be notified to the regulator.
Of course, there is a risk that excessive dividend payments could be made, which could result in the sponsor being unable to meet its obligations to make payments as part of the recovery plan, but this is very much the exception rather than the rule. We think that intervention to prevent dividend payments in some circumstances poses a greater risk of inhibiting investment in UK business and that our approach can deter inappropriate dividend payments and put things right if that happens.
The noble Lord, Lord Sharkey, requested information about the regulator’s success in engaging with employers, and we will write to the noble Lord with that information.
Baroness Drake
Does the Minister accept that a regime for notifying dividends is not necessarily the same as stopping the payment of dividends?
Baroness Stedman-Scott
I will carry on and answer the question from the noble Lord, Lord Flight, and then I will answer the question asked by the noble Baroness, Lady Drake.
The noble Lord, Lord Flight, asked what the Government are doing to reform the UK’s dividend regime. The Department for Business, Energy and Industrial Strategy is considering the case for requiring companies to disclose information about their distributable reserves from which dividends are paid. The Institute of Chartered Accountants in England and Wales has been asked to provide technical advice and options for doing so. It is expected to report shortly. Sir Donald Brydon’s recent independent review into the quality and effectiveness of audit recommended that directors make a statement that the proposed dividends would not threaten the existence of the company and are within known distributable reserves, and, in some circumstances, that the distributable reserves should be subject to audit. Further consultation on this is expected later this year. The department has welcomed the Investment Association’s recommendation to companies that they should publish a dividend policy setting out the board’s long-term approach to making decisions on the amount and timing of return to shareholders.
In answer to the question asked by the noble Baroness, Lady Drake, yes, notifying is different from stopping. We do not want to stop them; we want to focus on ensuring that an appropriate recovery plan is in place. Things can be put right.
The noble Baroness, Lady Bowles, asked how the Pensions Regulator knows what resources the employer has and whether a recovery plan is appropriate. In assessing the appropriateness of a recovery plan, the Pensions Regulator looks at the strength of the employer covenant, which is a measure of the ability of a scheme’s employer to support the scheme now and in future. The regulator takes account of a range of employer-specific information, including underlying trading strength and trajectory, profits, cash flows, debt structure, market risks and opportunities, asset strength, and insolvency risk. This can come from a range of sources including statutory accounts, publicly available information such as credit ratings, market analysts’ views, sectoral analysis and analysis performed by the trustees, the employer or its adviser. The regulator will also focus on how a company uses the cash flow it generates to assess whether a scheme is receiving an appropriate and fair share of these amounts. Greater clarity will be provided through the provisions we are proposing in the Bill, and the regulator intends to set clearer guidelines on recovery plan length and structures for schemes in different circumstances. This will help to improve regulatory grip and make enforcement easier.
The noble Baroness, Lady Bowles, also asked how we will ensure that companies with significant available resources address defined benefit pension scheme funding shortfalls more quickly. Most employers do the right thing and treat their schemes fairly, but we know that this best practice is not universal and that some employers are not devoting a fair proportion of available resources to paying down deficits. We are determined to do something about this.
Baroness Sherlock
My Lords, I want to pursue a couple of points. I am a simple soul compared to many around the table who can come back to the noble Baroness on the detail. However, I think that she has just said in summary that the regulator knows that some companies have a problem in this area but feels that, by and large, the current regime gives it the tools to deal with it; where there is a gap, it will deal with it by secondary legislation, which will be clearer about the requirements for an appropriate recovery plan; and that anything above that, such as notification, will be disproportionate and unnecessary. I invite her to correct me if I am wrong.
I will bring her back to what is missing from that statement. First, it is pre-emptive and proactive in nature. Neither I nor the noble Baroness, Lady Drake, said that separate rules should be set up for overseas shareholders or companies with them. We were making the point that one of the reasons that it would be useful to have a notification requirement, as set out by the noble Lord, Lord Vaux, would be so that money would not be taken out and the regulator would not then have to go after it—rather, it would get advance notice that this was going to happen and could see whether it was appropriate. The point about overseas companies was simply that, if money goes overseas, it is much harder and more expensive to get it back if the regulator goes after it.
I come back to my question: why do the Government not believe that it would be useful to have some requirement that companies should notify the regulator if they declare a dividend where there was a DRC in place? Why is that a problem?
Baroness Stedman-Scott
Requiring the payment of dividends to be reported is not necessarily very helpful to the regulator. It is likely to inhibit legitimate business processes without getting more resources for the scheme. We need to take a proportionate approach. We think that the priority is to ensure that a suitable recovery plan is put in place that takes account of the full range of circumstances of the employer and the scheme.
Trustees and the regulator need to look at a whole range of demands on the employer’s resources. Dividends are just one of these. Others may include maintenance of its business, and investments in its sustainable growth and debt repayments. All of these need to be considered in deciding whether a recovery plan is fair.
The Pensions Regulator scrutinises all valuations and recovery plans submitted, assesses the key risks, and assesses whether further engagement and potential enforcement action is required. Measures in the Bill will help to clarify exactly what is required for an appropriate recovery plan. Along with the regulator’s revised funding code, these measures will make it clear to trustees and employers what is expected, and will support the regulator in taking enforcement action where necessary. Provided that an appropriate recovery plan is in place, how the employer chooses to spend the remainder of its free resources is rightly a matter of business priority.
Baroness Donaghy (Lab)
I have listened carefully to the debate and cannot help but think that this is not sufficiently fleet of foot to prevent those such as BHS and Carillion—there is recent past history on this—which were basically giant Ponzi schemes towards the end, where they were paying dividends instead of funding the pension scheme, had deliberately obscure governance rules and left their pensioners bereft of a considerable proportion of their money. Is this system sufficiently fleet of foot? Would it take account of a company which then decided to sell itself to another person for, for the sake of argument, £1? Would it help to cover the situations covered by the amendments? It does not sound to me as though we are doing anything different from just saying, “Everybody has the right to the appropriate dividends.” How do we know that those dividends are appropriate, and how do we have power for the regulator to ensure that there are not some really bad guys out there?
Baroness Stedman-Scott
The noble Baroness makes some valid points. We consider that dividends are paid at a point in time. The regulator needs to form a picture of the employers’ ability to pay and, for a period in the future, needs to see the whole picture.
Baroness Sherlock
Can we try to narrow the point of difference? The Minister is often being given briefings which cover points with which no one disagrees. To interpret her last answer to me, the Government are saying that they do not want every company to tell them why they are paying a dividend because there will be too much information and it will take too much resource to process, rather than focusing on things that raise a particular problem. However, the amendment from the noble Lord, Lord Vaux, does not suggest that; it simply suggests that, in some very specific circumstances, there should be a notification of a declaration to pay a dividend. He suggested that those circumstances are that there will be a dividend, there is a deficit on the scheme, the amount of the dividend exceeds the DRC and a ratio between the different on the valuation. If the Government think that those are the wrong criteria, they could suggest alternative criteria. I am trying to get to the bottom of what is the problem of saying, “In certain circumstances where there could be a risk, it will be helpful to have a requirement on companies to notify the regulator as part of the notifiable events regime so that it can then do something about those risk situations”? Why is that a problem?
Baroness Stedman-Scott
The last word I would use to describe the noble Baroness is simple; that is not the case. She and other noble Lords have raised some interesting, valid and appropriate points on this issue. I believe that the best way that we can delve down into this and, I hope, give the comfort that they are looking for, is to meet to discuss it outside the Committee, which we are happy to do.
Baroness Drake
I would just say that my argument is not with the noble Baroness personally; she will be provided with the arguments to answer the points we are asking. The argument she put was that the recovery plan would be the route through which one would deal with an excessive payout of dividend, but the recovery plan is also based on an assumption about the strength of the sponsoring employer covenant. If, after that recovery plan is settled, there is a huge dividend payout—particularly to an overseas parent—which impacts the strength of that covenant, I cannot believe that the regulator would sit there and say, “We will wait until the next actuarial valuation and the new recovery plan before we act”. It would act: it has a range of powers to act straightaway. If there is a material change in the constituent elements that went into the recovery plan, the regulator has to act. A major excess of dividend payment from the sponsoring employer could materially impact the covenant strength. That is already in legislation. We just want to capture the impact of the high levels of dividend payment.
Baroness Stedman-Scott
I thank the noble Baroness for the points she has made. I think we should put this into the conversation that we will have to try to give answers which give noble Lords the comfort they need. My officials will call a meeting, and we will look at Hansard and try our very best to answer all the specific questions and allow further debate to resolve these issues.
Baroness Bowles of Berkhamsted
The point made by the noble Baroness, Lady Drake, is similar to the point that I was going to make. Some of the answers the Minister gave, in particular to my questions, were good and comprehensive, but they rely on having an appropriate plan in place. The point is that there are times when the appropriate plan is no longer appropriate, and at that point it all falls apart. I think what the Minister has said is that in regulations there will be things that will allay some of our fears, but it would be nice to have something about that in the Bill, because otherwise we are taking it on trust. It is not that we inherently mistrust the Minister or her officials. Of course there have been previous framework provisions that have been remarkably empty of policy, but that does not make it correct. The Government and this Parliament make policy. Regulators do not make policy; they shy away from it. There is no greater making of policy than putting it in the Bill.
Baroness Neville-Rolfe
I would also like to be involved in the further talks. We have to try to find a way of dealing with big risks between recovery plans without gungeing up the system for the regulator so that it cannot focus on what matters rather than on what does not matter with the bureaucracy overtaking the objective.
Lord Sharkey
I also want to be invited. A critical feature of the discussion is the effectiveness of TPR. When we have the meeting—to which almost everybody seems to be invited—it would be very helpful to have a detailed discussion on what assessment the Government have made of the performance of TPR against its three key principles, certainly in the past year and perhaps slightly longer. I know the Minister gave an example of TPR being effective, but that was one example and I would like to see more data on why we should have faith in TPR’s ability to police this scheme or any scheme.
Baroness Stedman-Scott
We will pass a piece of paper around, and if noble Lords will write their names on it, we will make sure they are all invited.
I am sorry if I am repeating myself. I am well aware of the expertise of noble Lords in this Room who work in the industry. It is highly regarded and highly respected. The message in the points that noble Lords are making is received. We will meet to talk about them in more depth. That will give officials more time to reflect on the very detailed questions that noble Lords have asked, collect data, answer some of the exam questions and try to come to a place where we all understand and agree on what we are trying to do. We take it in that spirit. In that spirit, I ask the noble Lord to withdraw his amendment.
Lord Vaux of Harrowden
I thank all noble Lords who have taken part in this excellent debate and the Minister for agreeing to meet with us—given the number of us wanting to attend that meeting, I slightly wonder whether we should not adjourn and have it now.
This debate has demonstrated a very clear feeling that there is a potential problem here and, as I said in introducing the debate, I have quite a lot of sympathy with the idea that getting too heavy-handed could damage the companies and notifying everything could clog up the Pensions Regulator. I do not disagree with any of that.
The noble Baroness mentioned that this risk is the exception; we are talking about the exception here and trying to make sure that it does not happen. There is a balance to be found. My amendment may well not be the right balance, but it was an attempt to find some sort of balance or at least to work our way towards one. There is also a danger of overcomplicating.
When we meet, we need to sit down and work out where that balance lies, and this issue needs to be dealt with in the legislation. It is too important. We cannot afford another BHS or Carillion situation. However, on that basis and looking forward to the meeting, I beg leave to withdraw the amendment.
Baroness Altmann
“72B Provision of information: further provision(1) The Regulator may, by notice in writing, require the trustees of a scheme to which section 35 of the Pensions Act 1995 applies to provide information as set out in subsection (5).(2) A notice under subsection (1) may include a requirement for information—(a) to be disclosed to the Regulator on a periodic basis, and(b) in respect of specified periods of time.(3) Where the provision of information is required by a notice under subsection (1), the information must be provided in such a manner, at such a place and within such a period as may be specified in the notice.(4) The Regulator must publish information provided in respect of the provisions set out in subsection (5) on its website within one month of receiving it in a form that is searchable and easily accessible.(5) For the purposes of subsection (1), information to be provided on request of the Regulator is any information set out in—(a) regulation 29A of the Occupational and Personal Pension Scheme (Disclosure of Information) Regulations 2013 (publishing charges and transaction costs and other relevant information), and(b) paragraph 30 of Schedule 3 of the Occupational and Personal Pension Scheme (Disclosure of Information) Regulations 2013.”Member’s explanatory statement
This amendment would place a reporting duty on the Pensions Regulator to publish statements of investment principles (SIPs) under section 35 of the Pensions Act 1995. The amendment would place a requirement on the Pensions Regulator to create a SIP repository, accessible to the public through its website, so that all scheme members could check their scheme’s investment strategy.
Baroness Altmann
My Lords, I rise to move Amendment 28 in my name in this group and will speak to Amendment 92, to which I have added my name. I also support a number of the other amendments. The noble Lords who tabled them will obviously rise shortly to expound on their own aspects of this issue.
The main area this group deals with is the environmental impacts that pension funds can have. We have £1.3 trillion of pension assets; they can help tackle climate change. Our country will host the COP 26 in December, at which we will have the opportunity to show world leadership in our thinking on climate change and policies to address these issues.
Climate change, as most of us believe, poses a potentially material risk to pensions and financial assets. The insurer Aviva estimates that investors could lose £2.7 trillion from investment value globally due to climate change. I am delighted that the Government have tabled amendments giving Ministers a power to require pension schemes to disclose how they manage climate-related financial risks in line with the more detailed, granular requirements of the Task Force on Climate-related Financial Disclosures.
I support those amendments, but the Government have said that they will require only large schemes to report in line with the TCFD disclosure requirements. They have not said what “large” means, but I assume it will probably not include schemes with fewer than 5,000 members, for example. These smaller schemes still need to manage the risks to savers’ pensions potentially posed by climate change. Amendment 28 is therefore calling for the Pensions Regulator to create a compliance framework based on a public register of schemes and ESG—environmental, social and governance —investment policies.
In October 2018, the Government changed the law to require UK pension scheme trustees to prepare a policy on how they manage the financially material risks arising from issues such as climate change. Trustees are required to state these policies in their statement of investment principles, a statutorily mandated document which all schemes are required to have. Trustees should have updated these statements by 1 October 2019. Some schemes were required to publish them at that point.
However, the UK Sustainable Investment and Finance Association has reviewed—with the help of the Pensions Regulator—the policies of a representative sample of these UK trust-based pensions. For those schemes, representing 3 million or so savers, its report found clear evidence that “large scale non-compliance” with this requirement exists and that trustees had not been publishing their statement of investment principles. Two-thirds of the schemes in its sample had not published, and of those which had the policies were pretty thin and noncommittal.
It is not exactly clear why trustees are failing to disclose and comply with this new law. The UK Sustainable Investment and Finance Association has suggested that it may be because smaller schemes—schemes with fewer than 5,000 members, let us say—do not have a website, so the administrative burden of publishing these statements and complying with the law has proved overly taxing for them. There has therefore been a recommendation that the Pensions Regulator should be given a duty to obtain these statements of investment principles and publish them on its own website in a central registry. Amendment 28 seeks to insert this into the Bill.
If the Pensions Regulator has the power to obtain and publish these statements of investment principles, it will obviously be able to remove the administrative burden from the schemes. It will also give the regulator a much better ability to monitor compliance with these requirements. It will improve the transparency and scrutiny of the schemes’ policies to manage these environmental, social and governance risks, as well as providing the industry with a resource to find out about and share best practice. Importantly, it would allow scheme members to see their own schemes’ investment policies. These are the reasons why I urge the Minister to consider whether we might be able to insert this provision into the Bill.
The notion of a public register of these statements of investment principles and implementation statements could be a powerful way to drive up trustee awareness of action on the risks arising from climate change. It would allow monitoring and scrutiny of what these schemes currently do better to educate those which may not be compliant—some of these laggards, perhaps —about what the leading trustees and schemes are doing. Campaign groups could scrutinise this. Ministers could also scrutinise and report on the issues that are so important and potentially powerful in allowing our country to be a leader in this field, given the size of our pension assets. They dwarf those of most other countries, particularly in Europe. It could help to fill an important hole in the Government’s overall climate change strategy.
The Government are of course right to mandate that the large schemes are going to do this. As I say, I support the government amendments, but we should also bear in mind that this is a question of protecting all pension savers’ money—not just in the large schemes but in all schemes—from the risk of climate change. Therefore to expose workers in small companies or small schemes to more financial risks from climate change does not seem an effective way forward. We have an opportunity in the Bill to make a real difference. There is scope to help the pensions industry be better able to address the financial risks of climate change and to be better aligned with the interests of savers, who will increasingly be concerned about these issues. This is an opportunity to put our pension funds and pension industry on a more sustainable footing and, if noble Lords will forgive this play on words, it can also include sustainable investments in relation to climate and environmental sustainability.
I have added my name to Amendment 92 in the name of the Baroness, Lady Hayman, and I support Amendments 75 and 89, which talk about requiring schemes to align their portfolios with the Paris agreement objectives. The UK Government need to ensure that pension investment portfolios are aligned with, for example, the UK’s emission reduction targets. Pension funds also need to act to protect their beneficiaries’ savings from these financial risks. For example, research from the leading consultancy Mercer has found that for nearly all asset classes, regions and timeframes, a 2 degree increase in global temperature scenario would lead to much better projected returns than if there was a 3 or 4 degree increase in global temperatures. The requirements in these amendments would not necessarily involve disinvestment from any particular sector; it does not direct how the trustees must invest. It would involve trustees in assessing whether their assets in their portfolios have a clear strategy for, for example, aligning their business model with the UK emissions reduction timeline and taking appropriate action. That would also give the companies clear incentives to develop Paris-compliant business models and invest in low-carbon opportunities, making it much easier for the Government to achieve their own targets.
Amendment 92, in the name of the noble Baroness, Lady Hayman, would help to facilitate this by requiring pension schemes to report against the Task Force on Climate-related Financial Disclosures framework. The amendment would ensure that all pension schemes have to report against the same frameworks, so there is commonality here, and, as I say, it does not dictate that schemes have to pursue a particular investment or disinvestment strategy. It would be left to the trustees. Operational independence, which is, of course, an important part of our system for trustees, is maintained. However, the requirement to disclose how the trustees are mitigating climate risk should also help to drive up standards of trusteeship, as well as protecting these assets and enhancing the UK’s global role in tackling climate change and other related issues.
I beg to move, and I look forward to the debate, other noble Lords’ contributions and the Minister’s response.
Baroness Hayman (CB)
My Lords, I added my name to Amendment 28, which the Baroness, Lady Altmann, has just cogently explained to the Committee. I will speak to that, as well as to my own Amendment 52, about the information available for dashboards. I shall also speak to Amendments 74, 75, 76 and 92, which, as the noble Baroness mentioned, seek to strengthen the Government’s welcome Amendment 73, which recognises the salience of climate change to pension funds and to the Bill. I remind the Committee of my interests as co-chair of Peers for the Planet, and that my son works for Make My Money Matter.
Baroness Bennett of Manor Castle (GP)
My Lords, I thank the noble Baronesses, Lady Altmann and Lady Hayman, for their powerful, comprehensive introductions to this group. I shall try not to repeat what they said, which covered much of the ground that I would have covered. I shall speak specifically to Amendments 36, 67A, 67B and 97, which are tabled in my name, and to Amendment 52, to which I have attached my name. Just to make life even simpler for novice amenders like me, Amendments 67A and 67B were previously Amendments 55 and 56. For simplicity for anyone who is looking at the old paperwork, Amendment 55, now Amendment 67A, refers to environmental and social governance, and Amendment 56, now Amendment 67B, asks for the views of beneficiaries to be taken into account. I hope that makes things clearer.
The noble Baroness, Lady Altmann, said that she believes people believe in the climate change crisis. I would go somewhat further and say that I know there is a climate emergency and I think the world knows there is a climate emergency and has acknowledged that through international declarations. I also stress the point that both noble Baronesses referred to previously: that as host of COP26, we have a particular responsibility to lead the world this year in measures such as this.
As the noble Baroness, Lady Hayman, said, Amendment 36 essentially mirrors Amendment 28. The drafting is different, as is the insertion point. I will leave it to those who know a great deal more about legal details than I do to work out which might be preferable. However, proposed new subsection (6B) goes further, because as well as having a statement of investment principles—principles are great, but what matters is what is actually happening—it requires the most recent version of the implementation statement, which states how the SIP is being implemented, and the most recent version of the statement of the chair, who is accountable for what is happening. Will the Minister consider this as a possibility?
Amendment 67A covers much the same ground as Amendment 52, which was focused on the climate emergency, but goes further by talking about environmental, social and governance factors. I am not sure how many noble Lords were at the Fairtrade Fortnight event down the corridor, but I am sure it was not just the really delicious tea, coffee and hot chocolate that produced a packed room. There is grave concern about poverty, hunger, access to education and the situation of women and girls around the world, and the way in which investment can make a difference. This amendment seeks to ensure knowledge about what people’s money is doing to address those issues; it is broader than looking at just the climate emergency.
Further to that, the world is having a major conference on biodiversity and addressing the nature crisis, the accompanying crisis to climate change. We cannot afford to simply look at the climate emergency on its own. We have to look at the broader framework. The world is doing this through the globally agreed framework of the sustainable development goals. ESG is a way of asking whether we are addressing those goals. People will have the choice; as other noble Baronesses have said, we are not mandating what happens but trying to ensure that people have a choice and know where their money goes.
Amendment 67B closely relates to Amendment 92. There is rightly a lot of focus these days on transparency in decision-making and how people know that decisions are made. I quote the Pensions Minister, who said that pension schemes,
“ought to be thinking about the assets which help drive new investment in important sectors of the economy … which deliver the sustainable employment, communities and environments which all of us wish to enjoy”.
However, I refer back to the advice from the Law Commission to trustees that they,
“may not impose their own ethical views on their beneficiaries”.
I would argue that the legislation as currently drafted puts trustees in a difficult position, because they are not allowed to impose their own views but there is no mechanism directing where the choices should be made from. If we provide a mechanism by which schemes are directed to consult their beneficiaries, that will provide the guidance that the trustees need.
We seem to have been going for a very long while. I hope that this covers the main points of the amendment I have put forward. I look forward to the contributions from others who have put forward amendments, and to the Minister’s response.
Lord Flight
My Lords, I want to point out that Amendment 28 is important because members of pension schemes do not generally have much knowledge or understanding of how their assets are invested and managed. This clause places a reporting duty on the Pensions Regulator to publish statements of investment principles under Section 35 of the Pensions Act. The amendment would also place a requirement on the Pensions Regulator to create an SIPP repository, accessible to the public through its website, so that all scheme members could check their scheme’s investment strategy.
It will be interesting to see how investment strategies are described. I think that it will be necessary for them to be described in a way that is readily understandable by all citizens.
Baroness Janke (LD)
My Lords, my Amendment 89 relates to the occupational pension schemes regulations in the statement of investment principles. Again, it is about compliance with the Paris Agreement, particularly to hold the global average temperature increase to well below 2 degrees centigrade. Other amendments in the group seek compliance in this area.
It is clearly very important to protect the interests of savers and the economy. I am grateful to the Minister for her amendments on climate change risk, her speedy response and her awareness of issues arising in this area. I have also supported Amendments 75 and 92. I certainly support Amendment 28 from the noble Baroness, Lady Altmann, on the register and publication of the SIPPs from all pension schemes, and understand the administrative problems of smaller ones.
As we have heard from others, the size of the pension fund is hugely influential, particularly in transforming the economy into a green economy. I believe that pension schemes have had enormous effects in other areas. My own recollection is of South Africa, where schemes exerted very strong influence. In my city of Bristol, when creating a smoke-free city, we sought to get the pension schemes and their investors to support it. This can be a very powerful instrument in changing behaviour and thinking; I hope that it will be.
The noble Baroness, Lady Hayman, mentioned that her amendments extend to all pension schemes. Again, I am not clear what the differences are. I note that the briefing from the ABI suggests that the PRA and the FCA are better placed to deal with the smaller pension schemes, but I would like to hear the views of the Minister on this. I very much support the spirit and content of most of the amendments in this group.
Baroness Jones of Whitchurch (Lab)
My Lords, I shall speak to Amendments 52, 74, 75, 76 and 92 to which I have added my name. As the noble Baronesses have said, these amendments refer to the need to strengthen the obligations on pension funds to play their part in meeting the challenge of the climate emergency. We accept that the issue goes wider than this Bill, but we will succeed only if every part of government, including the DWP, industry and the economy play their part, so this pensions Bill does have a part to play.
In relation to pensions, it is vital that a consistent approach is taken across the pension scheme market with the DWP, the Pensions Regulator and the Financial Conduct Authority all requiring contract-based pension schemes and trust-based occupational schemes to demonstrate the same levels of compliance with our climate change objectives; otherwise, there could be adverse competition between the different funds, which we do not support.
I add my thanks to the Minister for acknowledging the importance of these issues when we raised them at Second Reading, arranging to meet us to discuss them further and tabling the Government’s amendment today. As the noble Baroness, Lady Hayman, said, it happened very quickly, and we were very impressed by that. It is fair to say that it is a start, but we do not think that it goes far enough. However, I am sure that we will have a good dialogue on this issue. In the meantime, we have tabled amendments.
I shall be brief as I do not want to echo what other noble Lords have said. Amendments 74 and 76 take out the specific reference to occupational pension schemes so that the requirement would apply to all pension schemes. This is important because, although occupational defined benefit and defined contribution schemes comprise a large part of the pensions market, there is a gradual shift taking place towards contract-based personal schemes. As one model is regulated by the Pensions Regulator and the other by the Financial Conduct Authority, it is vital that we take this opportunity to provide alignment and consistency on the climate change action that they require across that sector.
In the Minister’s helpful letter to Peers explaining the purpose of the government amendments, it did not seem to me that she addressed this lack of consistency. Perhaps she can do that now. Does she accept the need for a joint approach across the regulators to ensure that investment decisions have parity, so that one cannot take advantage of the other or lead to the detriment of members by requiring higher standards of one than another?
Secondly, our Amendment 75 explicitly spells out that the Government’s reference to climate change means the need to align with the objectives of the Paris agreement to hold temperature rises well below 2 degrees centigrade. It is important to have that wording in there because we bandy around the expression “climate change” but it means different things to different people, and we are concerned that it could otherwise be loosely interpreted. That is why we set out a more explicit requirement. We set out the reasons for that requirement at Second Reading. As other noble Lords have said, we are currently on track for 2 to 4 degrees centigrade of global warming by the end of the 21st century, and we know that that will have a profoundly negative impact on the global economy and therefore upon the investments and the financial returns of pension schemes. So it is important that we have a requirement to deliver our Paris agreement commitments. It is not just about us being fluffy and caring about the planet; it is a more hard-nosed issue about the direct interests of savers and our economy. That is why pension funds have such critical role to play. I hope that the Minister will accept the intent and the importance of that amendment.
Thirdly, I was pleased to add my name to Amendment 92, which provides a timescale for the consultation on implementing the recommendations of the Task Force on Climate-related Financial Disclosures. It requires that the consultation will commence within one month and be completed within one year. Obviously we welcome the Government’s intention to consult widely on this issue, and we understand some of the complexities that lie behind all that, but meanwhile the clock is ticking on our Paris commitments and we are failing to step up to the mark on that, so this is one of the many areas where we need to take urgent action but also where we could deliver the biggest impact. I hope that the Minister understands and accepts the need for that consultation and follow-up to take place within a specific timeframe.
Finally, our Amendment 52 returns to the issue that we raised at Second Reading about the need to inform pension savers via the dashboard of the actions being taken by their trustees to deliver on climate change as set out in the UK Stewardship Code 2020 and to align with the Paris agreement. This amendment would add these factors as information that may be required to be provided by regulation. I know that at Second Reading there was some argument—maybe there will be again today—about the information on the dashboard needing to be kept simple in the first instance. We understand that issue, but we also have to acknowledge, as the noble Baroness, Lady Hayman said, that pension savers are concerned about their pension funds propping up fossil fuel extraction, and they are keen to have information so that they can be empowered to take action on these issues. Our amendment has been tabled to explore how best we can achieve that by providing information in a simple and meaningful way to pension savers.
I hope that the Minister will agree that savers need to have access to this information and that the dashboard could be a meaningful way of achieving that objective. I look forward to her response.
Lord Balfe
I would like to say one sentence about this. First, could the Minister comment on this situation? I do not have a big role in pensions but in so far as I have, I have been pushing people towards index trackers. An index tracker that conforms to the UN principles for responsible investment is generally accepted. However, at the moment the UN principles do not contain climate change, so to what extent are we putting forward something which would be difficult to implement? Secondly, I wonder whether we are suggesting something which, far from being implemented by the trustees, will be implemented by means of companies, such as one or two I have come across in my life, which will go to trustees and say, “Here you are; for just £500 we can give you a statement of principles which will get you past the regulator”. There is a sense in which we might not be curing a problem at all but creating it, certainly for small pension funds that are largely invested in index trackers and bonds. Even bonds have their problems. In a pension fund where I was once a trustee when I said, “We will probably buy some UK Government bonds”, a member said, “Oh yes, Mr Blair needs the money to bomb Iraq, doesn’t he?”
Baroness Sherlock
My Lords, I do not think I will start at that point.
I will not add much. I had a lovely speech prepared, but it was much less good than some of the speeches we have heard already. Let me simply say that I am grateful to all noble Lords who have put this issue on the agenda. Like them, I am particularly delighted that the Minister was listening so carefully to my noble friend Lady Jones, the noble Baroness, Lady Hayman, and others at Second Reading. If that is what could happen over Second Reading, just think what will happen by Report, after all we have done here today. I am very excited indeed at this new responsive Government: hurrah!
I want to add just a couple of things. I hope we all now recognise that there is no way that the Government are going to hit the 2050 target, never mind Paris, without pension schemes stepping up and playing their part. In response to the noble Lord, Lord Balfe, I know it is difficult, but there is quite a lot of good thinking going on out there. I commend to him work done by the Church of England Pensions Board, which has recently developed an index, made available specially to enable funds—it is putting its own money where its mouth is—to do compatible things. I can talk to him about it afterwards. I should declare an interest: I am a Church of England priest, but my knowledge of pensions in the Church of England stops there, because I do not pay into any. There are things that can be done.
I am particularly conscious that people want to know this information. It will increasingly be the case: if we want more people to save, young people in particular will want to know where their money is going. The Government will have to find some way to address that. I will come on to talk about the dashboard, but I should be interested to know if MaPS is beginning to think about this. Is this in its consideration?
I should also be interested to know from the Minister about the amendments of the noble Baroness, Lady Hayman, and my noble friend Lady Jones to the government amendment, which raise interesting points. Is there a reason why the Government feel that they cannot apply them to all pension schemes and are they amenable to a stiffening around Paris, as opposed to generic climate change? If she could address both those questions, that would be helpful.
I should also be interested in her response to an amendment which is pushing a sense of urgency on the timescale of the task force on climate-related financial disclosures. It would be very helpful to get a sense of where the Government are going on that. It does not seem a hard ask: to run a consultation, soon after commencement, on implementing the recommendations of a task force coming back within a year would seem to be one of the easier concessions that the Minister has been asked to make, so perhaps she may look with a smile on that too.
Baroness Stedman-Scott
I thank all noble Lords for their amendments and contributions. They have been numerous, but they have been numerous in quality, so I thank them for that. I assure the noble Baroness, Lady Sherlock, and the whole Committee that we are listening and aim to please.
I thank all noble Lords who have taken part in this important debate. In responding, I will first address the three government amendments and then the others in the group. The Government are clear that action needs to be taken to address the risks that climate change brings. The Government announced in the Green Finance Strategy, published last July, that all large asset owners, including occupational pension schemes, would be expected to report on how they address climate change risk, in line with the international, industry-led task force on climate-related financial disclosure, by 2022.
Building on that expectation, the Government are now, through new Clauses 73, 81 and 98, seeking to take powers to require occupational pension schemes to manage the effects of climate change effectively as a financial risk to their investments and to report publicly on how they have done so. New Section 41A inserted into the Pensions Act 1995 confers powers on the Secretary of State to impose requirements on occupational pension scheme trustees and managers to secure effective governance on the effect of climate change on the scheme.
Let me be clear. This does not mean that it is for the Government to direct schemes or set their investment strategies. The Government never have directed pension scheme investment, and do not intend to. Our clear view is that the amendments do not permit us to do that. Amendments 74 and 76, tabled by the noble Baronesses, Lady Hayman and Lady Jones, would amend the new clauses, expanding the remit of these powers and those under new Section 41B beyond occupational pension schemes to include personal pension schemes. Personal pension schemes are regulated by the Financial Conduct Authority, not the Pensions Regulator. To place requirements on personal pension providers through the Bill would create a patchwork of overlapping regulatory oversight, under which providers would have to respond to two separate regulators on the same activity.
The noble Baroness, Lady Hayman, raised occupational schemes. The FCA is currently considering how best to enhance climate-related disclosures by workplace personal pension schemes. The noble Baroness, Lady Janke, also referenced personal pensions.
Turning back to the government amendment, the Government believe it is absolutely necessary that trustees act within their fiduciary duty to protect members’ benefits against the growing physical risks of climate change and the risks of the transition to a lower-carbon economy. However, action taken by trustees and managers should not be limited to avoiding risk but should involve consideration of the investment opportunities that climate change presents, as new Section 41A(2) makes clear.
New Section 41A(3) sets out the kinds of activities trustees and managers of pension schemes may be required to undertake as part of their governance on the effects of climate change. Where such requirements are introduced, our intention is that trustees or managers are doing the determination, review and revision of strategies and targets. It is not a matter for the Government. We will consult on the exact requirements, the timings for introducing them and the scheme in scope.
New Clause 92 seeks to bind the Secretary of State to a specific timeline for launching this consultation and publishing the response. I am very grateful to noble Lords for their compliments about the speed of our action on climate change; I must tell your Lordships that our Secretary of State Thérèse Coffey and Minister for Pensions Guy Opperman are 110% behind this. It was their action, not mine, that put this into the Bill, so I cannot take credit for something I did not do; they deserve all the credit for that. I understand the point of the noble Baroness, Lady Jones, that we should push further. As my great friend William Booth would have said, that and better will do. I understand the point she is making.
I assure the noble Baronesses, Lady Hayman and Lady Jones, in response to their amendment, that the Government intend to launch their consultation on the task force recommendations upon the Bill completing its passage through Parliament, and to respond within a year.
Amendments 52 and 75 and new Clause 89 specifically identify alignment with the Paris Agreement as one of the risk-assessment activities which schemes should be doing. Our view is that the industry is not quite ready for this sizeable step in reporting requirements. The noble Baroness, Lady Jones, raised global warming. Amendment 75 goes further than reporting on alignment to require governance of schemes to align with the Paris Agreement’s objective of global warming of well under 2 degrees Celsius. This would be tantamount to directing schemes’ investments, which the Government have already ruled out. The Government are seeking to ensure effective governance of climate change risk, not to direct trustees’ or managers’ investments.
However, new Section 41A(4) in Amendment 73, taken with new Section 41B, would enable the Government to prescribe reporting on Paris alignment, requiring schemes to consider their alignment with Paris in relation to risk and exposure and to make this information public. At present, there is little consensus on methodologies for reporting on Paris alignment. This area is developing very quickly, which is why the Government are seeking powers to prescribe such reporting in future. We will continue to monitor the development of methodologies and data in the industry, and would put any future proposals on this issue to consultation.
The Government believe that schemes should be doing effective governance, as new Section 41A will allow us to require, and that schemes should publish this information as set out in the task force recommendations. New Section 41B would enable the Government to lay regulations to require this information to be made public, free of charge, including to members.
New Clause 89 would require some of this information on Paris Agreement alignment to feature in the scheme’s published statement of investment principles, or SIP. However, should the amendment be accepted, this would pre-empt the outcome of the consultation. In contrast, new Section 41B of the Government’s amendment takes powers which would enable the Government to introduce publication requirements relating to the degree of Paris Agreement alignment at a later date.
When disclosing information and documents, subsection (3) of new Section 41B in the Government’s amendment requires trustees and managers to have regard to statutory guidance which the department will publish. In requiring schemes to follow this guidance, consistency and comparability across reporting by different schemes will be easier to achieve. Other benefits of publication are ensuring that best practice is shared across the industry and that trustees and managers can learn from those with the most advance climate risk governance.
Amendments 28 and 36 seek to achieve a similar objective by granting the regulator the responsibility to create a repository of statements of investment principles and forcing schemes to provide their SIPs, as well as sections of annual statements, to the regulator. The Government were concerned by the UK Sustainable Investment and Finance Association’s recent research, which showed widespread non-compliance in publishing SIPs. We have urged UKSIF to pass its findings to the regulator, so that it can take swift action. We believe a central repository has a part to play in that, but Amendment 28 does not take into account the growing concentration of the vast majority of members in a small number of schemes. Of more than 5,000 defined benefit schemes, the largest 200 schemes have more than 60% of members. Of more than 3,000 defined contribution schemes, the largest 150 have more than 96% of members. For these members, their own scheme’s website or public pages are the natural places to look for investment information, not a corner of the Pensions Regulator’s website.
Similarly, in relation to Amendment 36, the regulator has already placed the largest schemes under one-to-one supervision and has regular sight of the all the documents referred to. In any event, Amendments 28 and 36 are unnecessary, as I can report that officials at the DWP and the Pensions Regulator have already begun work to identify how a central index of SIPs can be produced. Amendment 97 seeks to put a duty on trustees to consult members each time they review their SIP. However, this imposes unreasonable burdens on trustees. The Law Commission has confirmed in two reviews that trustees are not required to take account of members’ views, although in some circumstances they can. It would be unhelpful to require trustees to solicit member preferences which they had no ability or intention to take into account. Amendments 52, 67A and 67B seek to include information on Paris alignment reporting and consideration of ESG in the pensions dashboard.
We will turn to the dashboard later in Committee, but it is important to highlight here—
Baroness Altmann
I am so sorry to interrupt my noble friend. First, I want to draw the Committee’s attention to my interests as set out in the register in connection with pensions, and to the fact that my son works on sustainable transport and reducing transport emissions. Will the Minister write to members of the Committee about the regulator’s plans for creating a central repository? Will it be comprehensive? If DWP and the Pensions Regulator are working on setting this up anyway, would it do any harm to have this measure in the Bill to make sure that it happens?
Baroness Stedman-Scott
Of course we will be happy to write to answer the questions that my noble friend has raised.
Baroness Hayman
There is a lot of detail in what the Minister has said and I am very grateful to her for saying that she will look at it. I think she said that the Financial Conduct Authority is considering the requirements to be put on personal pension schemes; that is, those not covered by the government amendment and the regulations. The Minister was very helpful about the timetable of the consultation on the Government’s proposal on occupational schemes. Is there any timetable for personal pension scheme requirements? Is it the Government’s ambition that they should parallel the requirements in the Bill?
Baroness Stedman-Scott
I am advised that we need to get that information from the FCA; when we do, we will give it to all members of the Committee. I hope that that is acceptable.
Baroness Bennett of Manor Castle
I apologise, but this seems to be the logical point at which to do this. I echo the comments of the noble Baroness, Lady Altmann, and request to also get a copy of that. Further to that, if there are already plans to have a central index of SIPPs and that system already exists, including the implementation and chair statements would surely be a very small administrative burden. Could the Minister consider whether that is possible? She can answer now or in the future.
Baroness Stedman-Scott
Can I answer the noble Baroness’s question when I come to the specifics that have been asked? If I get to the end and have not answered, I have no doubt that she will let me know.
We will turn to dashboards later in Committee. However, it is important to highlight here that the Government want to ensure that information on dashboard services can be easily comprehensible to consumers. For this reason, dashboards should start with simple information. We remain interested in finding out whether dashboards can support an increase in engagement on issues, including the investment decisions made by schemes.
Moreover, new paragraph (c)(i), which would be inserted by Amendment 52, would not only duplicate the intent of the Government’s new clauses but would also duplicate existing duties that the Government have already placed on trustees. Amendment 67A would have a corresponding effect on workplace personal pension schemes, for which the FCA has also legislated to take account of such factors. Both these sets of requirements are mandatory, unlike the voluntary UK stewardship code referenced in this amendment.
Amendment 67B would enable the dashboard to include information on how schemes take into account members’ interests. Notwithstanding earlier arguments for keeping the dashboard simple at first, occupational schemes already have duties to report on the extent to which they take account of members’ views in investment decisions.
The final new section in the Government’s amendment, new Section 41C, confers powers on the Secretary of State to lay regulations ensuring that managers and trustees of occupational pension schemes comply with requirements in regulations laid under powers delegated by new Sections 41A and 41B. In particular, regulations may allow the Pensions Regulator to issue compliance notices, third party compliance notices and penalty notices. The provisions in new Section 41C are consistent with similar compliance provisions relating to pension schemes in paragraph 3 of Schedule 18 to the Pensions Act 2014.
New Section 41C and indeed 41A are subject to the affirmative procedure at first use only. The first regulations made in exercise of the powers in these sections will confer enforcement powers on the regulator and place new requirements on trustees or managers. The Government therefore consider that they should be subject to a higher level of scrutiny. However, the Government expect any subsequent use of the powers to be for the purpose of periodically amending these requirements to ensure that they reflect developments. We therefore believe that the negative procedure beyond first use is appropriate. The consultation requirements in Section 120 of the Pensions Act 1995, into which these new sections are proposed to be inserted, would also apply.
Delegated powers to set out these requirements in secondary legislation are essential to ensure that the requirements can take account of developing operational and financial best practice and are proportionate to the scheme in question. It also ensures that they reflect the rapidly developing understanding of the effects of climate change and its interaction with the financial system. Furthermore, the urgency of action required to address the climate emergency demands a swift policy response now and in the future.
All the Government’s new clauses also make provision for Northern Ireland that is equivalent to the provision that would be made by the Government’s amendments. This would ensure that, in accordance with the long-standing principle of parity, the single system of pensions across the UK is maintained. As such, the arguments made in relation to the proposed amendments to the Pensions Act 1995 apply equally to the amendments proposed to the Pensions (Northern Ireland) Order 1995, inserting a new paragraph into Schedule 11.
The government amendments and their associated powers are as urgent as they are important. Climate change is a major risk to the nation’s pension savings. It is appropriate and responsible for the Government to require those who have a duty to deliver members’ retirement income to safeguard investments against climate risk and publish information on how they have done so.
I come to some of the specific questions raised—
Baroness Bowles of Berkhamsted
I am sorry to interrupt but this is specifically on the government amendments. Like others, I welcome what is there and I hear the Minister referring to the matter as urgent and important. I just come up against a block when I see that it says “Regulations may impose”. Why can we not have “must” if there is an intention that these things are to be done? From the particular point of view of justice, in new Sections 41C and 41D, the reference to what would be your right of appeal to a tribunal still comes under “may”. I know that it is a standard formulation but it really does not appear to be right, because nothing is actually promised when it says “may”. Why can we not have “must”, and certainly have “must” when it comes to defences and reference to tribunals?
Baroness Stedman-Scott
In answer to the noble Baroness, subject to the passage of the Bill we will consult extensively this summer on the content of new regulations, which will likely include the content of these new requirements and the timing thereof. When we lay regulations and when they come into force will depend upon the outcome of the consultation, but we will respond to that within a year of its launch.
Baroness Bowles of Berkhamsted
That still does not mean that something will definitely happen then. I understand that the regulations’ shape depends upon the consultation but they should be regulations that do something, with a promise that we are going to have them—that there will be some, not that there “may”.
Baroness Stedman-Scott
As I understand it, we have to consult before we can make that decision.
Lord Sharkey
Could I join in on this? We are talking about Amendment 73, which would insert new Section 41A on “Climate change risk”. Its first proposed subsection says “Regulations may impose requirements”; it does not specify any requirements in that part because, as the Minister rightly says, they are all to be consulted on later. But it is odd that it should say “may” and not “must” since it talks about imposing requirements. In practice it means that the Government need not do anything at all, which is unfortunate.
Exactly the same comment applies to new Section 41C, headed “Sections 41A and 41B: compliance”. It begins “Regulations may make provision” and underneath that is a long list of things that will eventually turn out to be regulations and will be consulted on. I understand that “may” is appropriate there but, as it stands, the Government do not have to do anything at all about this as long as the word “may” remains as it is in both those initial paragraphs. I re-emphasise the point made by my noble friend Lady Bowles: leaving the provision of an appeal mechanism to “may” might not be a very good idea.
Baroness Stedman-Scott
I do not know whether the noble Lord has put his name on the list to meet, but it looks as though I am able to offer him a meeting on the consultation first, if that is helpful, to try to get to where he wants to be.
Going back to the point raised by my noble friend Lady Altmann about schemes not having a website, schemes are not required to set up a website to publish their statement of investment principles or other documents. The information must be published on a publicly available website in a manner which allows for the content to be indexed by internet search engines. This can include a social media site, a blogging platform or a repository offered by a search engine provider, as long as trustees have ensured that the document is public and can be indexed. The Government are not in the business of endorsing publishing tools, but Facebook, WordPress and Google Docs allow for free publication.
Coming on to my noble friend Lady Altmann’s point about what is meant by a large scheme, following the passage of the Bill, we will consult extensively in the summer on what schemes should be in scope and how the scope will increase over time. My noble friend also said that the Pensions Regulator is not doing anything about breaches of ESG legislation. The chief executive of the Pensions Regulator has written to DWP to confirm that it is taking action. The regulator has engaged with the findings of the UK Sustainable Investment and Finance Association on the poor state of compliance among some pension schemes and will follow up on breaches of compliance.
My noble friend Lady Altmann also said that pension schemes should be required to align their portfolios with the Paris Agreement to reach net zero by 2050. The Government’s amendment and subsequent regulations will focus on schemes’ governance of climate risk and disclosure of that risk. We do not wish to direct pension schemes to align their investments with the Paris Agreement targets, and the legislation does not allow us to do so. Nevertheless, Paris alignment reporting could be useful as a measure of climate-related risk to the scheme. We will consult over the longer term on whether it is a useful assessment of a scheme’s exposure and risk.
I have already come clean to the noble Baroness, Lady Hayman, on whom to credit for the speedy inclusion of the amendments. She also raised a point about taking account of members’ views. The Law Commission has found that pension schemes have a fiduciary duty to take account of all financially material risks, including environmental risks. We have legislated to require all schemes with 100 members to publish their policies on financially material environmental risks, including climate change, and defined contribution schemes will be required to report annually on how they manage those risks from October 2020.
Trustees do not have a duty to take account of members’ ethical concerns but are free to do so when they believe a majority of members who express a view share those concerns and when doing so would not result in significant member detriment. The noble Baroness, Lady Hayman, asked why we will not legislate for personal pension schemes. Personal pension schemes are regulated by the Financial Conduct Authority, not the Pensions Regulator. To place requirements on personal pension providers through this legislation would create a patchwork of overlapping regulatory oversight under which providers would have to respond to two separate regulators on the same activity. The FCA is currently considering how best to enhance climate-related disclosures by workplace personal pension schemes, building on its existing rules framework and enforcement powers. I will write on the number of members of personal pension schemes.
The noble Baroness, Lady Hayman, asked whether dashboards will include pension schemes’ environmental, social and governance policies. We are very interested in how dashboards can support and increase engagement, including whether information on areas such as ESG, which trustees are required to cover as part of their disclosure obligations, may be incorporated into the dashboards. This is to be informed by user testing and may evolve over time.
The noble Baroness, Lady Bennett, quoted the Minister for Pensions, who wrote,
“pension schemes ought to be thinking about the assets which help … drive new investment in important sectors of the economy … which deliver the sustainable employment, communities and environments which all of us wish to enjoy.”
How will we meet this if the scheme does not know members’ wishes? The Government have been very clear that the purpose of a pension scheme trust is to deliver an appropriate return to its beneficiaries. The context of the Minister’s quote makes this clear and that it is possible to deliver this while having a beneficial effect on the communities in which they invest. The noble Baroness also talked about the implementation and chair statements being published. Schemes are already required to publish their chair’s statement and implementation statement. We are working closely with the regulator to develop a central index that can also be applied to the implementation statement and the chair’s statement.
Finally on the point raised by the noble Baroness, Lady Bennett, about pension schemes being required to go beyond climate change to consider sustainability more broadly, trustees already have clarity that they should take account of financially material social and environmental risk in investment policies. This includes, for example, considering violations of human rights laws and destructive environmental practices. In practice, most trustees do not actively manage investments and cannot make stock selections, but the Government have set the requirement for a clear policy which will be published and shared with those managing the investments. As I have said before, the Government do not tell pension schemes how to invest. Seeking to do that would force trustees to chose between acting in the best interests of members and following government directions.
I hope I have answered all noble Lords’ questions and therefore urge the noble Baroness to withdraw her amendment and urge noble Lords to support the amendments standing in my name.
Baroness Altmann
I thank my noble friend for her comprehensive response. I think she can tell from the comments that we would be grateful for some follow-up conversations. In the meantime, I beg leave to withdraw the amendment.
Lord Kirkhope of Harrogate (Con)
Compared with the very interesting debate we have just had on these important amendments, what I have to say regarding the stand-part element of Clause 110 is probably rather insignificant in many minds. On Second Reading, I raised with the Minister the question of the nature of the regulator’s responsibilities, particularly in relation to the process of interview. I am concerned about Clause 110(4), where there is a situation concerning an individual summoned for interview by the regulator failing to answer a question or to provide an explanation that satisfied the regulator. That comes in new Section 72A of the Pensions Act 2004.
I am concerned because, as far as I am aware, an explanation is defined as a statement or account that makes something clear, but there is a massive amount of subjectivity and responsibility on the regulator’s shoulders in concluding whether that explanation is satisfactory. With the sanctions in place—ultimately a criminal sanction, but also civil sanctions—it seems a very serious area and one in which the basic right of individuals not to self-incriminate, for instance, or even providing some information can result in a more serious effect than anticipated.
I want to defend the regulator here because some remarks have been made during the debate on these amendments suggesting that the regulator needs thoroughly investigating. We are putting upon the regulator a whole lot of new responsibilities, partly in the area I am talking about—decision-making on subjective matters—but also in the overall workload, which I am concerned about.
I was just looking at the impact assessment of the Pension Schemes Bill 2020. In relation to the matters I am talking about, it suggests, for instance, that the impact on the government side of this—the changes that might be made to the requirements for the regulator or the regulator’s ability to pursue these matters—is “broadly cost neutral”. I suggest that this is not a fair appraisal because the extra responsibility placed on the regulator, and the way in which that becomes controversial from time to time, is bound to be costly. It will cost money, and the regulator therefore needs to be resourced adequately to be able to deal with that and other responsibilities we are placing on it.
Similarly, the extra obligations on those who are being interviewed or are required to comply with these things are not inconsiderable. There will be costs for those businesses that are already having to find considerable resources to deal with matters where the regulator has the powers to intervene. Therefore—perhaps my noble friend would consider this—I suggest that it would be very useful if, when this legislation is passed, the regulator is taken fully into account in terms of the resource. Just as importantly, it would be very useful if the regulator had thorough and better guidance compared to the present guidance about how to handle these circumstances and how these subjective requirements should be dealt with. That is enormously important. It is not part of the legislation as such but I think that the regulator is entitled not to be so liable for its judgments. Also, more guidance should be available to it so that it does not find itself in an unfair and unreasonable position in making these powers work.
That is all that I want to say to my noble friend at this point. I did so at Second Reading and have spoken to her subsequently. Although this issue is not as important as some of the amendments, it is significant in terms of the obligations on the regulator and on those who fall under these regulations.
Baroness Stedman-Scott
I thank my noble friend for that contribution, which is equally as important as the amendments. The regulator will update its current compliance enforcement policy in due course and that will include how it conducts interviews under this clause. We will discuss the impact assessment at a later stage, and I suggest that we address the specific issues that my noble friend has raised at that point. I hope that he is happy to proceed on that basis.
Lord Sharkey
Lord Sharkey
My Lords, I shall be very brief. Amendments 29, 30 and 32 in my name are all probing. Their purpose is to allow discussion of the reasoning behind the choice of penalties written into Clauses 112 and 115. In each case, I would be interested to know two things: what comparisons, if any, did the Government make in deciding on the penalty amounts, and what was done to assess the likely effectiveness of these amounts? In other words, are the upper limits really large enough to influence behaviour, and what has convinced the Government that they are?
At Second Reading, I noted that the Government seem uncertain about the merit of the £1 million upper limit contained in new Section 88A, inserted into the Pensions Act 2004 by Clause 115. Subsection (2) of new Section 88A is where this £1 million is set, but the very next subsection allows for secondary legislation to change this upwards without limit. As far as I can tell, this power to adjust upwards by regulation does not apply to the penalty upper limits in Clause 112, and I think that that deserves an explanation. Why are the Government confident that they will not need to change upwards the lesser penalties in Clause 112 but feel that they might have to do so for the major penalty in Clause 115? Surely it is not wise to allow unlimited power to raise penalty levels by regulation.
The Government implicitly acknowledge that that is the case by setting limits on the face of the Bill. Then they do a reverse ferret by giving themselves unlimited discretion to revise upwards in one case. I can see why the Government might lack confidence in the proposed £1 million limit, given the resources of those upon whom the penalty might fall, but surely it would be better to have in the Bill a limit that we think might work, or at least a limit on how far the initial amount may be raised or a proportional system, as proposed by the amendment of my noble friend Lady Bowles.
In any event, it would be very helpful to know how the Government alighted on all these upper bounds, especially the £1 million limit, and especially as they all seem intuitively to be rather on the low side. I look forward to the Minister’s response. I beg to move.
Baroness Bowles of Berkhamsted
My Lords, I support all the amendments in this group—Amendment 31 is my own. The broad principle is not to let the fines simply be a cost of doing business for the wealthy and especially large companies. Inevitably, large fines give rise to concern among those who would be the bottom end of any range of fines, with respect both to the seriousness of their offence and their resources. It is clear that proportionality is key—proportionality both to the severity of the offence and the resources of the offender. The fine must also be a sufficient deterrent, not just a cost of doing business.
It does not seem to be customary to recite proportionality in legislation, as it is presumed. For my part, I would not see it as damaging to include wording on proportionality, and anyway it would always be part of any appeal. That is why, in Amendment 31, I changed the new Section 88A fine from “£1 million” to
“twice the employer’s pension deficit or 4% of the employer’s annual global turnover (whichever is greater)”.
The fines may not be these amounts; they are the maximums. These fines can be for egregious matters that put pension funds at risk—and, therefore, the livelihood and well-being of pensioners and future pensioners—and potentially impose on taxpayers. They are fines for being a social pestilence.
I thought that the size of the deficit was relevant—maybe I should have made it three times the size, because my inspiration was US-style triple damages that can apply for monstrous offences. I have made it clear that I think doing bad things to pensions is pretty monstrous.
Turnover-linked criteria are also not new. They are in use in the UK, having been recently introduced for the Information Commissioner; that is what I have copied. They have, of course, been in play for some time for competition offences. The Information Commissioner penalties also have a numerical option, although again that is not limited to the turnover side of the penalty. I left out the number in my amendment to emphasis the proportionality point, but I would have no problem adding in the amendment of my noble friend Lord Sharkey so that we have a numerical measure in there as well.
It would seem from something that was said to me—in one of the meetings, I think—that the £1 million fine level was inspired by “similar fine provisions” by the FCA. Well, I can suggest several responses to that. First, the FCA may be the one out of line with modern thinking, the fine having been set a while ago. Also, it has perhaps been undermined because it always has to do consultations and, strangely, has to consult those who might be fined. But, as a matter of consultation, I note that the ABI has supported my amendment.
Baroness Sherlock
My Lords, these amendments offer a good opportunity to explore whether the penalties in the Bill are of the right kind and scale. I hope the Minister will take this opportunity to set out the thinking behind the decisions that the Government have reached. I read the DWP policy brief for the Bill; it says that, in developing the new sanctions, the main priority had been getting the right balance between increased deterrents and protection for members, minimising any negative impacts on industry, and ensuring that the new sanctions are in line with the wider statute book. So one of the questions is: has it done that?
The first question, raised by the noble Lord, Lord Sharkey, is: are the penalties set at the right place and why are they set at that place? What is the argument —why £50,000 and not £100,000? Why £l million and not £10 million or £50 million? Was this done to mirror provisions elsewhere? If so, which ones? If not, what work—what modelling—was done to lead Ministers to believe that they have landed in the right place?
Interestingly, the policy brief then says that the DWP considered the level when establishing the new penalty of up to £1 million. It says that the level had to be proportionate for local individuals and businesses of different wealth levels and appropriate for a wide range of behaviours, provide a stronger deterrent than the current regime and work alongside the new criminal offences for non-compliance, under which an unlimited fine can be issued. I need the Minister to help me here because this is not my area of expertise: if the maximum fine is £1 million, why does the maximum fine have to take account of a wide range of behaviours and wealth of individuals or businesses? Presumably, the maximum fine applies only to the people at the top of the scale, either those who have the most money or have done the worst thing. How does that balance work in setting a maximum fine? There may be a really good reason—maybe you have to be proportionate; I do not know—but could she explain it to me?
Baroness Stedman-Scott
I thank noble Lords for tabling these amendments and I will do my best to answer all their questions. Clause 112 inserts new provisions for the Pensions Regulator to impose fixed and escalating civil penalties where a person has not complied with the regulator’s information-gathering powers. The level of the penalties is to be set in regulations, but the fixed penalty cannot exceed £50,000 and the rate of the escalating penalty cannot exceed £10,000 a day.
Clause 115 provides for a new financial penalty in the Pensions Act 2004 which can be issued by the Pensions Regulator, and sets the maximum amount of this financial penalty at £1 million. Amendments 29 and 30, in the name of the noble Lord, Lord Sharkey, seek to raise the penalty levels for both the fixed and escalating penalties. Fixed and escalating penalties are already available to the regulator for non-compliance with information-gathering provisions in connection with automatic enrolment and master trusts. We consider that it would be inconsistent and unfair to have a much higher maximum, as introduced by these amendments, for similar breaches connected to other types of pension schemes.
We have no evidence that these maximum levels are inadequate or not working. On the contrary, the regulator confirms that the current levels of fixed and escalating penalties provide an adequate deterrent in automatic enrolment: issuing a fixed penalty results in compliance in the majority of cases, with only a few cases resulting in escalating penalties. The noble Lord’s amendment would introduce a maximum fixed penalty of £1 million, but that is the maximum level of the financial penalty that the Bill is introducing for serious breaches of pension legislation—for example, deliberately giving the regulator false information, or conduct that puts members’ benefits at risk.
I know that some noble Lords feel that the financial penalty should be higher, but we believe it is set at the right level. It would not be right for the penalty for not complying with an information request to be as high as for serious breaches of pension legislation. I should also make it clear that not complying with information requests, or obstructing an inspector, is a criminal offence and will remain so, with the potential for an unlimited fine. The intention is that these fixed and escalating penalties will be imposed for less serious breaches, where the regulator thinks a civil penalty is more appropriate than a criminal prosecution. Imposing a civil penalty is likely to take less time than instituting criminal proceedings, therefore the regulator can receive the necessary information and conclude an investigation more quickly. In the 2018 consultation on the regulator’s powers, mirroring the approach for automatic enrolment and master trusts was supported by industry representatives.
Amendment 31, in the names of the noble Baronesses, Lady Bowles and Lady Janke, and Amendment 32 in the name of the noble Lord, Lord Sharkey, seek to raise the maximum amount of the new financial penalty. We consulted on our proposals in 2018 and they were developed from the Green Paper consultation in 2017. The £1 million maximum penalty was supported by the majority of respondents. The £1 million penalty is positioned as a mid-level sanction, between the lower £50,000 penalty for acts of non-compliance by corporates and £5,000 by individuals and the new higher-level criminal offences for serious wrongdoing that has an unlimited fine. The £1 million maximum level was also deemed to be appropriate as it is comparable with the average level of equivalent sanctions for financial crimes in the financial sector issued to individuals by the Financial Conduct Authority.
The new financial penalty can be applied to a number of offences, and changing the maximum penalty to the levels in the noble Baronesses’ amendment would be inappropriate in the case of some of these offences. Moreover, the people who are within scope of these penalties vary. In some cases, the target of the penalty may not have any direct connection to the sponsoring employer’s company or to the scheme itself. It would therefore be difficult to justify why such a person should be liable to pay a penalty of up to a maximum of double the scheme deficit or a percentage of the employer’s turnover. In such cases, a maximum level of £1 million is more proportionate and provides clarity. The introduction of the new financial penalty in this clause was also an integral part of enabling the Pensions Regulator to take action more swiftly, thereby becoming a “clearer, quicker, tougher” regulator.
The new maximum penalty levels proposed in Amendment 31 in particular go against this intention, as the precise meaning of the terms “deficit” and “turnover” is uncertain, and how these are to be calculated is unclear. This leads to uncertainty for any targets of the penalty and will place an unnecessary burden on the regulator. For example, the regulator would need to interpret what is an appropriate definition of deficit to use for the purposes of the penalty and then estimate what this deficit would be. Similarly, the regulator would need to dedicate resources to estimating what constitutes the employer’s annual global turnover and what would be relevant turnover for this calculation. Further, a question arises about the time at which the deficit or turnover should be assessed. For example, should it be calculated from the time the act took place or at the point of instituting proceedings? If the act is part of a series, at which point in the series should the deficit or turnover be calculated?
Until the regulator had carried out these assessments, the maximum penalty that could be charged would be uncertain. The assumptions that the regulator would need to use would also be open to challenge by the target. This would impede the regulator’s ability to take swift action and could tie enforcement up in lengthy challenges over the penalty amount. This would also put a drain on the resources the regulator has to undertake its functions.
The clause contains a power to increase the maximum amount of the financial penalties if required. This is to ensure that the penalty remains an effective deterrent in the future and accounts for factors such as inflation.
The noble Lord, Lord Sharkey, asked why we were consulting on the level of penalties rather than putting these figures in the Bill. The maximum level of penalties is included in the Bill. The level and daily rate of the existing fixed and escalating penalties which relate to automatic enrolment and master trusts are set in regulations. These provisions mirror that approach. Feedback during the consultation on the regulator’s powers indicated strong agreement on similar fixed and escalating civil penalties, but little consensus on the detail of the exact levels. We need to consult further to ensure that the penalties are set at an appropriate level.
The noble Baroness, Lady Bowles, asked why we do not follow the method of imposing fines used by the Information Commissioner’s Office. The ICO has a fining power as required in accordance with the 2016 general data protection regulation. Article 83 of the GDPR states that the penalties must be at particular levels.
The noble Baroness, Lady Sherlock, asked what modelling or consultation took place to set the maximum financial penalty at £1 million. The Government consulted on the proposals for strengthening the regulator’s powers in 2018, which were developed from the Green Paper consultation in 2017. As I have said, the £1 million maximum penalty was supported by the majority of respondents to the consultation.
The noble Baroness, Lady Sherlock, also asked about different fines decided by the FCA rather than by averages. I am afraid that I will have to write to her to answer her question on whether others have the power to change the maximum.
I hope that I have reassured noble Lords that the Government have thought carefully about these penalty amounts and struck the right balance between protecting members and being proportionate to the business. Therefore, I urge noble Lords not to press their amendments.
Baroness Sherlock
I realise that my questions were quite detailed, so could I ask the Minister to look at the record and write to me to answer each of them in turn? Could I encourage her to draw on the expertise behind her to answer the questions? Sometimes one gets letters after a debate and, while they relate to the general area of the questions, they are maybe not quite as well targeted as one would hope. I encourage her to do that and would be delighted to leave it at that at this time.
Baroness Stedman-Scott
I thank the noble Baroness for this homework. I will ensure it is delivered to her and that it is accurate.
Lord Sharkey
My Lords, in her explanation of the £1 million upper limit, the Minister relied to some extent on the consultation outcomes from 2018. I am curious about who was consulted. Was the ABI a consultee? She will have heard earlier in this debate the ABI’s rather enthusiastic approval of an increase in the £1 million limit, so it would be interesting to know whether the ABI has done a reverse ferret or whether it was not included in the first place.
Secondly, if the Minister is confident in her arguments for the £1 million penalty, as she clearly is, then I find it very strange that in the next section of the Bill it says, “If we don’t like that, we can increase it to anything we like via regulation”. That shows a startling lack of confidence in the £1 million. It is quite wrong to give unlimited discretion via regulation to raise the fine to any amount at all. It is unsatisfactory that this provision exists within the Bill. I am sure that we will want to discuss this further, preferably before Report, and if not, certainly on Report. In the meantime, I beg leave to withdraw the amendment.
“Report for the purposes of the Company Directors Disqualification Act 1986
(1) The Pensions Regulator must make a report to the Secretary of State under this section if the circumstances in subsection (2) apply.(2) The circumstances in this subsection are where—(a) a person has been convicted of an offence under this Act or another offence related to a pension scheme,(b) it appears to the Pensions Regulator that a person has committed an offence under this Act or another offence related to a pension scheme, or(c) a person is fined under section 88A of the Pensions Act 2004.(3) In the report under subsection (1) the Pensions Regulator must—(a) identify the person,(b) identify, where the person is a corporate body, any person who was a director of it at the time any offence was committed or appears to have been committed,(c) report on any facts which appear to the Pensions Regulator to be relevant to the Secretary of State for the purpose of making a decision under section 8(1) of the Company Directors Disqualification Act 1986, and(d) state whether the Pensions Regulator considers that, having regard to the need for public confidence in the system of pensions regulation, it would be expedient in the public interest for any person so identified to be the subject of a disqualification order.(4) But the Pensions Regulator is not to be required to make a report to the Secretary of State in respect of a person if—(a) that person is a director who is the subject of a disqualification order under section 2 of the Company Directors Disqualification Act 1986 in respect of a criminal offence, or(b) in the case of a fine under section 88A of the Pensions Act 2004, it appears to the Pensions Regulator that no public interest would be served in making a disqualification order against that person.”
Baroness Bowles of Berkhamsted
My Lords, this amendment aims to utilise an existing provision in the Company Directors Disqualification Act 1986. Section 8(1) of that Act was broadened in 2015 so that the Secretary of State for BEIS may, in the public interest, apply to the court for a disqualification order. It used to be the case that Section 8(1) was activated by a report after certain specific investigations, one of which was an investigation by the FCA. The change in 2015 recognised that the reports did not need to be so restrictive. What I propose follows the theme of the original procedure and suggests that when there has been a serious offence committed regarding pensions, the Pensions Regulator should make a report to the Secretary of State for BEIS for the purposes of the Company Directors Disqualification Act.
The Pensions Regulator would be required to identify the person, or, if a body corporate, the directors at the time when the offence was committed, and,
“state whether the Pensions Regulator considers that, having regard to the need for public confidence in the system of pensions regulation, it would be expedient in the public interest for … a disqualification order.”
It would then be up to the Secretary of State to decide whether to refer it to the court for disqualification. The fact that I have had to explain what this is all about to others outside the Committee, and that it is already envisaged or in law, indicates that it needs a nudge to make it active and that the regulator needs to be empowered and encouraged to make reports.
My proposed new clause is constructed so that all offences can trigger such a report from the Pensions Regulator, whether criminal offences or fines. But under its subsection (4), the Pensions Regulator has discretion not to make a report if a disqualification is already proceeding, which is possible in the event of a criminal offence being decided against an individual, or if the offence is a fine rather than a criminal offence. These new provisions would be particularly relevant when a company has been found guilty. It would mean that the actions of the directors would be investigated. Again, I note that the ABI has indicated support for this amendment.
The inspiration for the amendment comes from the fact that there are certain financial instances or breaches of competition law where the directors are always investigated. Pensions is a significant social issue on which hearing from the relevant regulator should also be a matter of course. There is no automatic disqualification or even an automatic reference to the court—that is up to the Secretary of State—but at least for a criminal matter there would always be a report concerning the circumstances and an added incentive for board scrutiny of matters relating to pensions. I beg to move.
Baroness Sherlock
My Lords, I can add little to that careful explanation of the amendment; I know a lot more than I did five minutes ago. However, as the Minister responds, perhaps she could tell us a little more about what happens both now and when the Bill becomes law: that is, what the TPR does when someone has committed an offence, what is its understanding of to whom this should be reported, in what circumstances, and how its enforcement team works with the supervision team and with the FCA’s enforcement supervision arrangements. That is not directly the point which the noble Baroness, Lady Bowles, was making but I very much endorse her approach, which is to put the importance of pensions on a par with the importance of threats in other parts of the economy. That is interesting, and I am interested in the Government’s response to it.
Baroness Stedman-Scott
I thank the noble Baroness, Lady Bowles, for tabling this amendment, which would require the Pensions Regulator to provide a report to the Secretary of State for the purposes of the Company Directors Disqualification Act 1986. Director disqualification is within the remit of the Insolvency Service, which has the powers, resources and expertise to disqualify directors. As such, the Pensions Regulator does not have the power to disqualify directors, as this would be unnecessary, costly and inefficient. However, the Pensions Regulator is already able to share information with the Insolvency Service if it meets the “gateway” criteria as outlined in its restricted information regime under Section 82 of the Pensions Act 2004. The regulator can use this gateway in circumstances where the sharing of information is with a view to instigating director disqualification proceedings.
As such, the regulator is already able to share information with the Insolvency Service where it has identified persistent wrongdoing by a director or where it has already taken regulatory action. Under Section 8 of the Company Directors Disqualification Act 1986, the Insolvency Service is then able to apply to the court for a disqualification order on behalf of the Secretary of State, based on investigative material provided by other agencies or departments. Whether or not the Insolvency Service takes action to disqualify a director on the basis of information provided by others, such as the Pensions Regulator, will depend upon its assessment of the case in question. The Pensions Regulator and the Insolvency Service regularly engage with each other to discuss areas of joint interest. They continue to monitor the effectiveness of the disclosure process and are taking steps to streamline it when necessary. This will help to ensure that the organisations are able to work together to achieve successful outcomes and better protect the public.
In summary, the amendment is looking to introduce a process which is already in place. The Pensions Regulator and the Insolvency Service continue to work closely together to streamline this disclosure process and ensure that both organisations have a good working knowledge of each other’s remits. On that basis, I urge the noble Baroness to withdraw her amendment.
Baroness Bowles of Berkhamsted
I thank the Minister for that explanation. I think that there are two provisions within the Company Directors Disqualification Act: the ones with the Insolvency Service tend to be based around purely financial mechanisms. I will carefully read the response in Hansard to see whether it covers everything that I envisaged it should. I am a little suspicious that it does not; there would otherwise not be the provision of Section 8(1) and its very careful amendment in 2015. As the Committee might expect, I have had some communication with QCs who deal with these kinds of issues. If it is covered, I am happy; if not, I would like to see whether we can tighten it up. With that, I beg leave to withdraw my amendment.
Baroness Drake
Baroness Drake
My Lords, I shall speak to Amendments 37, 47, 48, 60 and 61. Amendments 37, 47 and 60 place in the Bill that there can and will be a publicly owned pensions dashboard. The Minister may give ministerial assurances that it is intended that there will be a public dashboard; unfortunately, ministerial Statements have currency only until the next occupant. There is no requirement in this Bill as drafted that would require a future Secretary of State to make such a provision.
The amendments require that the dashboard ecosystem will include a publicly owned dashboard. The Government’s current policy,
“supports the coordination of an industry-led dashboard”—
leading—
“to the creation of a dashboard service designed, developed and owned by industry”.
The whole of the UK’s second-tier pension system will be mandated to participate in dashboards owned in the industry, giving rise to major public good considerations, yet nowhere in that wording is there a requirement to set up a publicly owned dashboard, nor is there one in the Bill.
The DWP feasibility study launched at the end of 2018 set out a clear direction of travel towards a single non-commercial dashboard before moving towards multiple dashboards. By April 2019, in responding to the consultation on their study, the Government had shifted their view to commencing with the simultaneous testing of commercial dashboards. Of the 125 replies to the consultation, 15 were from individual citizens and according to my calculation, nearly 60% were from financial service providers and associated trade bodies and six were from consumer bodies. By late 2019, in a previous version of this Bill, and in this Bill and its impact assessment for this version, commitment to a publicly owned dashboard has faded further.
Amendments 48 and 61 do not prevent commercial dashboards being authorised. They seek to ensure that the Government secure a level of confidence in operational delivery, security, consumer protection and insights into customer behaviour by commencing with a publicly owned pension dashboard for at least a year, and that the Secretary of State should lay before each House of Parliament a review of that service before commercial dashboards enter the market. A year is not a long time, given the scale of the consumer interest. If the Secretary of State believes that there is good reason for taking longer than a year, then my noble friend Lady Sherlock and I will be guilty only of prescience.
Lord Young of Cookham (Con)
My Lords, Amendments 70 and 71 in my name have much in common with Amendments 47 and 60, tabled by the noble Baroness, Lady Drake, which I support. But my amendments are more specific, in that Amendment 70 designates the Money and Pensions Service as the public body, to which the noble Baroness has just referred, which would have to provide a publicly owned pensions dashboard. Amendment 71 stipulates a date by which it should be up and running. Without a date, there is no guarantee in the Bill that we will ever see the service. I will mention in a moment some of the slippages.
I assume that MaPS would qualify under the description of a public body from the noble Baroness, Lady Drake. It is an arm’s-length body sponsored by the DWP, and the Government appoint the chairman and chief executive. It is funded by levies on both the financial services industry and pension schemes, but that does not preclude it from being a public body. We have been told that it is going to provide a dashboard. Page 70 of the very helpful policy brief says:
“The Government is committed to the provision of a dashboard hosted by MaPS.”
If that is a commitment, I see no difficulty in making it a statutory requirement, which Amendment 70 does. Without such a requirement, we would be entirely dependent on the private sector to take the project forward. As we saw from the Library briefing at Second Reading, it has doubts about costs, and the noble Baroness, Lady Drake, has just reminded the Committee of some of the warnings about being over-reliant on the private sector.
I turn to Amendment 72 about the date. At Second Reading, I quoted from the Pensions Dashboard Prototype Project, which said:
“The industry and government hope to have Pensions Dashboard Services ready by 2019.”—[Official Report, 28/1/20; Col. 1372.]
My remarks were drawn to the attention of the project and the comment was hastily withdrawn. However, yesterday, I logged on to the ABI website entitled, “The Pensions Dashboard—your online pension finder”. That website has a 2020 date at the foot of the last page, indicating that it has been updated relatively recently, but on page 1 it said:
“The Government’s objective is for the service to be available to consumers by 2019.”
I expect that also to be revised in the near future—indeed, an email may already be winging its way to the ABI.
Against that background, my target date of December 2023, for something for which we are told the Government’s objective was for it to be up and running two months ago, is excessively generous. Reading the ABI website further, I found the following question:
“If the prototype has worked, why do I have to wait until 2019 to use this myself?”
The answer makes it clear that, in the ABI’s view, any delay is down to the Government. It says:
“The prototype has proved that the technological challenges of agreeing data standards, verifying people’s identities and reporting back in a secure and meaningful way can be done, but it is only part of the solution.”
It goes on to say:
“Setting up a service like this cannot be done by the pensions industry alone, but needs support from the Government and regulators to agree rules for how it will operate.”
That, of course, is what we are doing this evening. It seems that the ABI is ready to go and is just waiting for the Government.
I will put this in a historic context. In 2002, the then Secretary of State at the DWP, Andrew Smith, said that the Government would create a web-based retirement planning tool—the online retirement planner—showing people their total projected pension income. Fast-forward to 2014—if fast-forward is the right expression—when Mark Hoban, then Financial Secretary to the Treasury, said:
“A ‘RetirementSaverService’ (dashboard) will be essential to support pension freedoms.”
Five years after pension freedoms were introduced, there is still no dashboard. In the meantime, eight national pensions dashboards have been launched in Europe.
Lord Sharkey
My Lords, I strongly support the amendments in this group and have signed Amendment 70 in the name of the noble Lord, Lord Young. I signed it because I was extremely puzzled by the use of “may” in this context. I had thought that the Government had publicly committed to establishing a public, free-to-use dashboard under the aegis of MaPS. Can the Minister say whether that commitment stands? If it does, surely “must” has to replace “may”, as suggested by the amendment?
Baroness Sherlock
My Lords, my noble friend Lady Drake has made a compelling case for the importance of this issue as well as giving us a helpful strategic overview of the state of the long-term savings industry and the impact of this dashboard on it. Done right, a dashboard could in time offer a useful service to savers. It would offer a chance to locate lost pots, to view in one place all the different bits of pension, state and private, and to make a realistic assessment whether someone is saving enough for retirement. But equally, the risks are huge, particularly given the scale if, as my noble friend said, data for more than 22 million people are to be channelled through this platform.
This becomes a public good only if it is designed and delivered in the right way, with transparency and all the necessary safeguards. As my noble friend Lady Drake said at Second Reading,
“public good cannot be traded off against commercial interests.”—[Official Report, 28/1/20; col. 1367.]
Labour would prefer this to be a public service, but if the Government are determined to go down the road of commercial dashboards, it is clearly essential that there be one “public good dashboard” owned, controlled and governed by a public body. My noble friend has given us a frankly staggering list of organisations supporting this that are right at the heart of the industry, including the CEO of the Pensions Regulator, who told the Work and Pensions Select Committee on 26 June 2019 that
“there must be the public dashboard”.
It is really very simple: the public should not be required to use a commercially owned dashboard to access their own data, especially in a market so susceptible to consumer detriment.
It is quite extraordinary that there is nothing in the Bill saying that there should be a public dashboard, when I think everybody had assumed this was going to happen. The Minister said at Second Reading
“MaPS committed to providing a dashboard in its 2019-20 business plan.”—[Official Report, 28/1/20; col. 1414.]
However, a Minister telling us that an NDPB has plans to do something is not the same as legislating that it must happen, so our amendments simply require that there be a public good dashboard.
The MaPS business plan said:
“It is envisaged that there will be multiple dashboards connected to the infrastructure, but also that there is merit in a consumer facing dashboard provided by a non-commercial and impartial organisation. The Money and Pensions Service, as part of its business as usual function to provide impartial information and guidance, will begin the development of a noncommercial consumer facing dashboard.”
There is not exactly a sense of urgency there; it contrasts quite markedly with what the noble Lord, Lord Young, has described as the ABI champing at the bit to get going and hoping to have it done by last year, or at the very latest this year.
That is the second point. Even if Ministers seek to assure us that MaPS is committed to producing a public dashboard, we want to know that it will be up and running before any commercial dashboards are allowed to start operating. That is what Amendment 48 is designed to ensure. I cannot see why this should be controversial. If Ministers are confident that MaPS is on target, no doubt they will accept the amendments from the noble Lord, Lord Young, and reassure the Committee that a good public dashboard will be set up. Would it not be obviously sensible to have that up and running to test the architecture and infrastructure before allowing private companies to set their own up dashboards, with the additional risks that will bring?
I suppose it is possible that Ministers are not confident that MaPS will have its public dashboard running any time soon. They could easily dispel that thought by accepting the amendments from the noble Lord, Lord Young, or indeed ours. I believe MaPS has said only that it hopes to be one of the first. The state’s recent track record with large-scale IT projects, as those of us covering DWP know to our cost, has not been fantastic. If multiple dashboards are to be allowed to be set up all at once, and if MaPS is to take its time in doing it, there could potentially be a considerable period in which consumers will be able to access their data only through a commercial dashboard. That does not seem to be in line with what we understood the Government intended to do.
Our amendments are simply designed to ensure three things: that there is a dashboard which is publicly owned, controlled and governed; that it is free to use and does not display advertising; and that if Ministers are to go down the route of commercial dashboards, they do not do so until the public dashboard has been operating for at least a year, and the Secretary of State has been able to report to Parliament on its structure and effectiveness.
I would like to ask the Minister some specific questions. They are really easy—not A-level questions but low-grade SATs questions, which I have no doubt should be in her brief somewhere. I shall read them really slowly. First, when does DWP expect the MaPS dashboard to be up and running? Secondly, when does it expect the first commercial dashboard to be up and running? Sorry, I was looking at the wrong Minister. Thirdly, how many dashboards do the Government think we will have? How many do they know of that are being tested or in the pipeline? Fourthly—this is a biggie—will commercial dashboards be allowed to charge consumers for using them? Fifthly, and this may be at GCSE standard, I understand that alongside any dashboard developed by MaPS, a liability model will need to be developed. We do not have any guarantee that the liability model will be ready before commercial dashboards become available, even if the MaPS dashboard is not ready. Is there any way that there could be a gap between people using commercial dashboards and the liability model being ready? That matters because, of course, if detriment is created then we need to know how it is to be managed and where responsibility lies.
I remain very worried about what the Government may be creating without considering all the implications, and its unintended as well as intended consequences. I look forward to the Minister’s reply to our amendments and to those tabled by the noble Lord, Lord Young. I hope the Government can reassure us that they will in fact be committed to having a high-quality, public good dashboard established before the industry is allowed to get into a free-for-all.
Earl Howe (Con)
My Lords, I thank the noble Baronesses, Lady Drake and Lady Sherlock, my noble friend Lord Young and the noble Lord, Lord Sharkey, for their valuable contributions to a debate on what I am the first to acknowledge is a significant set of topics. This group of amendments explores how privately operated dashboards will work alongside a public dashboard provided by the Money and Pensions Service. They also explore whether a public service dashboard will be delivered.
I want first to reassure the Committee that the Government are absolutely committed to the Money and Pensions Service, or MaPS, providing a qualifying dashboard service. Let there be no doubt about that; it was clearly set out in our consultation response Pensions Dashboards: Government Response to the Consultation published in April last year. The MaPS business plan for 2019-20, also published last April, subsequently confirmed its commitment to deliver a dashboard.
Furthermore, to pick up the sense of Amendments 47, 48 and 70, we entirely understand the importance of having a dashboard run by a public body without any commercial interest. One of the core functions of the Money and Pensions Service under the Financial Guidance and Claims Act 2018 is to provide free and impartial information and guidance about occupational and private pensions. Read together with Clause 122, that ensures that MaPS has the legal powers to provide a pensions dashboard that includes state pension information. To be clear, I say that accessing the information on dashboards will remain free, regardless of whether a dashboard is provided by MaPS or another organisation.
MaPS will be able to include signposting to free and impartial guidance on its dashboard, as will other organisations, as that supports its pensions guidance function. However, MaPS will not be able to host any income-generating advertising. MaPS has no revenue-raising powers under the Financial Guidance and Claims Act 2018.
I turn to ownership. We expect MaPS to provide a dashboard on an ongoing basis. However, it is important for there to be flexibility in how that function is carried out in line with changing technology and consumer interests. Here I am talking about the medium to long term. We also want to maximise the Government’s ability to ensure that ownership of the dashboard is in the right place in the longer term.
On Amendment 71, I very much share my noble friend Lord Young’s desire for a dashboard to be delivered in a timely manner to help people plan for their retirement. However, setting a date in legislation may be counterproductive. It risks creating a situation where decisions are taken simply to meet a legislative deadline, regardless of outcomes, rather than to meet the needs of individuals. To my mind, more important here is that we ensure that the service is accurate, secure and consumer focused. Developing a service that gives consumers a single point of access to their pensions information is complex. There are 40,000 schemes of differing types, covering around 25 million people with private pension wealth. The staged onboarding of thousands of pension schemes covering millions of separate records will raise issues that are not currently apparent, it is safe to predict. That tells us that dashboards should be delivered only when the Government and MaPS are confident that they are ready, so that consumers can be confident in the service offered. I hope that the noble Baroness, Lady Sherlock, in particular agrees, given her apposite references to computer systems that perhaps have not quite lived up to expectations.
Through Amendments 37 and 48 the noble Baronesses, Lady Drake and Lady Sherlock, also probe the question of introducing multiple dashboards alongside a MaPS dashboard. Having the potential to offer multiple dashboards at launch maximises the possible reach of this policy from the outset and could help to meet the differing needs of the many people using them. User research completed as part of the Government’s feasibility study and consultation showed that individuals may prefer to use a dashboard provided by an organisation with which they already have a relationship—for example, their employer—due to higher levels of familiarity and trust. It is a case of one step at a time, however.
I hope that the Committee is reassured that the information shown on all dashboards, public or private, will be the same, and based on user testing. We also intend all dashboards to start with a limited functionality until we better understand how individuals interact with their information.
A majority of respondents to the government consultation were supportive of multiple dashboards, provided sufficient consumer protections were in place. The Government have considered how to ensure that consumer protection, and accordingly we shall be introducing a new regulated activity under the Financial Services and Markets Act 2000 to reflect the provision of dashboard services. As I am sure noble Lords are aware, we will cover this issue in more detail later.
Clause 118 provides the power to set out detailed requirements “for qualifying pensions dashboards”. It is also likely that this will be linked to the new regulated activity outlined by the Financial Conduct Authority. These are all provisions to ensure consumer protection in relation to privately run dashboards. Our job is to put that consumer protection regime in place, but, once it is in place, we do not wish to constrain the potential reach of the policy. Nor do we wish unnecessarily to limit consumer choice.
Baroness Altmann
I hope my noble friend will forgive me for intervening, but after what he has just said, it is important to put on record that there are potentially significant dangers in launching commercial dashboards at the same time as the publicly funded dashboard. It is likely that that will generate enormous confusion in the consumer. It is entirely possible that consumers will not know which dashboard is which and will be driven to a commercial dashboard, which may not be in their impartial interests. I urge my noble friend to consider carefully that there are really strong and important reasons from a consumer protection perspective to have this publicly funded dashboard first, especially as the Government have devoted so much resource and commitment to providing it.
Earl Howe
I say—gently—to my noble friend that I could not disagree more. I cannot see the risks that she has articulated, given all that I have said about putting the necessary consumer protections in place before anyone makes the first move to launch a commercial dashboard. Having said that, I very much respect her knowledge of the landscape and would be happy to have a conversation with her about the risks that she referred to. But having thought about this in some depth myself, I am satisfied that we will not allow a situation to arise where consumers are confused or put at risk by the multiplicity of dashboards. All the dashboards will show the same information. They will not be allowed to show different information. They may set it out differently, but that does not seem to constitute a risk to the consumer or of confusing the end user.
Subject to those remarks, and despite the lack of clarity around the timing of the matters I referred to, I hope that the assurances I have given are sufficient for noble Lords, and that the noble Baroness feels content to withdraw her amendment on that basis.
Baroness Drake
My Lords, this is the first chance Parliament has had to scrutinise this major project. I am not asking for the project to be rushed. I am the last person who would want to set up MaPS or the DWP to fail. I wish them well and to succeed. I do not have a negative view, but I want this project to work.
The Minister gave assurances that there will be a public dashboard, but it is not in the Bill. I could cite various previous occasions when Ministers made assurances about things but they did not materialise. If we accept, which I do, the sincerity with which the Minister has committed to there being a publicly owned dashboard, I see no reason why a little amendment to the Bill could not capture that assurance, so that the next Secretary of State does not change their mind.
On the ownership of the dashboard, I was actually rather worried—not reassured—by one comment the Minister made. He said that ownership in the long term, with a whole series of unknowns about how things will develop, is something that will need to be considered. That may be true; however, given those unknowns and that we do not know how policy will develop, the delegated powers in this Bill should not take to themselves the ability to make fundamental changes to the ownership of the dashboard. Because it is of such significance, that issue should come back to Parliament. Does the Minister accept that point?
Earl Howe
I will come back on a couple of points raised by the noble Baroness. The regulations that would achieve any future changes to the dashboard are subject to consultation and the affirmative resolution process. It comes back to what I indicated earlier was a step-by-step process. If the Government wanted to augment or change the content of the dashboard, they would have to do it in a measured and ordered way.
She also asked whether I believe that consumers want a publicly funded dashboard. I think that the answer to that will be revealed in consumer behaviour: if they clearly want it, they will use it, and we will know that. Of course, we cannot predict how consumer behaviour may change over the medium to long-term. That is the point that I was seeking to make earlier.
Lord Flight
I will make a practical point. Running up to the launch, it would surely be very useful to have extensive marketing and advertising of MaPS, so that citizens know what to expect when it is live.
Baroness Sherlock
My Lords, that had better not happen too soon, though, because there might be nothing to see for a while. I am very grateful to the Minister for his thorough response, even if some of it disappoints me. I am grateful to him for taking his time to go through the questions.
My noble friend Lady Drake, as always, expresses it more cogently and thoroughly than I do, but my problem is that the Minister is essentially saying that the Government are committed to MaPS producing a dashboard. This is not the same as the Government saying that they will ensure that there is a dashboard. My worry is that I do not want to see this rushed. I have been an adviser in government myself, when tax credits were being developed. I realise the problems that come out and I know only too well that when you develop new computer systems, you do not know what will happen until you press the button on the first day. However, my worry is that that is precisely what could happen here. If the Government are determined to allow commercial dashboards to go live whenever they are ready, what if MaPS then takes years to get it right? What if it never does? What if MaPS itself fails on another front? We could end up never having a public dashboard, in which case the Minister would not have broken his word but none the less a public dashboard would never have come to pass. If it were in the Bill there would be an obligation on Ministers.
I take my noble friend Lady Drake’s point about new incumbents. I have been in my brief since I think 2011 or 2012. I think that I am on my seventh Secretary of State. Given that one of them was there for quite a long time, there has been an awful lot of turnover since. It is not impossible that a new Secretary of State could come in and take a radically different view from their predecessor, as they have in my time, on some aspect of policy. It is not really the kind of assurance that we would want.
My worry is that the Minister has not addressed one point: if the Government believe that there should be a public dashboard, but are relaxed about the fact there could be a long period of time where consumers would be able to access their data, which the Government had mandated the release of, through only a commercial dashboard, why do they think that there should be a public dashboard at all? Theoretically, there could be five years between the commercial dashboard and the MaPS dashboard. If the Government think that it does not matter that there will be no public dashboard for that interim period, why do they think that it matters at all?
My final point is about the fact that the Minister thinks that there are no risks at all. I would like to hear this conversation between him and the noble Baroness, Lady Altmann, but I think it should take place in this Committee. The Minister defended the skeletal nature of the Bill. We will come back to this in the next group on Monday, but the Constitution Committee was quite explicit in saying that the Government’s defence that the Bill is very complex, that we have to get on with it and that we should not worry because the regulations will be affirmative, is not adequate or an excuse for drafting the Bill in this way. Part 4 is almost a skeleton.
The combination of all this is that the Government are saying, “There should be a dashboard. We cannot tell you when the public dashboard will be up. Don’t worry, it’ll be fine because we will regulate it. We can’t tell you who will regulate it, or how, or any of the circumstances. We can’t even tell you how we’ll make sure the risks don’t come to pass”. The Minister says that the information will be the same, but can he tell me whether it will be displayed in the same way, who will decide what the information will be or what the time periods will be? None of these questions has yet been answered. We will come back to them with our next amendment.
The Minister is asking the Committee to take a huge amount on trust when we have literally no idea what the dashboard will look like. Yet, somehow, we are just meant to say that it will be fine and the risks are fine. I spent 10 years on the board of the Financial Ombudsman Service. Every year we had to read a selection of case files. I have a pretty long experience of all the things that have gone wrong in sectors where the Government were confident they were well regulated and controlled, and where things could never possibly go wrong. My goodness, they have gone wrong in ways one could never have imagined when the regulations were being framed.
I am glad that the Minister is confident that there are low risks. I do not share his confidence, but maybe I am an old cynic. I would be interested if he could respond in particular to the point about why there needs to be a public dashboard at all if the Government do not mind whether there is not one for as long as it takes for MaPS to catch up. Can he answer that point?
Earl Howe
I believe I am right in saying that while your Lordships’ Delegated Powers Committee had some trenchant things to say about the delegated powers in the rest of the Bill, it felt pretty relaxed about the powers in Part 4, because it recognised that it was absolutely necessary to have the kind of flexibility I referred to. We must take it that the committee looked at these matters in some depth. Clearly, it did not feel constrained in criticising the nature of the powers in other parts of the Bill. I think the delegated powers here are necessary. I do not think we should be frightened of them, but I can see that the accumulation of them might appear off-putting to noble Lords.
Baroness Drake
I am conscious that I was a member of the Constitution Committee. The issue is not that simply the Government do or do not want flexibility. The issue is that such extensive delegated powers are being taken in the absence of significant areas of policy being settled. That is not the correct way to approach legislation.
Earl Howe
I hear what the noble Baroness says. It is not that the policy is not settled but that the implementation of the policy is not settled. We know broadly what we want to achieve but the detail has yet to be worked through; including the functionality and the way that the liability model will form. We do not know all the answers; we know some of the answers, but not all of them. I do not accept that the policy as such is a blank sheet of paper.
Pension Schemes Bill [HL]
Monday 2nd March 2020
(4 years, 8 months ago)
Grand CommitteeRead Full debate Pension Schemes Act 2021 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 4-IV Fourth marshalled list for Grand Committee - (2 Mar 2020)
The Deputy Chairman of Committees (Baroness Garden of Frognal) (LD)
My Lords, if there is a Division in the Chamber while we are sitting, the Committee will adjourn as soon as the Division Bells are rung and resume after 10 minutes.
Clause 118: Qualifying pensions dashboard service
Amendment 38
Lord Young of Cookham
Lord Young of Cookham (Con)
My Lords, Amendment 38 in my name endeavours to fulfil the objectives of the pensions dashboard by ensuring people have access to all their pension entitlements. At the moment, they will be able to access entitlements under schemes only in their own name; they will not be able to access information about entitlements they may have because their husband, wife or partner has named them as a beneficiary under another scheme. More and more couples are both at work, and most pension schemes enable a beneficiary to provide for a surviving spouse. My amendment would enable a named beneficiary to access a dashboard where they had an interest. Without that information, that beneficiary will not know whether they have made adequate provision for their old age, which is a primary objective of the dashboard.
There may be other ways of achieving this objective. When a policy is taken out, beneficiaries could be sent a copy; I do not think this happens at the moment. They could be sent an annual statement, as the main policyholder is, or the main policyholder could be given the option of ticking a box so that beneficiaries can access the relevant dashboard with their consent. The point made in the amendment is a simple one: if the dashboard is to give people a complete picture so they can make informed judgments, they need to have access to this relevant information.
Amendment 43, supported by my noble friend Lord Flight, and Amendment 44 have a similar objective in enabling someone to see whether they have made enough provision for their old age by including relevant assets that can provide a pension income on the dashboard. The helpful policy brief says on page 45:
“Putting individuals in control of their data, dashboards should support engagement in pensions and planning for retirement.”
Planning for retirement involves more than pensions. Each Sunday, the Money section of the Sunday Times has a “Fame and Fortune” feature, in which there is a standard question:
“What’s better for retirement—property or pension?”
Yesterday, the Olympic medallist Sharron Davies said “Property.” The question makes the point that, for many people, there is a choice of how to provide for retirement. This amendment is a permissive one, which would enable a pension provider with a dashboard to include information on the equity locked up in someone’s home.
For millions of people, the equity in their home is worth more than their pension pot. Increasingly, that equity can be and is unlocked to provide an income stream in retirement. According to the ONS, we have £14.6 trillion in wealth—perhaps a little less following the slump on the stock exchanges last week—within which private pension wealth makes up 42% of national wealth, while net property wealth is not far behind at 35%. Arguably, equity release should play a higher role in proactive financial planning. Potentially, it is a valuable source of supplementary retirement income, particularly for pensioners on low incomes in homes that they own.
Many pension providers also provide equity release: for example, Aviva, Liverpool Victoria, Scottish Widows and Legal & General. It would make sense for them to be able to include illustrations about equity release alongside the pensions dashboard. Equity release is regulated by the FCA and can be sold only through a financial adviser. It is now one of the most highly regulated financial service products in the UK. In many ways, the decision whether, when and how to access equity release is not unlike the decision to access a pension pot. Independent advice is necessary, taking all considerations into account. I repeat what I said at Second Reading: I do not want to do anything to slow down the introduction of the dashboard, but I want to ensure that, when it is up and running, it can be used by those providing it to give customers a comprehensive view of assets and options, rather than a partial one.
I turn finally to Amendment 45, which deals with the verification process before one is allowed to access the dashboard. This is the weakest link in the chain. The ABI website—incidentally, it still proclaims that the Government’s objective
“is for the service to be available to consumers by 2019”—
says this about verification:
“The process to confirm the identity of users is based on the gov.uk/verify system which has already proved to be a secure portal for people accessing personal information.”
That could be an understatement. So secure is the portal that, as I will come on to in a moment, 56% of those who try to verify that they are who they are fail to do so and hence would be unable to use the dashboard.
There are risks in building the dashboard on the shaky foundations of Verify—one of the Government’s least successful IT initiatives—from which it is hastily disengaging, leaving its future in doubt. The NAO described Verify in March last year as
“intended to be a flagship digital programme to provide identity verification services for the whole of government ... In its 2016 business case, GDS identified the following key targets and expectations for the platform: 25 million people would use Verify by 2020, and 46 government services would be accessible through Verify by March 2018.”
As of 13 February, 22 government services use Verify—fewer than half the number expected by March 2018—and only 5.8 million people have signed up. There is a verification success rate of 44%, against an initial target of 90%. I failed twice to verify who I was.
In July 2018, the Infrastructure and Projects Authority recommended that Verify be closed as quickly as practicable. In a recent report, the NAO concluded:
“Even in the context of GDS’s redefined objectives for the programme, it is difficult to conclude that successive decisions to continue with Verify have been sufficiently justified.”
The Institute for Government’s Whitehall Monitor recently commented that the scheme continued to be “mired in issues”, had fallen short of targets and had
“failed to build its intended user base and it is not delivering the efficiencies that the government sought.”
In October 2018, the Cabinet Office announced that the Government would stop funding the scheme in March 2020. Against the background of the unpromising progress of the scheme, the then Minister for Implementation stated, in words that could have been crafted by the scriptwriter of “Yes Minister”, that it was
“now sufficiently mature to move to the next phase of its development.”—[Official Report, Commons, 9/10/18; col. 3WS.]
The intention is that the private sector will take over responsibility for the scheme, despite the NAO finding that the Government have failed to make the scheme self-funding and the Government failing to convince their own departments to use the scheme. What will the private sector do with the scheme? With no government support, the providers of the service may have to increase the charges to government departments, which the NAO warns may make it unaffordable for them to use. Of the 22 that use it, half have alternative means of accessing the services provided.
This is what the whole dashboard depends on. Will the private sector continue with it? If so, will it be free for consumers, as at the moment? What happens if there is no Verify process? On charges, the policy brief says on page 51:
“Government is clear that accessing basic information via pensions dashboards must be free at the point of use for consumers.”
I ask this in passing: where in the Bill is that commitment legislated for, and what is the point of making it free to access the dashboard if the verification process has a charge? I appreciate that my noble friend the Minister is dependent on the Cabinet Office for support on this issue, as that is where responsibility for Verify rests, but she has an obligation to satisfy the pension industry and pensioners that the system proposed in the Bill is fit for purpose.
Finally, at the moment, many pension providers have websites that customers can access and where they can get information about their individual pension pot. They can not only access that information but top up their pot, withdraw sums and switch investments. But under the Government’s proposals, if that pension provider then provides a dashboard, existing customers will not be able to access it using their usual log-on procedure; they will have to go down the Verify route first. Perhaps the Minister can confirm that that is indeed the case.
So, we have the odd situation where a purely passive site such as the dashboard, which can provide only information and is not interactive—Amendment 39 secures that—has a different and higher standard of security than the pension provider’s site, which is interactive. I do not understand why a pension provider that has satisfied itself about the bona fides of a customer to the extent that it will respond and pay drawdown cannot allow access to a dashboard on its site, which is purely passive, without obliging the customer to go through a cumbersome verification process. Perhaps that could be looked at as well. I beg to move.
Lord Flight (Con)
My Lords, I support Amendments 43 and 44 in the name of the noble Lord, Lord Young. He made the point that equity release is a growing source of income for people later in life. I would say it more strongly than that: I can imagine it being the biggest source of income for such people in 20 years’ time. I understand that the financial advisers who advise otherwise on pension fund matters are not qualified to advise generally on equity release. That has been substantially cleaned up, as it were, over the past 10 years so it is not a problem, but if the dashboard cannot include equity release, it does not meet its objective of setting out what people have to live on in older age. We do not want to delay wider progress but if equity release is not included quite speedily in the dashboard, it will not do its job.
Baroness Drake (Lab)
My Lords, the purpose of Amendment 39 is to contain the delegated powers in the Bill so that they do not provide the power to authorise commercial dashboards to engage in transactional activities. Any authorisation regime to permit transactions should be addressed in a future Bill.
In a previous contribution, I sought to set out the policy still to be settled when the dashboard is focused on enabling individuals to view their pensions information in one place. When functionality is extended to the ability to transact on a commercial dashboard, the challenges and potential risks are even greater; there are multiple ways in which detriment to savers can occur. We should again remind ourselves that the dashboard project can extend to the whole of the UK pension system—public and private—embracing many millions of people. Allowing transactions over dashboards needs separate and clear consideration. It cannot be implicitly tucked into the delegated powers in this Bill.
Issues of private and public good will be impacted by whether the dashboard is fit for purpose when it comes to transactions: private good at the individual level and public good at the whole pension system level. I have yet to see the behavioural outcomes strategy associated with the dashboard. I assume the Government are not agnostic on the matter, given that the state supports the long-term saving system with some £45 billion of tax relief, so they will have a direct interest in knowing that the outcomes are good.
Baroness Altmann (Con)
My Lords, I will make a few observations about this suite of amendments. It strikes me that the demands to add even more to the current proposal for the dashboard are fraught with danger from the customer perspective. I agree that, from a strategic, overall macro perspective, if one is looking to plan one’s retirement income, it will be most helpful to have as many sources reflected in any dashboard that will contribute to that income. However, the problem we face in getting this dashboard up and running is that there are so many different types of pension and of scheme that we already face a monumental task in just trying to list people’s pensions and make sure that the dashboard reflects all the elements attached to them over the many decades: the different tax regimes they have been under; whether they have a guaranteed annuity or protected tax-free cash; a guaranteed return of some kind; whether benefits have to be taken at specified ages, otherwise certain things are lost; whether there is any extra insurance in there that might be attached to the pension from old-style schemes; protected rights, and so on. And that is just for defined contribution, before we even get on to the defined benefit records.
Equity release has significant dangers for any consumer who is considering it. My worry is that, if consumers look at this information on a dashboard, they will not understand those dangers and will think that the money is available. Recently I have seen very many cases where individuals or their families have taken out an equity release loan for something like 25% of the value of the equity of their home, with an interest rate rolling up at 6% per annum for 20 or 30 years, meaning not only that, if they were to pass away, no value would be left in the home but, more worryingly, if they needed to sell the home and move to a smaller one—if they took out equity release in their 50s or 60s and, in their 80s, needed to downsize for reasons of care or convenience—they would be unable to do so because there would be no equity left for them to use.
Therefore, I caution significantly against trying to go more broadly. I think that we have enough of a challenge in trying to get pensions alone on to a dashboard. I completely agree that it is important to have the state pension on there and, in that regard and in speaking to amendments in the name of my noble friend Lord Flight to which I have added my name, we want people to be able to see what their projected state pension will be. However, we will need an electronic system so that people can go online to check their state pension. If Verify is not the gateway to that, we will need to develop an alternative secure gateway. We need to make sure that the dashboard has a standardised protocol and standardised systems so that every pension provider has to use the same IT structure that can then be securely fed to a dashboard.
Lord Flight
With the state pension, you already get from social services advice on what your pension will be about a year before you draw it, so it strikes me that the state pension information is just sitting there waiting to be used by the dashboard.
Baroness Altmann
I thank my noble friend. Of course, he is absolutely right but the point of the dashboard is that much younger people can plan their future pension income. The current procedure is to encourage people to log on to the state pension checker, where they can verify their future predicted state pension income so that, as they get into their 50s and closer to retirement, they will be able to make more meaningful financial planning. However, as my noble friend Lord Young pointed out, there are significant security concerns with the current gateway system that allows you to find out what your state pension is. Therefore, if we want the state pension to be on the dashboard, we will need a certain level of security.
The aims of the amendments are correct. We want to be able to see the state pension and a comprehensive list of pensions, but I caution against trying to go more broadly. I also caution against commercial dashboards which might use their own IT systems that lock people out of checking their pensions on other providers’ systems and which try to encourage people to merge their pensions. Indeed, we have seen that the systems of some pension providers do not always flag up the guarantees that can be very valuable for individuals. If people are being not advised but merely guided, or if it is merely information and they are not aware of the guarantees, they could lose out and have no comeback.
Baroness Bowles of Berkhamsted (LD)
My Lords, I was not intending to speak to these amendments, but it has been quite an interesting debate to listen to. In some ways, I have changed my mind during the course of the debate. I found the notion of having everything all in one place, as put forward by the noble Lords, Lord Young and Lord Flight, an interesting idea. Of course, it can already be done, but for historic reasons—because I have been self-employed for most of my life, as has my husband, and we have quite a lot of pension schemes around—I am well versed on various different platforms. Yes, I do a lot of mystery shopping, as I call it, on these things. I have loaded up information and practised telling lies as well—putting in overvaluations of my house or saying what other things I have—to see how a platform projects what my income will be, so it is difficult to get right. I wonder about the house valuations that people might be tempted to put in, because there is a tendency to be optimistic when it comes to that.
In this last week, I was looking at one platform, thinking, “Where is the sell-all button for absolutely everything?” I could not do it; I had to go through several times, so I very much take the point made by the noble Baroness, Lady Drake, that you will take the path of least resistance when there is something that you think is urgent. If I can fall for that kind of wanting something to be there, others will too, but when I went through everything and had to think, “Do I really want to sell that or don’t I?”, I made different decisions from those I might have made if I had had a sell-all, transfer-all button. Given that I like to think that I know a thing or two about these things, I would rather err on the side of caution, as the noble Baroness, Lady Drake, pointed out. I do not want to interfere with people’s freedoms, but it has to be good to have a certain number of hurdles to give people a pause to think.
I tend to agree that equity release will have to be a big part of the future, and I wonder whether some of the people already taking out lump sums are thinking that way as well. Perhaps that is safer left until we can more broadly investigate what is going on there and make a rather safer and better environment, though I acknowledge that that there have been improvements that I have not tested yet.
Baroness Sherlock (Lab)
My Lords, I will speak to the three amendments in my name in this group and respond to the others. Amendment 39 in my name, and that of my noble friend Lady Drake, would, as she indicated, prevent the powers granted under the relevant sections of this Bill from being used to extend dashboards into becoming transactional. My first question, therefore, is whether that is necessary: will transactions be permitted? The noble Earl, Lord Howe, said last Wednesday:
“We also intend all dashboards to start with a limited functionality until we better understand how individuals interact with their information. ”—[Official Report, 26/2/20; col. GC 183.]
Does that rule out transaction? I think not specifically. The excellent policy brief from the DWP says this:
“Dashboards will present simple information, without the ability to carry out transactions.”
That seems really clear: no transactions. A bit later on, however, it says:
“In future we expect that dashboards should be able to provide a greater level of functionality and information.”
So here is the rub: does functionality include transactions? Will the Minister tell the Committee plainly: is it the Government’s intention ever to allow transactions at any point on the dashboards? If not, then let us make that clear on the face of the Bill. If they do, then, as my noble friend Lady Drake said, they should have to come back to Parliament and seek further authorisation before going down that road. The reason is simple: we are being asked to authorise the establishment of a service that will be based on the compulsory release of data about the assets of some 22 million people, with no clarity about what is being created.
In the debate on the last group of amendments last week, my noble friend Lady Drake offered the Committee a short list of some of the matters not yet resolved. The Minister—the noble Earl, Lord Howe—said:
“It is not that the policy is not settled but that the implementation of the policy is not settled.”—[Official Report, 26/2/20; col. GC 190.]
Obviously, it depends where one thinks policy stops and implementation begins. If the policy is, “Have at least one dashboard with some pension information on it”, I acknowledge that the policy is settled. If it is much beyond that, we are into murkier water.
Let me add my shortlist of a few things we do not yet know. We do not know how many dashboards there will be. We do not know who will run them. We do not know what information will be provided on them or in what form. We do not know what uses of the information will be permitted. We do not know how the whole system will be governed and regulated. We do not know where liability will lie for each of the links in the chain. Without that, we do not know how complaints about failure and compensation for detriment arising at each point will be handled. We do not even know who will get to make rules for the dashboards, because the regulations provide for that to be literally anyone.
There are so many points in the information and action chain where something could go wrong: data loss or leakage; errors in data being supplied to the dashboard, by either the state, TPR-regulated schemes or FCA-regulated firms; compliance failures in displaying it inappropriately; transactions on or off screen, regulated or unregulated, where the consumer ends up with a poorer outcome than should have been the case.
Last week, the Minister defended the proposed delegated powers, saying to my friend Lady Drake that they were needed to provide momentum to the process of co-operation that would be required to develop the dashboard infrastructure. But the Constitution Committee addresses that specifically in its comments on Part 4 and the use of broad regulation-making powers. It said:
“There is a need for some of these powers in order to commence the work on pensions dashboards and facilitate the sharing of data to make them function. However, the rest of the powers could have been omitted until the policy had been prepared and sample regulations produced for consideration as part of a future bill. We have observed previously that ‘Skeleton bills inhibit parliamentary scrutiny and we find it difficult to envisage any circumstances in which their use is acceptable. The Government must provide an exceptional justification for them’”.
Can the Minister tell us what the exceptional justification is?
The case for not allowing regulations to be made under the Bill to allow transactions is overwhelming. Having thought about it over the weekend, I now think it is even stronger than when we tabled the amendments, because the debate in Committee last week surfaced more information about the Government’s plans for dashboards. We have learned that they are committed to MaPS providing a dashboard service, but we also learned that they are open to anyone who can meet the criteria running a qualifying dashboard and that they have no idea how many people that will be.
We learned that the Government think that having multiple dashboards running right from the launch would actively be a good idea because they think it would increase reach, and we learned that they are relaxed about commercial dashboards being there first and MaPS coming in, if necessary, some time later. If MaPS took a long time to get a dashboard up and running, which is not impossible, there could be years in which the only way the consumer could view the data on her own pension, the release of which the Government had mandated, would be on a commercial dashboard. I asked the Minister last week if the Government think that it is a good thing to have a public dashboard, and if so why. I ask him that again now. If he thinks it is a good thing, why are the Government relaxed about there potentially being a period of years when there is no public dashboard yet the mandated data has been released? I should be interested to hear the answer to that.
Also last week, the Minister said that accessing the information on dashboards will remain free. That is good news, but it means that, as my noble friend Lady Drake said, we need to understand the charging model of commercial dashboards. If they cannot charge you to look at it, why would they do it unless they can make money at it some other way? We need to understand what those other ways are. I do not know; I can only speculate. Are they hoping to find a way to monetise the access to data that the dashboard gives? Would that be allowed? Will they want to use the dashboard to show a consumer her various assets and encourage her to consider a more efficient way of organising them? For example, “Look, it is all spread over here. Would it not be tidier if you brought it all over in this fund over here, which—oh look?—my firm happens to run?” That way, the firm might stand to make money either from transactions or from the scheme itself. What about through advertising? Perhaps when a user logs on to her dashboard, up pops an advert that either encourages her to engage with a firm or asks, “Have you thought about equity release? Would not that be a better way of going about what you do?” Or even, as my noble friend said, there could be careful presentation of the data that seems to privilege some kinds of assets over others, depending on who is running the scheme. This is potentially a really powerful tool and we need to place some firm limits on its use until the market is much clearer.
Amendments 49 and 50, in my name, specify that regulations may require the provision of information on likely retirement income and administrative charges. I put these out as probing amendments to find out what information will be on the dashboard. What will consumers see? Without an estimate of their likely income on retirement, many consumers who do not have the skills and knowledge of the noble Baroness, Lady Bowles, may have no idea of what the size of a fund will mean in terms of an income on retirement, and without some guide they may struggle to understand that. Often, it should be possible to provide that, because for occupational DC schemes that are used for auto-enrolment, trustees must produce a chair’s statement with value-for-money assessments which include illustrations on the likely retirement income. Presumably, if schemes are doing this properly, that data can be uploaded to the dashboard.
There should also be transparency on charges, but the presentation of charges to members often does not distinguish between the many kinds of charges that can be levelled on a fund. This amendment would require the disaggregation of investment and administration charges, so individuals could readily see the administrative charges that they face on the scheme in which their savings are held. Schemes can differ a lot in their administrative efficiency, and consumers should be able to see at a glance which schemes are levying high administrative charges.
Can the Minister confirm that this information—indeed, the requirement to be on the dashboard at all—will not apply to any legacy private schemes or new private pensions not covered by auto-enrolment? That leaves out quite a chunk of the market where transparency would be particularly important because a lot of those old schemes are very inefficient, with very high charges. Do the regulations permit the Government at some point to force those schemes to come on board? If so, do the Government intend to use that power?
I understand that any dashboard developed by MaPS would have a liability model developed alongside it. I asked about the liability model and the Minister said that he would come back to it this week; I cannot remember if he is coming back to it now or later, but I look forward to hearing about it at some point today. That would be marvellous. I would also like him to answer this question: if it is to be developed alongside the MaPS dashboard, and that is delayed, will there none the less be a liability model in place before any dashboard goes live, so that we are not waiting for the public dashboard?
Amendment 57, from the noble Baroness, Lady Altmann, requires that the projected state pension on retirement be available on the dashboard. It is important that people can readily access information on the state pension, which for many of them will be a core part of their retirement income. The challenge is that it will change at different points in their life depending on choices made, working patterns, et cetera, but it seems quite hard for the DWP to mandate everyone else to provide their data, and not do it themselves. It will have to go into that space.
After the comments between the noble Baroness, Lady Altmann, and the noble Lord, Lord Young of Cookham, I am interested to hear the Minister’s response on questions of identity verification. I found his comments on the challenges of some of the services very interesting. I take her point that, if one is to get personal data, some verification process will be needed. His points about beneficiaries are important as well.
I am a little more nervous on the point about equity release. The FCA has just started to look into this market. The noble Lord, Lord Flight, said that it has cleaned itself up, and certainly some practices which were standard 10 years ago, such as negative equity, are no longer standard. However, there are still a lot of questions about this, and a number of people are concerned that we are seeing patterns of commission-driven decisions; these have raised concerns in other markets in the past. Certainly, if any noble Lord has the misfortune to find themselves self-isolating for coronavirus and watching daytime television, they may at some point see advertisements for equity release, because a lot of advertising on this is going out in different forms.
One of the main arguments for having all the bits of pension on the dashboard is that you know where they are. Most people, even if they do not have the expertise of the noble Baroness, Lady Bowles, know where their house is, are reasonably confident that it is there, have some idea of its value and could find out readily if not. I take the point about people wanting to look at the whole of their assets, but, given some of the nervousness around this market, before we dive too firmly into that area I would be interested in the Minister’s view on this—as I am in in his view on all the amendments.
Earl Howe (Con)
My Lords, I am grateful to all noble Lords who have spoken to this group of amendments. Perhaps I can start by addressing the questions raised by the noble Baroness, Lady Sherlock, in the context of the issues posed by the Constitution Committee. I appreciate the points she and the noble Baroness, Lady Drake, made on this. The Constitution Committee raised the skeletal nature of the provisions in this part of the Bill and sought clarification on how, and by whom, some of the powers might be exercised. Notwithstanding that, as I have pointed out previously, the committee accepts the need for some of the powers, even if in skeletal form. The noble Baroness was kind enough to concede that.
The noble Baroness picked me up on the distinction I made last week between policy and policy implementation. The policy in this area is developed: we are clear about what we want to achieve and what needs to occur for that to happen. There was a full and thorough government consultation. Following that, a government response was published and our policy aims were set out. As we have made clear throughout this process, further work on the technical development must be carried out and in due course, we will bring forward the affirmative regulations that provide much of the detail that noble Lords seek.
I would like to explain why it was necessary to bring the Bill forward at this point. The noble Baroness asked me why we think dashboards are a good thing. In our government consultation, there was overwhelming support across consumer groups, individuals and industry for our proposal to introduce a legislative framework in order to,
“deliver dashboards within a reasonable timeframe”.
Our experience over the past five years of trying to make progress on this matter—a long time, as noted by my noble friend Lord Young—is that without the clarity of our commitment brought by legislation, it would prove impossible to bring together the industry in a way to develop the service that consumers require and have said they want.
We have asked the industry delivery group, under the guidance of the Money and Pensions Service, to develop the infrastructure required to provide dashboards by working with a range of stakeholders, including pension scheme providers. This process will inform the content of the delegated powers. The alternative approach would be to table a Bill once all the technical work has been completed but, as I have just outlined, we would struggle to get industry to engage with us to enable this technical work to complete. We took the view that that course of action would be impractical and simply further increase the time that consumers need to wait for a dashboard service.
I am the first to recognise the Constitution Committee’s reservations about the use of delegated powers but, in this instance, we consider their use to be entirely appropriate and in keeping with the committee’s suggestion that they meet “an exceptional justification”. As to that justification, the reasons for the nature of the delegated powers are fully set out in the delegated powers memorandum. This recognises the need for a degree of flexibility while creating a digital service solution in order to ensure that the service provided remains up-to-date, secure and accurate. Technical requirements and user needs change and the legislative framework needs to be able to adapt at pace to meet those requirements.
The committee also referred to Clause 118 and asked the Government to explain who might be prescribed by the Secretary of State as someone who can publish standards, specifications or technical requirements for a qualifying pensions dashboard service. Pensions dashboards fit with wider government aims to give consumers access to and control over their own data, particularly across financial services. The Government’s approach is therefore to ensure that dashboards are fit for purpose over the long term, which includes recognising that ownership of the dashboard infrastructure and responsibility for the setting of standards may need to change over time, as explained in paragraph 1.364 of the delegated powers memorandum. It is not possible to set out now who might be asked to take on this responsibility in future, nor to state now the mechanisms of accountability to Parliament. That would need to be determined according to the circumstances but, as we have already set out, such changes will occur within the wider legislative framework, which offers multiple layers of consumer protection.
Viscount Eccles (Con)
Perhaps I should already know this, but will it be possible, in the additional technical work, for an individual to decline to have the information about his or her pension position put on to a dashboard? If past history is any guide, some people will always prefer not to join such a system. They might feel that they do not need it. Therefore, I express the hope that it will be possible to opt out.
Baroness Drake
At one level it is entirely up to the consumer, but if somebody hacks into the system or steals their identity, that is not under the control of the consumer.
Earl Howe
I will come on to the question of identity in a second when I address the amendment tabled by my noble friend Lord Young. Clearly, we want to do our utmost to ensure that the system is secure and that data can be accessed only by those entitled to access it.
I share the aim of noble Lords to make dashboards as useful as possible to individuals planning for their retirement. To that end, we are considering many of the aspects in these amendments as potential features of pensions dashboards in the future. Having said that, I need to come back to a point that I made earlier. The development of a pensions dashboard service that gives consumers a single point of access to their pensions information is a complex undertaking.
I remind the Committee that there are over 40,000 schemes, around 25 million people with private pensions wealth and a huge amount of state pension information. My noble friend Lady Altmann was absolutely right to stress that. It is why we have asked the industry delivery group to work with representatives from the pensions industry and consumer groups to ensure that the service is accurate, secure and consumer focused. Once again, I underline the word “secure”. I have to sound a cautionary note to noble Lords who want to broaden out the service in short order. Again, my noble friend Lady Altmann is quite right: adding any further complexity at this stage, however well intentioned, risks delaying the delivery of pension dashboard services to individuals.
I am sure we can agree that it is important that the design of this service is consumer focused. It must consider potential risks to the consumer and provide benefits to individuals planning for their retirement. The industry delivery group will undertake further user research and testing to ensure that that is the case. Any additional functionality should be made available only if three conditions are met: a clear consumer need should have been identified; safeguards and protections must be in place; and any functionality must be controlled and tested.
With those thoughts and aims in mind, I turn, first, to the amendments tabled by my noble friend Lord Young. In Amendment 45, he raises the important point of identity verification. This is crucial in giving consumers and pension providers confidence in the security of their data. In order to ensure a consistent consumer experience, the dashboard infrastructure should have one digital identity standard agreed across the industry. The level of identity verification used must be consistent with the internationally recognised standard published by government—the good practice guidance on identity proofing and verification. The good practice guidance is designed to be as inclusive as possible, so that as many people as possible are able to securely access the online services.
The creation of a digitally secure identity is complex. Last year, the Government introduced the digital identity unit, which is now leading work to develop a digital identity solution that can be used across the public and private sectors. The industry delivery group will work with the digital identity unit to enable the delivery of a secure, effective and inclusive identity service for users of the pensions dashboard. I understood what my noble friend said about Verify, and I assure him that the industry delivery group has this issue squarely on its radar. It is being informed by industry experts and consumer groups, and it will carefully consider available options and make recommendations on the best identity solution for pensions dashboards. The solution may not be Verify.
ID verification will have to meet the standards for all parties, including state pension, and that requires a high level above that for an individual scheme. Whatever happens, I can assure my noble friend that dashboards will be free at the point of use for consumers; that includes identity verification. Digital identity remains a priority for government and we are considering ways in which to continue this work with departments across government. We hope to make announcements on that in due course.
On Amendment 38, the Government fully support beneficiaries with entitlements having access to their pension information via dashboards. I can tell my noble friend Lord Young that this clause, as already drafted, enables this to happen. The delivery of this facility will be considered by the industry delivery group. However, his amendment does not distinguish between beneficiaries with entitlements and potential beneficiaries, without current entitlements to the scheme. Creating provision for a person with a potential entitlement introduces considerable legal and technical challenges about data protection and confidentiality in relation to the principal scheme member. The members themselves should have control of the access to such information, and this should happen only with consent. We should be wary of undermining confidence that an individual’s own pensions data will be kept safe, confidential and secure.
On Amendments 43 and 44, the Government recognise that some people will have a range of assets, including their homes, which could be used to form part of an individual’s retirement income. I understand all that my noble friend said in favour of adding to the dashboard in this way. However, I question whether such amendments are either wise or necessary. Many income projection tools are available through independent financial advisers to support individuals with this. The amendments open up the possibility of financial advisers being able to add information and make calculations directly on to a dashboard. This would significantly extend the scope of pensions dashboards, adding more complexity and risk to delivery.
That cautionary note is quite a good segue into Amendment 39 in the name of the noble Baroness, Lady Sherlock, on financial transactions. The document Pensions Dashboards: Government Response to the Consultation sets out that qualifying pensions dashboard services will not initially have the capability to facilitate transactions. They will start with a “find and view” function, allowing only individuals to see their information. Further functionality will be carefully considered, taking into account the potential risks to consumers alongside the potential benefits.
It may reassure the noble Baroness, Lady Drake, that although the Government have been clear that we want to enable consumer-focused innovation in the long term, this does not necessarily lead to transactions on dashboards. I also respectfully remind her of the mantra that we have uttered many times: that the consumers’ interests must come first. We set out in our consultation document three overarching design principles, which underpin the pensions dashboard ecosystem. These are: first, to put the consumer at the heart of the process by giving people access to clear information online; secondly, to ensure that consumers’ data are secure, accurate and simple to understand; and, thirdly, to ensure that the consumer is always in control over who has access to their data.
Baroness Drake
Perhaps I may put three questions to the Minister in response to his comments. First, he opened by pointing out the overwhelming support for the dashboard that was evident in the consultation; I have no argument with that. Does he accept that the consumer focus groups, taken in the broadest sense, actually lined up behind the Government’s starting with a public-owned dashboard and had quite strong views about proceeding without one? Does he accept that when one disaggregates the responses to the consultation, that is a correct summary? I am quite happy to name the organisations on which I base that view.
Secondly, the Minister actually gave a very good explanation of why one should not run into transactions on the dashboard: not just because of the technical and IT requirements to building a safe dashboard, but because of the whole behavioural market- weakness issues that come into play. However, I do not think I heard him say that, as a result of recognising that, the issue would come back to the Houses of Parliament through another Bill before proceeding to transactions. That was the assurance. I do not think that simply a discussion on regulations would meet Parliament’s need to scrutinise such a big transition. To push again, will he confirm that the Government would need to come back to Parliament before proceeding to transactional activity?
Thirdly, the Minister mentioned delegated access, about which I am deeply concerned. I have no issue with MaPS having delegated access, because it was set up on a certain basis where it was implicit that the dashboard would improve the efficiency of the guidance service. Financial advisers are an issue of some substance. The FCA’s report and actions on the market in financial advice to pensioners is not good reading. Just by September 2018—and the up-to-date figure will be greater—the transfer advice in DB covered assets worth £82.8 billion. In terms of the recommended product, the regulator found 35% were suitable, 24% were unsuitable and 40% were unclear. They produced other reports to express their deep concern. I put a simple question: in the case of Port Talbot, if advisers did not advise those steel-workers well and delegated access to all their pension-pot assets, how great would the detriment have been to those steel-workers? It is not a principle that delegated access may be given to advisers at some point when there is a high level of confidence down stream, but evidence provided by the regulator—not anecdotal evidence from me—says that this market is not working well, which fills it with deep concern.
Baroness Sherlock
My Lords, I want to ask a couple of questions so that the Minister does not need to come back to us twice.
My noble friend Lady Drake powerfully picked up the points on transactions that I wanted to make. I heard the Minister say that the Government’s intention is to proceed to transactions at some point—I would be grateful if he could correct that if I misunderstood—but I did not hear him say why they feel that this is a good idea. I heard him say carefully that they would want assurances to protect consumers, but I did not hear anything about the positive driver for doing so that outweighs the risks that manifestly come with it, which my noble friend just articulated.
I apologise; I have two more questions. I should say that I am hugely grateful for the Minister’s thorough response; I appreciate him taking the time to give us that. It may be that, in all that, I missed the answers to a couple of my questions; I apologise if he gave them and I did not pick them up.
First, am I right in understanding that the dashboard will not cover legacy private pensions and new private pensions not covered by auto-enrolment? If so, do the regulations, as they stand, allow those to be included subsequently, and do the Government have any views on whether they were going to do so?
The Minister touched on my second question but did not answer it. On Wednesday, he said that
“we entirely understand the importance of having a dashboard run by a public body without any commercial interest.”—[Official Report, 26/2/20; col. GC 182.]
Why do the Government think that that is a good idea? Why are they not worried that there could be a long period when there are only commercial dashboards and no public dashboard?
Earl Howe
My Lords, on the final point made by the noble Baroness, it is fair to say that our debate last Wednesday gave my colleagues and me considerable food for thought as to the scheduling of all this. The strong wish expressed by noble Lords to prioritise a publicly funded and owned dashboard was duly noted. I hope to provide her with further thought on this as we go forward. I will come back to her in writing on her specific question on the inclusion of auto-enrolment schemes and so on.
The noble Baroness, Lady Drake, asked whether the consumer groups expressed a particular preference for the MaPS dashboard coming before any others. I bow to her on that. I will have to check whether that is a fair reading; I do not doubt that it is if she says so. I do not have the specific information to hand. The majority of respondents suggested and supported multiple dashboards, not just one. I can only repeat that the rollout of dashboards will be considered as part of a carefully controlled implementation plan.
I do not believe that I expressed a categorical government intention to include transactions on the dashboard. I said that we would make that incremental step only after the most careful consideration and public consultation, and assessment of all the risks. I freely acknowledge that risks exist in that quarter. If we venture into that sphere relating to dashboards, we must be absolutely certain that the risk of abuse, scams, misleading nudges and so forth is as minimal as it can be. Each incremental step will require further parliamentary scrutiny. The noble Baroness, Lady Drake, believes that this should be through primary legislation. I have to differ with her on that. We have made provision for secondary legislation by affirmative procedure, which provides a good measure of parliamentary scrutiny, preceded by public consultation which will inform parliamentary scrutiny. She and I have to part company in this area.
Lord Vaux of Harrowden (CB)
My Lords, the noble Baroness, Lady Sherlock, talked about the business model of these dashboards. The noble Earl has just talked about multiple commercial dashboards. There must be a reason why people will wish to create these things, and therefore there must be a business model behind them. What is the Government’s vision for that?
Earl Howe
The Government’s vision is for consumers to have access to their own information if they wish, and a multiplicity of ways to achieve that. We believe that more is better in this context. That is not to make comparisons between one provider and another, but multiple dashboards will give consumers more choice in where they access their pensions information, and will drive innovation to meet what are bound to be the varied needs of those 25 million people with private pension wealth who are not yet in receipt of their pension.
Lord Vaux of Harrowden
My apologies: my question was not clear. I was asking specifically about the business model behind this. What is the incentive for commercial providers to create these things? Is it advertising? We have talked about transactions, et cetera. If we are going to have this multiplicity of them, there must be a multiplicity of reasons. Do the Government have a view on the best model and controls around that, whether it might be advertising, transactions or charges to funds?
Earl Howe
Scheme providers have been absolutely clear that they are keen for this to happen, mainly because the more exposure that the information has to the particular consumer, the more opportunities there may be for a dialogue between the consumer and the scheme provider—“Are you saving enough? Can we do more for you?”, that sort of thing. They see marketing opportunities in this, but that is very distinct from allowing the dashboard to enable them to enter into transactions. I hope that I have already covered that point satisfactorily.
Lord Flight
My Lords, is there not the point that, with people having on average 11 different jobs during their career and potentially 11 different pension pots, particularly those they were part of when they were younger, many of them have no information at all about it. They do not even know who the manager or the provider is. Already, the amount of unclaimed financial assets in this country is colossal. Without what is happening under this legislation, the problem will get worse, and we urgently need to sort out the ownership of lesser pension schemes, going back a long time.
Lord Young of Cookham
My Lords, this has been a long debate, and I do not propose to lengthen it much more. I am grateful to all noble Lords who have taken part, in particular my noble friend Lord Howe, who gave a very full response to the many issues raised. I was particularly encouraged by what he said a few moments ago—that the debate we had last Wednesday, and the view of the Committee that it would be best if the MaPS scheme was up and running before the other ones, had made some impact. I noted that he said that he hoped to come back to us with more news on that in the future.
I will say just a word on Amendment 39, in the name of the noble Baroness, Lady Drake. I read page 56 of the policy brief, which says:
“Dashboards will present simple information, without the ability to carry out transactions.”
As I understand it from what my noble friend said, that has been qualified and, subject to all the reservations and safeguards that he mentioned, it may be that under this existing legislation, transactions could be provided—I think that is where we ended up. In that case, the wording in the policy brief, if it is by any chance ever reprinted, might be qualified. At the moment it is quite stark:
“Dashboards will present simple information, without the ability to carry out transactions.”
I am being given a look; I am not quite clear what it means, but I will move on.
I was grateful to my noble friend Lord Flight for the support he gave to my amendment on equity release. However, I take the overall view that, while it makes sense at some point to have the opportunity to take a picture of all the assets available that can form a pension income stream, perhaps using the pensions board to do it up front is not the right place. I was reassured by what my noble friend Lord Howe said—that in future, we could consider some embellishments to the scheme, but the top priority was to move ahead as currently planned.
I am afraid that my concerns have not been satisfied at all on Verify. I was grateful to my noble friend for the assurances, first, that there would be no charge for accessing any pensions dashboard; and, secondly, that there would not be a charge for accessing the verification process. The Government have spent hundreds of millions of pounds and many years developing Verify, so I was slightly surprised when he said that the identification process for the pensions dashboard may not be Verify. If it will not be Verify, what will it be? There is no other game in town at the moment. As of yesterday, the Government lost all leverage over Verify by stopping any funding, so its development is now entirely in the hands of the providers. Given that the providers have now heard that Verify may not be the scheme for the pensions dashboard, that may weaken even further their incentive to develop it. What is the business model for Verify if you cannot charge the people who are having themselves verified?
There is therefore still a huge question mark over how we will get access to the pensions dashboard if there is some doubt, as I explained a few moments ago, about Verify, and no clarity at all about what this alternative system might be, which is not Verify and which will unlock the key to the dashboard. Having said that, I do not want to sound at all mealy-mouthed to my noble friend, who did a heroic job dealing with all the other amendments, but I still have some lingering doubts on that one. However, I beg leave to withdraw Amendment 38.
Baroness Altmann
“( ) Requirements prescribed under subsection (2) must require that the provision of pensions dashboard services is an activity regulated by the FCA.”
Baroness Altmann
My Lords, the amendments in this group stand in my name and those of my noble friend Lord Flight, the noble Baroness, Lady Sherlock, and the noble Lords, Lord McKenzie and Lord Hutton. A number of us have tabled amendments in this group on similar themes. I will leave other noble Lords to talk specifically to their amendments but the main concern that we are trying to address is that there should be proper protection for consumers when using these dashboards. What is proposed in different formats is that the Financial Conduct Authority should oversee any dashboards—particularly the commercial ones—as a regulated activity. We have not seen that specified in the Bill and feel that clear regulatory protection for any consumers using a pensions dashboard needs to be on the face of the Bill.
Obviously there are different ways in which the FCA may impose regulatory protection. However, if this is meant to be an activity that benefits consumers, then, given all the experience that we have had in pensions and the issues that have arisen for consumers from time to time when there is an asymmetry of information and pension providers, and providers of different products are able to take advantage of the fact that consumers are not always totally au fait with the information on their pensions that they are presented with, it is really important, for example, that the FCA makes sure that the information is clear and that there is a recognised standard for a dashboard so that it cannot be misleading for consumers in some way, as might sometimes be the case. Sometimes providers do not intentionally try to mislead consumers but the language that they use every day is natural vernacular for them, although it does not mean a thing to a consumer. A provider might think that they have explained something very clearly for anyone who knows all about pensions but, on reading it, the customer might get totally the wrong idea or not understand what is being presented and perhaps take an incorrect conclusion from it.
Amendment 68 suggests that the provider of a pensions dashboard should have a fiduciary duty to the user of the dashboard. There is merit in our considering that as an extra layer of protection so that, once again, the provider of the dashboard is required to consider what the consumer might understand and need, and the provider therefore has a duty to help them rather than take advantage of them in some way, whether intentionally or not.
I am not sure that I need to take up the time of the Committee any further. That is the thrust of the intent behind these amendments, and I look forward to hearing from other noble Lords on this issue.
Lord Flight
My Lords, the point that I want to make is that there are four cases where the FCA is the regulator but no reference is made to where the Pensions Regulator will provide the regulatory task. It might be readily understood by the industry why regulation is divided but there is a question mark over whether citizens will automatically know to go to the FCA for certain things and to go to the Pensions Regulator for others. I am sure that there are sound reasons for it but I would be interested to hear the Government’s view on what the regulatory model should be.
Lord Hutton of Furness (Lab)
My Lords, I shall speak briefly to Amendment 68. I put my name to it and raised the issue at Second Reading in the Chamber. We have had a long debate this afternoon, and I think most of us are pretty clear that pension dashboard services are going to provide a significant service to pension scheme members. We might be able to track down £20 billion-worth of lost pension scheme assets, and we might be able to encourage more people to save for their retirement if it becomes clear to them through accessing a pensions dashboard that they may not be in possession of all the means they might wish to have in their retirement. However, we must not lose sight of one very important risk, which is that although I hope that pension dashboard services will bring significant advantages, they could also be the route through which potential harm is done to pension scheme members by bad or sharp commercial practice or whatever else. It is particularly important that we consider ensuring that a safety-first approach is adopted when it comes to the establishment of these new services.
I cannot think of anything more fundamental—this is what I think Amendment 68 is trying to flush out—or more important than to place on the shoulders of those responsible for running these schemes a duty to act in the best interest of pension scheme members. I am sure that through these regulations and other provisions a welter of regulation will bear down on to the shoulders of those services, but the idea is that they have a direct legal responsibility to pension scheme members to act in their interests when they are accessing data on the pensions dashboard. A very clear line of legal responsibility will go a very long way in establishing the right overall governance and attitude of mind that should be at work when these schemes come into operation. Those who are running pension schemes have similar fiduciary duties and therefore it is entirely appropriate. If this amendment is not accepted, there may be some other more effective approach. I hope the Government will give some consideration to how this further level of accountability and aid to the good governance of these new services is best advanced.
Baroness Sherlock
My Lords, the six amendments in this group in my name and that of my noble friend Lord McKenzie of Luton are probing amendments designed to get Ministers to reassure the Committee that there is a robust system of regulation and supervision for those involved in the dashboards. Rather than go through them one at a time, as there are overlapping amendments from other noble Lords, it might be easier if I simply ask the Minister to clarify some of the key aspects of the supervision and regulatory regimes which the Government have in mind.
I was delighted last week when the Minister indicated that the Government have acceded to the request from my noble friend Lady Drake and many others around the Committee:
“we shall be introducing a new regulated activity under the Financial Services and Markets Act 2000 to reflect the provision of dashboard services.”
Hurrah, say I. That is marvellous. The Minister continued with only very slightly less certainty:
“Clause 118 provides the power to set out detailed requirements ‘for qualifying pensions dashboards’. It is also likely that this will be linked to the new regulated activity outlined by the Financial Conduct Authority.”—[Official Report, 26/02/20; col. GC 183.]
I think we are being told that this means providing a dashboard service will be added to the regulated activity order. I am assuming that is what that means.
Those requirements in Clause 118 may include
“what … information is to be provided”
and
“how the ... dashboard service is to be … operated.”
They may also,
“require a dashboard service to comply with standards, specifications or technical requirements published … by ... the Secretary of State ... The Money and Pensions Service”
or another specified person. Crucially they may,
“require the provider of the pensions dashboard service to be a person approved … by … the Secretary of State … the Money and Pensions Service”
or another specified person. The last of those is crucial.
If running a dashboard service is to be an FCA-regulated activity, should that not mean that those running it have to be approved by the FCA—in which case, ought that not to be made clear? It could be another body, but the bodies named do not include the FCA. If the activity is on the ROA, does that mean that the FCA will then be able to use its full range of FiSMA powers of supervision and regulation on anyone providing dashboard services? Can the Minister further confirm that that would mean that complaints about anything to do with the dashboard could be made to the Financial Ombudsman Service?
This is the train I am trying to establish. It is great that the activities are regulated by the FCA. Will the people running it have to be FCA approved and therefore subject to the full range of FiSMA powers? It seems that that is where the real firepower is located. Alternatively, are the Government envisaging that a dashboard service might be run by an organisation that was not FCA approved, supervised or regulated? Would there be a real risk of consumer detriment if the FCA cannot use its full range of powers on anyone using a commercial dashboard?
Provision of information to a dashboard also needs to be subject to a scheme of regulation and compliance. Information will come from various sources. Will the provision of information from trust-based schemes to a dashboard be regulated by the TPR? What about the information provided from contract schemes? Will that come from via the FCA? Will it be directly under FCA supervision or by the fact that they regulate the firms providing the information? Who will oversee the provision of information from the state and make sure it is accurate? Where does the consumer go to complain about their data? At the moment, if a bank misuses your data, the ICO will deal with the bank, but the consumer will go to the Financial Ombudsman Service to deal with detriment. What will happen here?
My biggest concern is what will be done with data provided on dashboards and the potential for mis-selling. Amendment 68 would require that those providing dashboard services would have to act in the fiduciary interest of savers. My noble friend Lord Hutton just made a compelling case for that. Our argument is that this is a special situation where the state has mandated that consumers’ data should all be gathered together in one place. That is helpful, but it is a little like saying, “Rather than having them wandering freely across the hillside, all the lambs have been gathered into one pen”. In that case, you want to be pretty sure that there is a good lock on the gate and that anyone coming along pretending to be a shepherd can be spotted early and—“Stop. Enough of this analogy. Ed.” I think the point is made.
Because of this higher challenge, there should be a higher duty of care to the consumer. If an organisation running a dashboard service is regulated by the FCA, it will be subject to the “treating customers fairly” FCA standard, but this goes higher. It becomes even more important if it is possible that any of those people will not be subject to the full range of FCA supervision and regulation powers. There should be a duty of care to the consumer. We can see the benefit of gathering information/lambs in one place, but it of course makes the information/lambs much easier to access. Can the Minister give us some reassurance on those points?
Earl Howe
My Lords, the amendments in this group are designed to ensure that consumers are placed at the heart of dashboards and that the Financial Conduct Authority is given responsibility for certain aspects of that. I say straightaway that I wholeheartedly agree with this aim. What I cannot agree with is the way of achieving it proposed in the amendments.
The Government are persuaded that a strong regulatory regime is key to maintaining public confidence in dashboards. There are existing powers which we will use to introduce a new regulated activity for dashboard providers. We can do this by amending the regulated activities order set out in Section 22 of the Financial Services and Markets Act 2000. This will bring the provision of a qualifying dashboard service within the regulatory and supervisory the remit of the FCA. There is no need for the new dashboard-specific regulated activity to be in the Bill.
We are working with Her Majesty’s Treasury and the FCA to agree the nature and scope of the changes. Legislation amending the order will be brought forward in due course. I can also confirm that the Financial Services and Markets Act covers Northern Ireland, meaning that any new regulated activity would also extend to Northern Ireland. It is important to note that the new regulated activity will apply only to dashboard providers. Pension scheme trustees and operators are already within the regulatory remit of either the Pensions Regulator or the FCA. The requirement on pension schemes relating to the provision of information via dashboards will be set out in regulations and FCA rules pursuant to this Bill.
The noble Baroness, Lady Sherlock, asked whether the FCA will be able to use its full range of powers; yes, it will. All the FCA’s existing powers will be available where a dashboard provider must be FCA-authorised. To answer the noble Lord, Lord Hutton, the Financial Conduct Authority has an existing framework to ensure that authorised firms take the interests of customers into account. The Government will again set out in regulations the conditions that a dashboard will have to meet. This will be supported by new, dashboard-specific regulated activity, as I have just explained.
Strong consumer representation on the industry delivery group, alongside new regulations and a new, dashboard-specific regulated activity, will ensure that the design is in the interests of consumers and that they are protected. The regulatory framework for the new regulated activity will be proposed in the FCA’s consultation on the corresponding handbook rules and guidance.
Lord Hutton of Furness
I hear what the Minister is saying and am very grateful for the thoroughness with which he is responding to these issues, but will pension scheme members have any direct legal redress against a dashboard services operator should things go wrong? As I am hearing him, most of the remedies seem to lie in the hands of regulators or others, but if my data is misused or I feel that some problem has occurred as the result of the inappropriate organisation of a pensions dashboard service, where do I stand?
Earl Howe
Consumers will have various modes of redress available to them if they are not served legally or properly by their scheme provider or the dashboard provider. Our response to the consultation on dashboards highlighted the need for a clear liability model for the whole dashboard system. The objective is to enable users to identify easily where to raise a complaint or a dispute if a dashboard fails to work, or if they fail to receive their pension information. We have asked the Money and Pensions Service, through the industry delivery group, to consider how this might operate and to make recommendations. The Pensions Regulator and the FCA will regulate compliance by pension schemes and the Information Commissioner will have a role in ensuring that the disclosure of pension information takes place in accordance with data protection legislation. Only FCA-approved bodies can provide a qualifying dashboard. Only qualifying dashboards can connect to the infrastructure, and they will fall under the full regulatory regime.
New Section 238G, introduced by Clause 119, ensures that the regulator will be able to monitor and enforce compliance with the new requirements, in keeping with the existing regulatory regime. The FCA also has the power to enforce rules that it will make under this legislation. Part 14 of the Financial Services and Markets Act 2000 allows the FCA to enforce any requirement on authorised persons, including those setting up or operating a personal stakeholder pension.
Baroness Altmann
I thank my noble friend for his very thorough response to this group of amendments. Is it not possible that without a comprehensive, overarching regulatory framework for all dashboard activities, consumers could fall between different cracks, and the provider of the dashboard that has provided them with misleading or incorrect information could then say, “Well, it was the person who gave us the data who was misleading: it wasn’t us. We are just providing information.”? Or could this activity in some way be related to unregulated lead generation, which is part of the pensions landscape and has been so damaging to consumers? Therefore, what I hoped we might achieve with my amendment was an overarching regulated activity for anybody participating in or providing data to the dashboard and for the dashboard provider providing the data to a customer.
Earl Howe
We come back to the question of a liability model. I might as well deal with that now. We set out in the consultation response that we expect the industry delivery group to make recommendations on a robust liability model that ensures that there are clear roles and responsibilities and a clear process for dealing with complaints. The point made by my noble friend that there is a risk that something might fall through the cracks is a very good one. The best that I can do at the moment is to say that, as the service is developed, the detail of where liability exists will emerge. She will agree with me that we are not dealing with new data or with new financial transactions, but yes, potential service risks might emerge. The IDG will, as I have said, recommend robust liability models, and the framework of any new liability arrangements will be set out in regulations. That is one of the reasons why we need delegated powers in this area.
I think that the industry delivery group is the best forum to build a liability model to which all parties are signed up and that takes into account good practice and lessons learned from open banking. While I realise that there are many differences, there are certainly lessons that we can draw from that sphere.
Lord Flight
My Lords, is not the big issue in this territory that when people have discovered that they have four, five, six or seven different pension funds, they will want advice as to what to do with them? There is the whole problem of who can give advice, guidance or help in that area, but unless arrangements are determined about how to deal with this question, I can see all sorts of regulatory issues arising.
Baroness Drake
The liability model has not been settled. That is perfectly understandable; I do not rush to criticise it because there is a lot to do. All I would say, because I cannot resist doing so, is that it goes to the argument that one should start with a public dashboard. My question follows on from that asked by my noble friend Lord Hutton. On reading Clause 118, clearly powers are given to certain parties to set requirements—with the exclusion of the Secretary of State, who is in a totally different position. Can the Minister confirm that no such powers under Clause 118 can override the FCA’s existing powers? He may not be able to answer that yet but it would give clarity.
Baroness Sherlock
On a related point, I tried hard to listen to what the Minister said because I am particularly interested in whether somebody can run a dashboard service if they are not FCA-authorised. I heard him say that the full range of FiSMA powers could be used, so a dashboard must be FCA-authorised, but I think I heard him say also that only FCA-approved bodies can run dashboard services. Is that right?
Baroness Sherlock
Excellent. In that case, I am trying to relate that to New Section 238A(5)(c), to be introduced by Clause 118(2), on page 105 of the Bill. It states that requirements prescribed under subsection (2) may, in particular,
“require the provider of the pensions dashboard service to be a person approved from time to time by—
(i) the Secretary of State,
(ii) the Money and Pensions Service, or
(iii) a person specified or of a description specified in the regulations”.
If, as the Minister just said, the FCA must authorise someone to run a dashboard, does it not make more sense for a government amendment to come forward to make that clear in the regulations, rather than naming two bodies—neither of which is the FCA—and having a catch-all for the third?
While I am on my feet—hey, why waste an opportunity?—and the Minister reflects a little more on that point, I want to ask about the duty of care and the fiduciary duty. I take the Minister’s point about the wording there, but are the Government resistant to the underlying point made by my noble friend Lord Hutton and me: that, in these particular circumstances, there should be a higher duty of care to the consumer on the part of the organisation running the dashboard services than would be the case in the general mêlée of the FCA? Treating customers fairly and related things may suit that generic environment but this is a very particular circumstance; the Government have initiated this and put all this information in one place and mandated its release. If it were more felicitously worded, would the Government resist the notion of a higher duty of care in this circumstance than the one that prevails generally in FCA supervision?
Earl Howe
I will certainly go away and consider that point, even if “fiduciary” is not the appropriate word, and look in conjunction with my officials at whether there is a mechanism that would achieve that aim without inventing some new legal status. I am grateful to the noble Baroness and the noble Lord, Lord Hutton, for their points.
The question posed by the noble Baroness, Lady Drake, boils down to this: if MaPS or another specified person sets the data standards, how will they be accountable to Parliament? As I said, the regulations enable parliamentary scrutiny and debate on any specific future proposal as they come forward.
We need to ensure that dashboards are fit for purpose over the longer term. That cannot happen in a summary way. Delegating the ability to set and update standards and technical specifications support through secondary legislation will, in our view, ensure that dashboards remain beneficial and relevant to consumers.
Our approach recognises that ownership of the dashboard infrastructure and the responsibilities for the setting of standards may need to change over time, but I reiterate that, taking into account the good practice that exists, the industry delivery group will develop and make recommendations on a robust liability model to ensure that there are clear roles and responsibilities in the event of a breach. That includes a clear consumer redress mechanism. In answer to the noble Baroness, Lady Sherlock, the policy intent is that the FCA should authorise dashboard providers and that this should be achieved by order.
The FCA takes seriously the need to consult the public. It has a general duty to consult the public by publishing draft rules. This duty will apply equally in this case. The FCA will also consult the Secretary of State and Her Majesty’s Treasury prior to public consultation on draft rules. That will ensure that the rules have regard to the regulations that place obligations on trust-based schemes, which will provide a consistent and coherent approach.
We have covered quite a lot of ground, but I hope that I have effectively explained the role of the FCA in protecting consumers and provided the assurance that noble Lords are seeking that we will bring dashboard services within the FCA’s scope. If I have not covered all the ground, I hope that I can rely on meetings with noble Lords following Committee so that, by Report stage, I am able to come up with any further and better particulars that they seek. With that, I hope that for the time being the noble Baroness will feel comfortable in withdrawing the amendment.
Baroness Altmann
I thank my noble friend for his detailed response and the broadness of his willingness to consider the points that we have made on this important issue. I am delighted that he agrees that we all seem to have the same aim, which is to protect the consumer. However, I would be grateful if he went back to the department and perhaps wrote to me and other interested noble Lords about this. We all aim to have consumer protection but, if that is to be put in via a series of regulations with a liability model that we do not yet quite have, would there be any specific harm in putting in the Bill the regulatory framework and the requirement for FCA authorisation and protection for consumers, so that there is a comprehensive, overarching framework?
My concern is that, although this is portrayed as an information dashboard, we know that the provision of guidance and information has no consumer protection whatever—it is a matter of caveat emptor. If, for example, those dashboards carry advertisements that may be perceived as enticing people to buy products but they do not fall under such a regulation in FCA terms, we might be well advised at this stage to place an overriding emphasis from the consumer perspective on regulatory protection and authorisation for the entire framework, rather than relying on liability being proven later and redress being provided to the customer after a problem has occurred. For the moment, however, I beg leave to withdraw the amendment.
“( ) Any regulations made under section 238A or this section which make provision for privately owned or commercial providers of pensions dashboard services to enter service must include provision about—(a) designation of the responsible regulators for—(i) operators of the pensions dashboards,(ii) displayed dashboard information,(iii) conduct relating to the use of data,(iv) advertising, and(v) revenue generation from the pensions dashboard service for the provider, including revenue from advertising;(b) redress mechanisms and designation of the responsible body for claims arising from harm to users of a pensions dashboard service including for loss or improper use of data;(c) mechanisms to mitigate the risk of fraud;(d) rules about type of content, presentation of information, assumptions regarding predicted pension income, valuation, projections, risks and comparisons;(e) rules about advertising on the pensions dashboard service and any revenue generated from the pensions dashboard service for the provider of the pensions dashboard service or any third party;(f) display of charges or any commission received by the dashboard provider for any services, transfer of funds or purchases available through the pensions dashboard service, and(g) display of the projected cash effect on expected pension income or lump sum outcomes of any services, transfer of funds or purchases available through the pensions dashboard service.”
Baroness Bowles of Berkhamsted
My Lords, I am conscious that, in the two groups we have already discussed, we have touched quite thoroughly on the background that inspired my amendment. The Minister has explained several times that it is the intention that this legislation is flexible, that because of the ability to make regulations it can develop over time and that many of the things that noble Lords have already been pressing for are potentially in the mind of government. There was a similar discussion at an all-Peers meeting a couple of weeks ago, which several noble Lords—in particular, the noble Baroness, Lady Sherlock—were at and which inspired this probing omnibus amendment that puts together all the things we discussed in that meeting and a few more. I do not see that it in any way competes with the amendments about the content of regulations or the SCA being the dashboard regulator.
The purpose of this amendment is to discuss how to make certain that there will be joined-up, end-to-end coverage by the regulator and the regulations—or in supervision, as the noble Baroness, Lady Sherlock, expressed it. Again, I am sure that it is the intention for a lot of this to happen—there are certainly enough powers in the Bill to do it—but there is nothing yet in the Bill to make it certain. I acknowledge that things have been said but that is not the same as having something in the Bill.
It has been said that a lot of these things might develop as a result of consultations with industry groups. If industry groups decide that they do not want some of this, what happens? There needs to be a basic obligation that these things will be covered—in particular, as my amendment envisages, if we are getting to the point where we have commercial dashboards. If these things are not resolved by the time we get them—it looks as if we might be getting them anyway, not after a delay—I do not think that it is satisfactory to have nothing in the Bill.
To ensure end-to-end regulatory coverage for the process of loading information on to dashboards to the dashboard itself and for any consequential actions arising from the dashboard, my wish list, or probing list, covers: dashboard operation; information; data; advertising and revenue generation; redress mechanisms; fraud mitigation, which the Minister has already mentioned; content; presentation; assumptions; valuations; projections; risk; comparison; third-party revenue charges; and commissions and their effect on projections.
Noble Lords said on the previous group that it is difficult to have information about charges because they are done in different ways and are the be-all and end-all. That in particular is why I have said that the effect of the charges should be given because that is where you can assess them. If there are lots of different mechanisms and they can make things weaselly wordy or look wrong, they should not be able to disguise the cash effect of the charges that can be extracted. That is probably more important than saying what the charges are. I do not think that this is in conflict with anything else that has been said today.
However, what happens if there is a data breach? That might be a matter for the Information Commissioner. It might be automatic or a matter for redress by the financial ombudsman. These mechanisms are all out there. How will they join up? We want to know for certain that they will. Nothing in my amendment suggests how this must be done; it just says that it must be done.
While mentioning the FCA, we need to be clear that unless it is told categorically in legislation or regulations that something is regulated, it will not consider it as within the regulatory perimeter. As I have said previously, it regards that as a matter for government and Parliament to authorise. An example is that although the FCA covers conduct in banks—which, as we well know, are also heavily regulated by the Prudential Regulation Authority—banks can do quite a lot that, although they have that heavy regulation, falls outside the regulatory perimeter for conduct. Commercial lending is one example. People tend to trust regulated entities but then do not realise that things that do not have that supervisory and conduct backing can be done. It is necessary to dot the “i”s and cross the “t”s here.
For example, it might be that the phrase “Click here to transfer your pension” would be covered, but as the noble Baroness, Lady Altmann, hinted in her previous suggestions, would it be against the regulations to say, “Click here and buy a Maserati”? It was once suggested that that might happen with pensions freedoms. What about equity release for double glazing and conservatories, which feature heavily in the advertising about equity release? If we do not cover advertising and the FCA does not, who does? It must be covered. It cannot be left open. My amendment aims to draw attention to these matters through my list. I will obviously be interested to hear the reply.
However, when it comes to drafting regulations—again, this has relevance because the Minister has already mentioned it—there should not be too much left to the regulatory rules. They can create holes, especially after the regulator has consulted the people it is attempting to regulate. I touched on that in a debate last week, when I explained how regulators’ rules—FCA rules, to be precise—had watered down the generality of “fit and proper” as a test for behaviour. It is by no means the all-encompassing test that was originally intended; it was narrowed down by the rules of the regulator.
When it comes to pensions, I therefore want a belt-and -braces approach. As I said, I have attempted to draft something that sweeps together all the concerns in a probing, omnibus-type way; I will not go through the list because quite a lot of it has already featured in our debate today on previous amendments. I do not aim to say how it is to be done but I suggest that when there is to be a commercial dashboard, the regulations must be done for all these things. I believe that that is what the Government say they will do, but it is better to have it on a piece of paper inside the Bill. I beg to move.
Lord Sharkey (LD)
My Lords, my noble friend’s amendment, among other things, speaks about advertising. The underlying question about advertising, however, is surely why allow it at all? That was touched upon by the noble Lord, Lord Vaux, and the noble Baroness, Lady Altmann. You can see the benefit, obviously, to commercial dashboard providers: another revenue stream and/or the cross-selling of their products. However, it is hard to see why the customer would want yet another advertising channel while there are already thousands—perhaps tens of thousands—of advertising channels. What really is the benefit to the consumer; or perhaps more accurately, what really is the risk-benefit balance for the consumer created by the existence of advertising on commercial dashboards? What assessment have the Government made of this risk-benefit balance? If the answer is none, perhaps they should consider doing exactly that. I am curious about whether the Government have, in fact, indicated to potential commercial dashboard providers that they will be able to run ads on their dashboards. Is there some implicit quid pro quo going on here?
Baroness Drake
My Lords, I have some sympathy with the noble Baroness’s amendment in wanting to set out in regulation, rather than rely on regulatory rules, some of the things that will be required to make the dashboard function well. I suspect that there are three drivers behind that sentiment. One is that, in this market, the providers are particularly dominant: there is not an equality of arms when it comes to seeking people’s opinion or influencing government policy. Secondly, the FCA itself recognises that it is very difficult to get a functioning market and that it needs to think more and more about intruding in controlling providers’ supply-side behaviour. Thirdly, although the Government understandably want to rely on consultation, those consultations can be dominated by the providers in this market.
Very often, some of the raw consumer issues somehow do not come to the surface and the consumer groups often do not have sufficient resources to do the kind of detailed analysis that a submission requires to pull out some of the fault lines when these things are looked at through a consumer perspective. Members of the public are not going to participate because they simply do not understand what the issues are in relation to their interests until they experience them. I therefore have a lot of sympathy, leaving aside the precise wording of this amendment. The Government need to understand that sense of those three sentiments that often drive many of these amendments: the providers are over-dominant; even the FCA recognises the need for greater intrusion on providers in the supply-side; and consultation is often not an effective remedy for sufficiently capturing the consumers’ interests. Therefore, the more that is put in regulation, the better.
Baroness Sherlock
My Lords, I am grateful to the noble Baroness, Lady Bowles, for having opened up this territory. She is a creative inventor of amendments: she has drawn out here a good selection of the kind of things that regulations would need to cover. Will the Minister tell the Committee—whether or not he wants to accept this amendment—whether it is the Government’s intention to cover those matters within regulation? Are any of these items on the list matters that the Government think are inappropriate for regulations to cover them?
The noble Baroness also made a strong case in general for end-to-end regulation. The Minister has described the process that the Government are going through to develop a liability map. I presume that in this, there will also be a similar kind of regulatory map. There also needs to be a redress map to ensure that there are no gaps down the middle of all of those things. It is also particularly important that there is not a regulatory gap. In terms of redress, it is important that there are no gaps; if things overlap, that does not matter so much. For example, there are times when a pension complaint could go either to the Pensions Ombudsman or the Financial Ombudsman service. They judge things by slightly different criteria and in different ways: fair or reasonable versus the legal position. However, it does matter that nothing falls down the cracks. If a complaint is submitted to an organisation such as the Financial Ombudsman Service and there is any possibility that it is out of scope, firms will, and do, regularly take them to court to try to stop the complaint being heard, and exactly the same thing will happen with the regulators.
Therefore, it is really important that somebody has gone through the regulatory map incredibly carefully and made sure that either the regulator already has all the powers and the full scope necessary to cover all these matters or that it will be granted them. I am sure that that is already happening but it would be helpful if the Minister could reassure us about it.
My noble friend Lady Drake made a very strong point about both the drivers of the need for this change and the inequality of arms. The latter is also very strong on the advocacy side. Many times I have seen that there has been a lot of money behind those advocating on behalf of the firms but very little resource behind those advocating on behalf of the consumer. Therefore, it will be very important to make sure that one amplifies the voices that speak up for the consumer interest as well as those that speak for the provider interest.
Earl Howe
My Lords, I fully appreciate that the noble Baroness is trying to ensure that consumers are properly protected and have confidence in the dashboard infrastructure. Indeed, an aspect of this is the need for robust supervision, and I share her belief that it is important to make clear who will be responsible for oversight of the different aspects of the infrastructure. I do not think that much divides the noble Baroness and me on the objective to be achieved.
I recognise the need for a strong supervisory and regulatory regime for dashboard providers. I also agree with the thoughts expressed by many noble Lords at Second Reading about a new regulated activity being key to maintaining public confidence in dashboards. As I explained earlier, we intend to do this by amending the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.This will bring the provision of a qualifying dashboard service within the regulatory remit of the Financial Conduct Authority. Unauthorised firms will neither be able to connect to the supporting infrastructure nor be able to provide a dashboard service.
Once the amendment to the order has been made, the regulatory framework for the activity will be proposed in the FCA’s public consultation on the corresponding handbook rules and guidance. This will allow the public and the industry a chance to comment. The FCA must have regard to any representations made to it during the consultation period. This framework can be used to set out any expectations regarding the behaviour of dashboard providers and, in this way, will supplement any conditions imposed on dashboard providers set out in regulations. I would argue that this is where we dot the “i”s and cross the “t”s, as the noble Baroness put it.
I note that the amendment also refers to revenue generated by both dashboard providers and third parties. It might not be necessary for me to do so but I want to reassure the Committee that all qualifying dashboard services, like the dashboard provided by the Money and Pension Service, will not be allowed to charge simply for consumers to see their own information. The provision of financial services and products by firms that are dashboard providers will remain subject to FCA regulation. Fundamentally, our aim in allowing multiple dashboards is only to give customers more options in accessing their information, not different information.
The mention of information should remind us that pension information is the lifeblood of a sustainable dashboard. Dashboards will work within the existing framework established by the general data protection regulation and the Data Protection Act 2018. Dashboard providers will be subject to penalties under these laws should they fail to meet required standards of consumer and data protection. One of the key principles in the design of the dashboard is that the individual will always be in control over who has access to their data. Qualifying dashboard service providers will not be able to see information about the individual’s pension rights.
The responsibility for the provision of accurate data falls on pension schemes. The Pensions Regulator will be responsible for ensuring occupational pension schemes’ compliance with requirements. The FCA will regulate personal and stakeholder pension schemes. Enforcement options, including fines, will be among the tools available to the regulators if requirements are not met.
The role of these regulators will be complemented by the Money and Pensions Service, which will establish and maintain the dashboard infrastructure. While it will not act as a regulator, it will work with the regulators to enable their compliance activity. It is also obliged, as part of its consumer protection function under the Financial Guidance and Claims Act, to report to the FCA where regulated persons are behaving in a manner detrimental to customers.
That leads me to the issue of redress. If an individual wishes to seek redress, any queries around possible incorrect information should be directed to the scheme in the first instance. Schemes are already required to have dispute resolution processes. To come back to a question asked earlier by the noble Baroness, Lady Sherlock, if people are not satisfied with the outcome of the internal dispute resolution procedure, they can take their case to the relevant ombudsman.
The amendment covers the need for regulations around assumptions, projections and comparison of costs and charges. I reiterate that we expect that the initial information provided on dashboards will be simple in the first phase. Adding further information, such as projected pension income and costs and charges, requires consideration on the delivery and consumer protection aspects of these proposals, as we have discussed. I am not ruling out the possibility of including such information, but the industry delivery group should be allowed to consider the implications fully and make its recommendations. To commit to regulations around possible assumptions and comparisons before then would be premature.
Of course, as the noble Baroness will be aware, individuals can already access information on costs and charges. The DWP has consulted on simpler annual benefits statements; the noble Baroness may like to know that it will publish a response on that subject in the spring. The consultation looks at the presentation of costs and charges and how projections are calculated. It acknowledged the crucial need for simpler statements to be consistent with the work on dashboards. We will consider how insights from the consultation can be incorporated into dashboards.
The noble Baronesses, Lady Drake and Lady Sherlock, emphasised the need for adequate consumer representation. The Money and Pensions Service has brought together an industry delivery group whose job it is to ensure that the design of pensions dashboards is informed by industry experts and consumer groups. Membership of its steering group was announced in September last year. It includes a strong representation of consumer groups, including representation from Which? and an independent representative with significant experience in consumer protection. There will also be opportunities for other consumer representatives to take part in working groups, which will help to ensure that the final design is on what information and features consumers value.
The noble Lord, Lord Sharkey, asked specifically about the need to include advertising on a dashboard. I can do no other than refer back to my earlier points. Rules on advertising are as those around any other incremental addition to the dashboard, and rules on the parameters around the use of data will be looked at very carefully. They will be developed by the Government in conjunction with the FCA, which will work with industry and consumer representatives on the delivery group to make sure that if we go down that path, it is with our eyes open and with the risks minimised. We will of course consult on any rules surrounding that issue.
I hope that I have given sufficient reassurance around consumer protection to show that the dashboard infrastructure will build on existing regulatory frameworks. That, with the need to keep dashboards simple, means that while I understand the rationale of the amendment, I consider it unnecessary. I hope that, on reflection, the noble Baroness will feel that she is comfortable in withdrawing her amendment.
Baroness Bowles of Berkhamsted
My Lords, I thank the Minister for his response. As I said, this is a probing amendment but also an attempt to indicate a framework that could be constructive, perhaps in particular around some of those issues on which all noble Lords have spoken. It covers things such as advertising; it may be that the regulation that one would want around advertising is that there cannot be any of it, but that would still be a regulation to prohibit. I feel that there is a need for an explanation of this vision, somehow all in one place. Yes, a lot of it could be extracted from today’s debate and the reassurances that have been given. However, it would be much better at the very least if it was all put together, perhaps in an Explanatory Memorandum. I still tend to think that there should be something in the Bill, even if more dilute than what I have proposed.
I very much thank the noble Baroness, Lady Drake. This inequality of arms is extremely important. When it comes to FCA consultations, how many members of the public respond? I am not sure whether I am a member of the public, but I have done it from time to time, and I can tell your Lordships that, even for somebody like myself who is well used to this kind of thing, the way it is composed and constructive can be jolly difficult to get your head around. It can be difficult to get yourself organised to put it in, unless you happen to be an industry specialist who does these kinds of things all the time. I therefore very much doubt that you get members of the public responding; you may get some of the consumer organisations, but again, I doubt that they have the familiarity that is necessary always to be able to nail the point.
As was also suggested, there is a tendency with consultations to weigh the responses: X% says this, and Y% says that, and the ones who struggle and have difficulty, which is always on the consumer side, are outweighed. An awful lot of people with a financial interest from the industry side will respond. There needs to be a better mechanism for communicating with, if you like, the public and their representatives. One thing that could be done is for the FCA to obligingly inform Parliament when it is coming out with its consultations. I do not camp on the FCA’s website, looking for its consultations, and if I do not, I do not know how many members of the public will. This is a work in progress. I have to come back again on the costs.
Baroness Altmann
“238FA Accuracy of occupational pension scheme informationRegulations must impose requirements on the trustees or managers or administrators of a relevant occupational pension scheme to ensure that information held in respect of each member which may be submitted to a pensions dashboard service is regularly checked for accuracy and any errors are corrected within six months.”Member’s explanatory statement
This amendment aims to ensure that those running pension schemes must check data for accuracy and any errors are corrected regularly to prevent incorrect and misleading information appearing on a user's pensions dashboard.
Baroness Altmann
My Lords, I rise to speak to Amendments 54 and 65, both of which are on the same topic. I beg the Committee’s indulgence. This is such an important issue that I want to expand on some of the areas involved and my reasons for tabling these amendments.
Accurate and complete member data is surely an essential prerequisite for the success of any pensions dashboard. I was struck by the Minister remarking that pension information is the lifeblood of the dashboard, which is absolutely right. These are probing amendments; I do not claim that they are the perfect answer to the issues that I am raising, but I have tried to insert into the Bill specific requirements that must be imposed on trustees, managers and administrators of occupational pension schemes to ensure that the information submitted to the dashboard has been checked regularly for accuracy. I have suggested that errors must be corrected within six months. That may not be a reasonable timeframe, but it is a start. That is Amendment 54.
Amendment 65 seeks to do the same kind of thing for personal and stakeholder pensions which Amendment 54 is seeking to do for occupational schemes. I am not sure whether I need to mention this each time I speak in Committee, but I draw noble Lords’ attention to my interests as set out in the register. Auto-enrolment has been a great success as all UK employers have set up pension schemes for their staff. Workers will be building towards a better retirement, which is a force for good, but it cannot be right that there are currently no formalised requirements that data records are verified as accurate regularly.
In the past, pensions have been plagued by data problems. Recently a number of pensioners have had to repay some of their pensions and face future pension cuts as they have been told that past errors in their pension entitlement have been discovered, many decades later in some cases. Records were not regularly updated or corrected. In the past there was manual record-keeping, which was prone to human error, and failure to ensure robust data reconciliation had been regularly carried out meant that errors were not discovered promptly, and they persisted over time without people knowing.
For any dashboard initiative to work, consumers have to be able to trust that their pension contribution records are accurate. This is a particular problem because the complexity of pension rules makes it almost impossible for individuals, especially workers enrolled in auto-enrolment schemes, to know whether the amounts being paid in on their behalf are correct. The complex calculations must calculate the employee contribution, the employer contribution, the tax relief, and potentially the national insurance relief as well. The member would naturally assume that their employer or their pension provider was ensuring that the amounts being recorded on their behalf were accurate, but unfortunately this has not been the case in the past and it is still not the case for new pension schemes. For example, a study I was involved in last year which analysed data representing more than 1 million contributions from more than 100,000 schemes—these were small employers —showed that the data had a 50% initial error rate. Some 50% of some aspects of the information was incorrect and had to be sent back for correction. Those error rates did not persist, but the data was not necessarily checked as thoroughly as it could have been.
Pension administration is the Cinderella of pensions. It is the low-margin end. It is not the sexy end. It is under cost pressure, and administrators seem to have been expected to absorb often very complex changes. Sometimes pension providers change their data requirements and their payroll software is not updated to reflect the latest version, so administrators then manually adjust spreadsheets to try to make sure that they have some data recorded. Data includes incorrect contribution amounts, contributions made for workers who did not belong to the scheme or who had already opted out, wrong identifiers for the pension scheme, inaccurate postcodes, incorrect pay period dates and so on and, for example, incorrectly believing that a pension scheme operates on a relief at source basis when it is net pay or the other way around so the amounts are simply not right.
Unfortunately there are no regulatory checks to ensure that data is verified for accuracy. What we have seen in legacy schemes is the detriment that this can cause to pensioner members, and if we have a pensions dashboard that people are relying upon to make their retirement plans, it is not good enough that administrators will just to try to make sure that by the time people reach retirement and get their pension all the errors are corrected because people will need that all along. For example, the auto-enrolment declaration of compliance does not have accuracy checks built in. Employers are asked to confirm that they have paid the right amount but nobody ensures that that is the case.
If they want to check, many pension providers currently do not collect the information that they need to verify because they are not getting the pensionable pay data sent over to them; they just get an amount of money and are told that it is correct, and that is that. We are in the middle of pensions master trust authorisation. Again, there is a risk of records being incorrect but the authorisation does not entail robust checks on data accuracy or proof that proper processes are in place to discover and correct errors.
I was trying to put into the Bill a mechanism whereby we can draw a line at a point in time and make sure that the pensions dashboard data has been through a process of cleansing and verification as a requirement for submitting the data. I am not saying that this will be simple or easy, but as more schemes emerge it will be more difficult to go back and try to reconcile past records. We have an opportunity now to put that sort of requirement into the Bill.
I quote from the Pensions Administration Standards Association, a body that oversees pensions administration and has been directly involved in some of these areas:
“Data cleansing is costly, so in low margin operations there is little appetite to invest in either clean data or in digitisation which depends on the quality of data. There is no incentive to do better than your competitor, as you are all in the same boat. Customers do not demand improvements and where they do trustees choose to ignore the calls either because of cost, resource constraints or other priorities for the scheme.”
It goes on:
“There is an expectation that introducing mandatory data provision as part of the dashboard project will act as an incentive to schemes and providers to clean up data that has been in a poor state for decades … The uncomfortable truth is that while compulsion will encourage some clean up, it will only be to the minimum level needed to show some data in a field, which essentially means that the presence of a data item will take precedence over the accuracy of it. Schemes already report 90% compliance with common data standards set by the Pensions Regulator. This should mean 90% of schemes will be able to present data that identifies an individual, but of course we know this is not reality, because it has been self-reported and not robustly checked.”
We have an opportunity to recognise the poor quality of data. This is not a blame game; it is about trying to put into the legislation a mechanism through which providers and everyone involved in the dashboard know that they can no longer rely on other people not correcting their data and no longer not attend to this themselves.
Of course, it will never be possible to ensure 100% accuracy, but having processes in place that constantly check and which allow errors to be corrected promptly is urgently required. Random regulatory checks, mystery shopping and systematic accuracy verification by an independent body would be of value and is surely a vital ingredient of any dashboard on which consumers are expected to rely.
As I said, I am not suggesting that the wording of the amendments is appropriate, in the right place or expressed correctly, but I hope that my noble friend the Minister can give us some information on and consideration of whether this could be built into a dashboard requirement. I beg to move.
Lord McKenzie of Luton (Lab)
The noble Baroness paints a bleak picture; I do not doubt that she is absolutely right.
Is there not a role in all this for the auditors, and a body whose feet can be held to the flames for not doing its job and not checking the systems, for example? It would not be a solution, but presumably it would contribute to an improvement.
Baroness Altmann
The noble Lord raises an important point which highlights that I have not necessarily covered all the areas to be dealt with on this. Including auditors and having a requirement for them to verify the accuracy of data is indeed another way of approaching the issue. I went to trustees and scheme managers widely, but auditors are another area which might be considered.
Baroness Sherlock
My Lords, I do not want to say very much, but I have a couple of questions on the back of what the noble Baroness, Lady Altmann, has said.
Can the Minister tell the Committee a little about what the regulators and the Government are doing to ensure that companies are ready to clean up data ready for transferring to the dashboard? Is there any intention for providers to check that members recognise the accuracy of the data at any point? Regarding what the noble Baroness described, if data had been wrong for decades, perhaps the member would not have known the details, but they might have known if they were not in a scheme, were in a different one, or if the basics were different.
The Cheviot Trust said that it was concerned that deferred members’ data would be less accurate. Is this on the DWP’s horizon? If so, what is being done about it?
Earl Howe
My Lords, I completely appreciate my noble friend’s desire to ensure that the information on the dashboard is accurate and secure. I absolutely agree that accurate information is essential to the effectiveness of a pensions dashboard. The answer ultimately must lie with appropriate regulations and sanctions. The Government believe that these protections are in existing regulations, and that the relevant regulators have the powers to intervene if compliance is not maintained. Having said that, I shall explain in a minute what work is going on in relation to this set of proposals.
In relation to personal and stakeholder pensions, rule 9.1.1 in the FCA’s senior management arrangements systems and controls sourcebook requires pension providers to
“arrange for orderly records to be kept of its business and internal organisation, including all services and transactions undertaken by it, which must be sufficient to enable the FCA … to monitor the firm’s compliance”.
If a scheme fails to meet these requirements, the FCA will select the most appropriate regulatory tool in the circumstances. Responses are proportionate and could include supervisory intervention.
Where enforcement action is deemed appropriate, the FCA aims to ensure that the sanction is sufficient to deter the firm or individual from reoffending and deter others from offending. Where it takes disciplinary action against a firm or an individual, it will consider all its available sanctions, redress and restitution powers, including public censure, financial penalty, prohibition, suspension or restriction orders; it has quite an armoury.
Regarding occupational pension schemes, trustees and managers are also required under existing legislation to put processes in place to ensure that the data they hold is accurate. Section 249A of the Pensions Act 2004 and the internal controls regulations 2005 require occupational pension scheme trustees to establish and operate internal controls that are adequate to ensure that the scheme is administered and managed in accordance with scheme rules and the law.
If a pension scheme fails to administer the scheme to a sufficient standard, or to comply with any other aspect of pensions legislation, the Pensions Regulator is able to issue an improvement notice. Where trustees fail to comply with an improvement notice, the regulator can issue a fine of up to £5,000 in the case of an individual or £50,000 in other cases.
My noble friend and the noble Baroness, Lady Sherlock, stressed the importance of promoting data quality on dashboards to scheme providers. Pension trustees and providers have been aware of our intention to introduce dashboards for some time now. We have been clear that they should start preparing their data now. The Pensions Regulator has increased its scrutiny of scheme records in recent years, and launched a specific targeted initiative in October 2019. It will take time to resolve data issues, which have in some cases been ongoing for decades, but the regulator is seeing good results from its engagement. There is still work to do, as my noble friend will be the first to agree.
An in-depth understanding of the challenges that pension schemes and providers will face in complying with compulsion is essential. The industry delivery group has therefore commissioned specialist independent and qualitative research. This will be conducted on a completely anonymous basis and will explore the challenges of meeting the requirements on data through deep-dive interviews with sample pension providers and schemes. This builds on the Pension Regulator’s insight. It will inform the delivery group’s recommendations for data requirements, taking into account the needs of different scheme types. It may be helpful to my noble friend if I note that, as part of the delivery group’s activity, a priority is to consider these specific items of people’s pensions data, which pension providers and schemes should supply for dashboard displays.
Experiences from other countries with dashboards indicate the importance of agreeing data standards with all industry stakeholders and the benefits of using the widest possible consumer research. The industry delivery group, working with its steering group, is developing a data-scope paper, which will highlight its latest thinking on dashboards’ data across the whole pensions industry. The IDG plans to publish this paper in due course, asking industry for feedback and, in particular, its provision of additional evidence where it exists.
The first iteration of the industry working group on data will effectively involve the whole industry before a small, focused working group will then refine this data thinking as we move on through the spring. I therefore hope that my noble friend can be reassured that the process that we have in mind has several stages to it, that they are logical stages, and that they should tease out the issues that she has very rightly drawn attention to in her remarks.
I hope that I have illustrated that the current obligations placed on schemes by the FCA and TPR, together with the enforcement powers which both regulators have, combined with the work that I have just described, are sufficient to ensure that the schemes will provide accurate data to the dashboard. I hope, therefore, that my noble friend will feel able to withdraw her amendment at this stage.
Baroness Altmann
I thank my noble friend very much for his response. I said that this was a probing amendment, and I recognise that, in theory, such powers appear to exist. In practice, they do not seem to be used and there seems to be rather a reliance on self-reporting, which clearly has not produced the accuracy that one might wish. I am delighted that our honourable friend the Pensions Minister has been raising the issue of the need for accurate contributions. We need to encourage pension schemes to get going on cleansing the data. They do not need to wait for any regulations or legislation. If they already have the duty, perhaps they should just get going.
I also accept, and am delighted to hear, that the industry delivery group is working on some qualitative research and data standards. I have to express my concern that in 2015, there was an agreed data standard practice; unfortunately, the industry decided not to adopt it. I hope that there will be a different attitude this time to the importance of pension scheme data.
I beg leave to withdraw the amendment but I hope that this debate has at least raised the issue. Perhaps it may encourage some schemes to get on with data cleansing and have the regulators looking more closely at it.
Baroness Neville-Rolfe
“Pension dashboards: impact assessment
Within six months of the passing of this Act the Secretary of State must lay an impact assessment before each House of Parliament setting out the expected costs of the provisions of this Part for businesses, and governmental and non-profit organisations.”
Baroness Neville-Rolfe (Con)
My Lords, Amendment 72 would require the Secretary of State to lay an impact assessment before Parliament, once the Bill becomes an Act, setting out the expected costs of our pension dashboard proposals for businesses, government and not-for-profit organisations. I envisage the assessment covering business pensions, civil service pensions—of which I am lucky enough to be a beneficiary—and other government unfunded schemes such as the old-age pension, which we were discussing, along with funded government schemes, such as the universities pension scheme, and the pensions of non-governmental bodies: charities such as Oxfam or small not-for-profits such as Red Tractor, which I chair.
I start by thanking the Minister for the helpful briefing that she arranged with the Bill manager and the DWP team on the Pension Schemes Bill 2020 impact assessment. They have tried hard to respect the spirit of impact assessment, which allows Ministers and Parliament to address costs alongside the case for new legislation. The page numbering is confusing, but I found the document, particularly the section on dashboards, which is more than half way through, timely and informative. That is not always the case with the legislation that we scrutinise, so well done.
My concern today is that not enough attention is being given in our discussions to the costs of the new dashboards and that all the debates so far in this Committee—everything stretching from the climate change provisions debated last week to the long list in Amendment 46 in the name of the noble Baroness, Lady Bowles—are likely to increase them further.
Baroness Drake
I certainly agree with the spirit behind the amendment—that transparency is a good thing and that the costs should be known—but I just hesitate over how the costs are looked at. One would think from some of the debates that I have participated in that I am reluctant to harness financial technology, but that is absolutely not the case. I am very pro it; I just want it done well.
I spoke at an industry event the other day. I will not name the person but it was the first time I had heard the CEO of a major financial organisation say, absolutely correctly, that a single piece of public policy—auto-enrolment—brought billions of pounds into the financial services industry which providers themselves did not achieve. I am conscious that the industry is very aware of its costs but it benefited hugely from a simple piece of public policy, and I found it quite rewarding that there was recognition of that. I have often said that all this money is coming in because the state took the decision to use the private sector to deliver a second-tier pension and therefore it has a wider responsibility for delivering a big piece of public policy.
I am not saying how one should do it, but it would be wrong not to attribute to the cost of the pension dashboard costs that should be incurred anyway. Where you start in looking at costs influences what they aggregate to. Getting the data accurate in order for the dashboard to work has to be done anyway. You cannot make a profit on inaccurate data. I know that that has been the model for a long time but it is not the correct model; it is a dysfunction in the market. On the trust-based side, the Pensions Regulator is driving, and is required to drive that occupational trust-based schemes and master trusts increase the accuracy of their data. If you are auto-enrolling somebody into a product, the least you should do is provide them with accurate data about what they have accrued. I would not want to attribute to the costs of the dashboard something that the industry and pension schemes should be doing anyway, which is getting their data accurate. It is indefensible to say, “It’s an unacceptable cost to require us to get our data accurate.” If they were told, “You’ve got to get it 100% as opposed to 99.9% accurate,” that might be unreasonable within the timescale, but that should be at the heart of providing pensions, whether contractually, by trust or whatever.
Also, the sector has a duty to harness what is available in financial technology so that people can access more easily what is available. I agree that there should be this visibility, but I make a plea. Some of these things required by the dashboard should be done anyway, and some are being driven to be done by regulators. We must not overstate the costs attributable to the dashboard when they would be incurred anyway to meet other government priorities or the efficient operating of pension schemes or market providers. That is my only hesitation.
Baroness Neville-Rolfe
I am a big supporter of auto-enrolment, which has been transformative and helps with this long-term problem of providing for old age. The cleaning of data is not a big aspect of the impact assessment I read, although I am sure that we will be advised on that by the department. A lot of it is setting the things up. It is good that data is gradually being tidied up. We must ensure that the system is clean for the future.
Lord Vaux of Harrowden
I am staggered by the numbers on the cost of doing this that are bandied around. As far as I can see, the main work here is formatting data into a consistent format so that it can be uploaded to whichever platform it needs to be uploaded to. Frankly, the creation of a platform is pretty trivial stuff. It is not dramatically different to what happened with open banking in that respect; that was a question of formatting data and ensuring that it was in a consistent format. Do we have any idea of the open banking process costs so that we can compare them—and, if they are dramatically different, ask why?
Baroness Altmann
I echo the words of the noble Baroness, Lady Drake. A number of elements of the expense shown in the impact assessment are elements that one would have hoped that the industry would take upon itself in any case. I sometimes need to remind providers that automatic enrolment has been an absolute gift to them. It has brought them 10 million new customers on a plate, with all the associated tax relief money. Surely they need to take an obligation upon themselves to modernise their processes and bring their IT into the 21st century. The standard answer is: “It’ll cost too much”, or, “We’ve got our own system, we don’t want to change to a new one”, but in Australia, the Government mandated a particular system that everybody had to adopt so that there was a common standard. It worked very well. My noble friend suggested that the industry delivery group is working on such a potential procedure, which would be excellent. It would incur costs but it would set the industry up for much more business in future on a long-term, sustainable basis.
Earl Howe
I am grateful to my noble friend for raising this important issue.
The Government published impact assessments for each measure in the Bill at its introduction. As is usual practice, we will publish updated impact assessments when the Bill is enacted, setting out the impacts of any material amendments to the Bill. I assure my noble friend that for measures where regulations that are subject to consultation are required, we will publish impact assessments when those regulations are brought forward. This must be the most beneficial time to revisit the impacts, when further policy detail is set out and we are able to apply that element of further insight to our estimates of costs and benefits. I suggest that adding another impact assessment between Royal Assent and the laying of the regulations would not provide any further transparency.
Turning to dashboards specifically, the Government are well aware of the additional costs necessary to support the set-up and maintenance of pensions dashboards. As my noble friend knows, when we published an impact assessment that accompanied the Bill, we set out initial estimates of the possible costs. However, we should recognise that many schemes already provide similar levels of information directly to their consumer through annual benefit statements or digital platforms, so not all schemes will necessarily incur significant additional costs.
Baroness Neville-Rolfe
As I said right at the beginning, I value the work that the department has already done on this matter and the thought that it has given to it. I very much agree about the value of the single pension finder which reduces multiple costs. On climate change, I was not really commenting on the Government’s amendment as much as on the additional amendments that have been suggested and on many amendments on different areas. The point I am making is that often things seem a very good idea, but when they are added together, they bring cost and complexity. I feel that the spirit of this discussion is that we should avoid that to the extent that we can and bring in a simple system in a staged way. As noble Lords know, I always worry about small businesses, small operators and small charities because they find these things very difficult. I am delighted to hear that the Government have brought in outside advice from PwC. We will be looking at that in terms of what might be done and how it might be sequenced. If the Minister would like any assistance, I have a lot of experience of difficult tales from small businesses. I thank my noble friend, and I beg leave to withdraw the amendment.
Baroness Stedman-Scott
“Climate change risk
(1) The Pensions Act 1995 is amended as follows.(2) After section 41 insert—“41A Climate change risk(1) Regulations may impose requirements on the trustees or managers of an occupational pension scheme of a prescribed description with a view to securing that there is effective governance of the scheme with respect to the effects of climate change.(2) The effects of climate change in relation to which provision may be made under subsection (1) include, in particular—(a) risks arising from steps taken because of climate change (whether by governments or otherwise), and(b) opportunities relating to climate change.(3) The requirements which may be imposed by the regulations include, in particular, requirements about—(a) reviewing the exposure of the scheme to risks of a prescribed description;(b) assessing the assets of the scheme in a prescribed manner;(c) determining, reviewing and (if necessary) revising a strategy for managing the scheme’s exposure to risks of a prescribed description; (d) determining, reviewing and (if necessary) revising targets relating to the scheme’s exposure to risks of a prescribed description;(e) measuring performance against such targets;(f) preparing documents containing information of a prescribed description.(4) Regulations under subsection (3)(b) may, in particular, require assets to be assessed by reference to their exposure to risks of a prescribed description and may, for the purposes of such an assessment, require the contribution of such assets to climate change to be determined.(5) In complying with requirements imposed by the regulations, a trustee or manager must have regard to guidance prepared from time to time by the Secretary of State.41B Climate change risk: publication of information(1) Regulations may require the trustees or managers of an occupational pension scheme of a prescribed description to publish information of a prescribed description relating to the effects of climate change on the scheme. (2) Regulations under subsection (1) may, among other things—(a) require the trustees or managers to publish a document of a prescribed description;(b) require information or a document to be made available free of charge;(c) require information or a document to be provided in a form that is or by means that are prescribed or of a prescribed description.(3) In complying with requirements imposed by the regulations, a trustee or manager must have regard to guidance prepared from time to time by the Secretary of State.41C Sections 41A and 41B: compliance(1) Regulations may make provision with a view to ensuring compliance with a provision of regulations under section 41A or 41B.(2) The regulations may in particular—(a) provide for the Authority to issue a notice (a “compliance notice”) to a person with a view to ensuring the person’s compliance with a provision of regulations under section 41A or 41B;(b) provide for the Authority to issue a notice (a “third party compliance notice”) to a person with a view to ensuring another person’s compliance with a provision of regulations under section 41A or 41B;(c) provide for the Authority to issue a notice (a “penalty notice”) imposing a penalty on a person where the Authority are of the opinion that the person—(i) has failed to comply with a compliance notice or third party compliance notice, or(ii) has contravened a provision of regulations under section 41A or 41B;(d) provide for the making of a reference to the First-tier Tribunal or Upper Tribunal in respect of the issue of a penalty notice or the amount of a penalty;(e) confer other functions on the Authority.(3) The regulations may make provision for determining the amount, or the maximum amount, of a penalty in respect of a failure or contravention.(4) But the amount of a penalty imposed under the regulations in respect of a failure or contravention must not exceed— (a) £5,000, in the case of an individual, and(b) £50,000, in any other case.”(3) In section 116 (breach of regulations), in subsection (3)(b), after “10” insert “or under provision contained in regulations made by virtue of section 41C ”.(4) In section 175 (Parliamentary control of orders and regulations)—(a) in subsection (1), after “(2)” insert “, (2A)”;(b) after subsection (2) insert—“(2A) A statutory instrument which contains the first regulations made by virtue of section 41A or 41C must not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament.””Member’s explanatory statement
This amendment imposes requirements on trustees and managers of certain occupational pension schemes as regards taking into account the effects of climate change and publishing information relating to those effects.
Baroness Stedman-Scott
Member’s explanatory statement
This amendment extends to unfunded public service defined benefits schemes the requirement that prescribed conditions are satisfied before trustees or managers may use a cash equivalent to buy into other pension arrangements.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Stedman-Scott)
My Lords, Amendment 77 seeks to extend the scope of Clause 124 to include transfers from unfunded public sector schemes: those where the pension promised is underwritten by the Exchequer. This amendment ensures parity of protection for those members of unfunded public service schemes.
Clause 124 relates to cash equivalent transfer rights and amends Section 95 of the Pension Schemes Act 1993. It provides the Secretary of State with a power to make regulations that can place new conditions on a member’s statutory right to transfer their pension rights to another scheme. This amendment seeks to ensure that members of unfunded public sector schemes can exercise their statutory right to transfer only once the conditions to be specified in the regulations made under this clause are satisfied. The intention is to apply the same conditions to transfers from unfunded pension schemes as will be applied to transfers from other pension schemes. These conditions can include the member providing evidence or information about their employment link with a pension scheme or their residency overseas.
Pension transfers from unfunded public sector schemes are rare. No concerns in relation to scams were raised during the 2016 government consultation, so transfers from unfunded pension schemes were not included in the original draft clause. The Department for Work and Pensions has since been made aware of criminals trying to set up a scheme that can receive unfunded pension transfers, so we believe this amendment is necessary to safeguard members of unfunded schemes from fraud. Amendment 99 mirrors the provision for Northern Ireland in paragraph 12 of Schedule 11. It is essential to provide the same protection when transferring savings to members of unfunded public sector schemes as those saving in other pension arrangements. For these reasons, I beg to move Amendment 77 standing in my name.
Baroness Altmann
My Lords, I support my noble friend’s amendment and will speak to my Amendment 78, which is grouped here. I fully agree with her that it is important to protect members’ pensions on transfer, whether they come from one type of scheme or another. I am delighted to see the government amendment and its intent.
My amendment would do something that I have sought for a time, and I wondered whether we might be able to get it into the Bill. It relates to partners of pension scheme members who transfer their pension from one scheme to another. One hears so often of a divorced couple where the wife has no pension of her own and has sometimes even had a pension-sharing order. However, when the member’s pension is transferred as a cash-equivalent transfer value, there is currently no mechanism to ensure that the spouse, who clearly has an interest in potentially half that amount, is made aware that that is happening. Of course, once the money has been transferred, should the previous partner have ill intent, it is possible that the spouse—usually the wife—will be left pensionless when in fact she had expected to share the partner’s pension.
This is a probing amendment. I support my noble friend’s amendments and would be grateful to hear whether any other Members of the Committee are interested in this type of protection, which we might be able to request be inserted in the Bill, so that if somebody calls up to transfer their pension, some procedure is in place before that is done to ensure that anyone else with an interest in the pension has given their consent or has at least been informed, which does not always happen.
Baroness Janke (LD)
I have some amendments which we will come to later concerning similar issues. I very much support this amendment. The briefing that we had from the ABI gave us quite an insight into the way that women suffer as a result of not having a proper pension settlement. I very much welcome Amendment 78, which seeks to get the spouse’s permission for the transfer of a pension.
Lord McKenzie of Luton
My Lords, there are three amendments in this group. Amendment 78, in the name of the noble Baroness, Lady Altmann, focuses on the evidence of a member’s spouse’s consent when a transfer is to be made. We believe that this amendment has considerable merit and are supportive of it. Quite what the technicalities that come to confront us might be remain to be seen, but certainly we should seek to make progress on it.
Regarding the other two amendments in this group, Amendment 99 is simply the Northern Ireland equivalent of Amendment 77, which, as we have heard, deals with unfunded public service DB schemes. I am alarmed to hear that without this amendment they would be attacked by some source. That is rather worrying. Regarding the prescribed conditions that must be satisfied for the purposes of the provision, can the Minister outline what those might contain?
Baroness Stedman-Scott
I thank my noble friend Lady Altmann for tabling her Amendment 78, which introduces further conditions to the right to transfer. It would require the consent of a current or ex-spouse or civil partner of the member before a trustee or scheme manager could transfer a member’s savings. This condition would apply where the member was getting divorced or dissolving their civil partnership or might do so in the future. It would therefore apply to all members who might seek to transfer and are married or in a civil partnership.
The amendment would introduce unnecessary and onerous conditions into new legislation. Options already exist for those who seek a financial settlement on divorce or the dissolution of a civil partnership. The law identifies when pensions should be taken into account as part of a financial settlement on divorce or dissolution of a civil partnership, and the courts will make the final decision if there is no agreed settlement.
Where a couple are negotiating a financial settlement on divorce or dissolution of a civil partnership, they are obliged to disclose all assets, including pensions. The process includes provisions to compel disclosure where the court is concerned that the financial disclosure might not be honest or complete. The amendment introduces a radical precedent where someone other than the member will determine the final use of their financial asset without a court order or notice being in place. It is not a requirement for individuals to seek their spouse or civil partner’s consent in respect of other financial assets, such as sole name bank accounts. Why then would we include such a requirement in pension legislation?
In addition, the amendment would place additional burdens on trustees to verify that the spouse or civil partner consents to the transfer. In doing so, it risks causing a conflict with the trustee or manager’s fiduciary duty to act in the best interests of members.
The noble Lord, Lord McKenzie, asked about types of pension and the name of the scheme, and said that people might lose out in a divorce settlement. Both persons in a couple are obliged to declare assets when coming to a financial settlement in the context of the dissolution of their relationship.
Lord McKenzie of Luton
My question related to Amendment 77 and unfunded public service DB schemes where there is a requirement for prescribed conditions to be satisfied before trustees or managers can use the cash equivalent. I sought to determine what those prescribed conditions might be.
Baroness Stedman-Scott
In the circumstances, I will write to the noble Lord if he will allow me.
In conclusion, for the reasons I have outlined, I ask the noble Baroness, Lady Altmann, to withdraw her amendment.
Baroness Drake
This has become more problematic because of pension freedom. Before that, you could not quickly rush to play Gauguin in Tahiti and disappear, taking all your money with you, because you could not get it out in that way. At the age of 55, you can now do that if the taxman can chase you for the marginal rate of tax. There were partners, particularly women, who had certain protections in DB. In DC, at least the requirement to annuitise left some mechanism to temper this problem, although it did not deal exclusively with it. Pension freedom has transformed that.
I know that we will come later to the issue of gender and pensions—where I suspect that we will come back to this issue, among others—but there is a real issue here for partners, particularly women. If the person with the pension chooses simply to take the cash and go, once that has happened, it is very difficult for the partner to protect themselves or do anything about it. That is the underlying tension.
Baroness Sherlock
My Lords, I want to ask a question before the Minister comes back on this. In her reply, she gave a rather forceful defence of the current situation and directed the Committee’s attention to the courts as a means of settling this. However, she made the point that an agreement on pension sharing may already be in place. The problem is that this allows an agreement that had previously been reached to be frustrated by someone taking advantage of the pension freedoms. If the Minister does not like the way that this is being is sold, will she go back to the department and ask for some advice on whether there is a problem here? Then, when we come back on Wednesday, we can at least have a conversation about whether we agree that there is a problem here, and then we can think about the best way to address it.
Baroness Stedman-Scott
The suggestion made by the noble Baroness, Lady Sherlock, is very helpful. I would be happy to do that before we come back to this on Wednesday.
Baroness Altmann
I thank my noble friend for her reply, which does not come as a surprise to me. I also thank noble Lords for their useful contributions.
I believe that there may be an issue here. I hope that the department will consider it. As the noble Baroness, Lady Drake, specifically said, things are different now with pension freedoms, whether for DB or DC. If there is a pension-sharing order and a member transfers out of their DB scheme and takes a cash equivalent transfer value when their spouse had relied on a guaranteed pension income from half of that defined benefit pension, now that we have the freedoms, that pension could be dissipated. Certainly, a cash-equivalent transfer value, in terms of buying an annuity with an inflation protection to replace the income that could be lost, is not likely to be financially feasible. I accept that this would be an extra burden and that it would need careful consideration. I echo the request from the noble Baroness, Lady Sherlock, that the department considers this and sees whether there is a way of protecting these women. I beg leave to withdraw my amendment.
Lord Sharkey
“Consumer protection on pension drawdown or transfer
(1) Pension scheme providers must not comply with an application of a member of a scheme to transfer their funds out of the scheme into another pension or to exercise the right to take a cash equivalent transfer (under section 94 of the Pension Schemes Act 1993) unless –(a) the member demonstrates that he or she has received independent financial advice from an authorised or regulated independent adviser pertaining to the proposed transfer out of the scheme or exercising the right to cash equivalent, or (b) 60 days have elapsed since the application was made in writing, or(c) the member has provided responses to approved questions laid down in regulations to ascertain whether the member has detailed knowledge of the scheme to which rights are being transferred and whether the provenance of the transfer request originated from an unsolicited phone call or other unsolicited communication.(2) The condition in subsection (1)(a) may be satisfied by written confirmation from Pension Wise that they have given guidance to the member either orally or by other means relating to this transfer or cash equivalent transfer request.”
Lord Sharkey
My Lords, many of the problems faced by our pensions system are to do with drawdown and transfer, some of which we have just discussed. This amendment would introduce a cooling-off period to help to reduce these problems and increase the frequency of taking independent financial advice and Pension Wise guidance.
The FCA recently surveyed our pensions landscape in its excellent Sector Views, published two weeks ago. The introduction noted:
“Key issues causing consumer harm include unsuitable advice, the sale of unsuitable products, poor value across the value chain and pension scams.”
The gravity of these things led the regulator to conclude:
“From a wider perspective, the prospect that consumers may not get a retirement income that meets their needs or expectations remains the central challenge.”
This is entirely appropriate, given the scale of consumer harm.
The review estimates that unsuitable transfers out of DB schemes could collectively result in losses of up to £20 billion-worth of guarantees over five years, that consumers making unsuitable product choices in retirement could also collectively lose £20 billion from unsuitable investment strategies over five years, and that more than 15 million consumers of NWP pensions and retirement income products could be affected by poor value pension products. The compound effect of high charges could lead to consumer benefits being reduced by more than £40 billion over five years.
All this is worrying enough, but on top of this, there are the scams. Consumers who are scammed lose, on average, 22 years’ worth of pension savings. That is around £82,000 each. There are also warnings for the future from Australia’s more mature DC market. There we see that economies of scale are not being passed on to consumers and that poorly governed investments in alternative asset classes are leading to lower returns. There are also higher costs associated with the proliferation of small pots, created each time a worker moves jobs.
All these factors are at play now in the UK, and we have special factors of our own to contend with. For example, the FCA has found that 29% of pension transfer advice was unsuitable and that 23% was unclear— or, to put that another way, more than 50% of transfer advice was unsatisfactory. The FCA planned to write to 1,841 financial advisers about potential harm in their DB transfer advice. That is 76% of all advising firms—a truly alarming development and an unacceptably large number.
The problem with bad advice is a present and clear danger; so is the problem with unadvised and unguided drawdowns and transfers. Since we last addressed this problem in the Financial Guidance and Claims Bill, FCA data suggests that more than 645,000 people have accessed their pensions. Of these, only a tiny 15% are believed to have had a Pension Wise appointment before accessing their benefits. More than half of the pensions accessed by savers for the first time between April 2018 and March 2019 saw the saver withdraw the maximum amount. Perhaps even more worryingly, the FCA’s latest data shows that for retirees taking a regular income from their pensions, 40% were taking out cash at an unsustainably high withdrawal rate of 8%-plus. This 40% rises to 63% for those with funds of less than £50,000. That is the road to destitution.
Baroness Altmann
My Lords, I have added my name to this amendment, which is a very important amendment in the context of consumer protection. As the noble Lord, Lord Sharkey, has so excellently explained, the amendment is an attempt to ensure protection, particularly against scams. What we tried and succeeded in doing during the passage of the Financial Guidance and Claims Act was to pass an amendment that would automatically see people before they transfer money out of a pension—or withdraw money from a pension—receiving at least the independent, impartial guidance that was originally intended to accompany the pension freedoms. When they were introduced, the aim was for everybody to be able to have this impartial guidance so they did not do the wrong thing and understood the risks of taking money out too quickly. This is another line of defence for the consumer given that that amendment, which was passed in the Lords, did not make it into the Bill. It was taken out in the Commons.
One line of defence would obviously be if someone has an authorised adviser or can demonstrate that they have received independent advice. A second line of defence would be the providers themselves asking a few very basic, approved questions: “Are you asking to transfer out because of an unsolicited communication of some kind?”, and, “Do you know anything about the scheme you are transferring into?”. The provider could ask two or three basic questions; should those questions raise red flags, there would be an opportunity to protect the member before they transferred out. Other than that, there is a 60-day limit because, again, scams normally require you to transfer your money very quickly.
I hope that there may be some consideration of the importance of this protection and the use of Pension Wise in the way that it was originally intended. As we look to introduce a new Pension Schemes Act, we might find ways in which we can enhance the consumer protection that I know my noble friend understands is so important.
Lord McKenzie of Luton
My Lords, this amendment goes to the heart of protecting people’s pensions. We have touched upon a number of issues surrounding the same sort of concepts during debate on the Bill and in other legislation, such as financial guidance provisions. We should see whether we cannot get together a comprehensive note of how these things are covered. I am bound to say I am unclear as to what is and is not covered in all circumstances, so it seems that would be beneficial.
Concerning the specifics of the amendment, we clearly give it broad support. It raises practical issues, as I am sure the noble Lord, Lord Sharkey, would identify, particularly on responding to approved questions. I am not sure who is on hand when the questions are being asked. We have seen what happened with taxi licences and such things in the past. The provision could give rise to challenges but the thrust is right: it is another attempt to make sure that people are aware of the consequences of what they do, to the fullest extent possible. As I say, I am not sure whether we have a comprehensive arrangement yet across all pensions and circumstances. It seems that it would be worth some effort to try to get that into place. With those words, I am happy to it give broad support. When the Minister replies, I am sure there will be some stumbling blocks in it but if we do not keep pushing and shoving, we are not going to make progress on this.
Earl Howe
My Lords, I am grateful to the noble Lord, Lord Sharkey, and my noble friend Lady Altmann for tabling this amendment because it provides me with an opportunity to update the Committee on the progress that the Department for Work and Pensions, the Financial Conduct Authority and the Money and Pensions Service have made on delivering the stronger nudge to pensions guidance. As noble Lords are aware, this is a requirement of Sections 18 and 19 of the Financial Guidance and Claims Act 2018.
Before that, however, I would like to talk briefly about the take-up of Pension Wise guidance, which is a very positive story. The service is on target to exceed 200,000 guidance sessions this financial year, more than tripling those in its first year of operation. Recent Financial Conduct Authority data suggests that 52% of personal and stakeholder pensions accessed for the first time in 2018-19 received either regulated advice or Pension Wise guidance. That clearly demonstrates that the work the Money and Pensions Service, Government and the industry are already doing to promote both Pension Wise guidance and regulated financial advice is working.
I would like to talk about the measures in the Financial Guidance and Claims Act 2018 which were designed to further increase the take-up of Pension Wise guidance. Sections 18 and 19 require the Government to deliver a stronger nudge to pensions guidance. As the Committee is aware, MaPS is testing options for the best way to do that, in a way that complements the suggestions made by the noble Lord, Lord Sharkey, during the passage of the Act that his amendment was
“designed to be a nudge, rather than any kind of probably unenforceable or counterproductive compulsion.”—[Official Report, 31/10/17; col. 1294.]
As noble Lords are also aware, the drafting of Sections 18 and 19 was influenced by the Work and Pensions Select Committee. Following trials, those sections will deliver a final nudge to consumers to consider taking guidance prior to accessing their pension.
The Government firmly believe that, to effectively prompt more people to take guidance before accessing their pension where it is appropriate, we need to understand the impact of the nudge, and ensure that we avoid creating perverse incentives. We do not disagree with the principles of the amendment—work is already under way to establish how best to ensure that people thinking about accessing their pensions are encouraged to take guidance. We believe it is essential to use the evidence base that the trials on a stronger nudge will provide, and to consult before implementing the primary legislation in the Act. We would welcome the thoughts of the noble Lord and my noble friend on the proposals in the consultation.
The trials to test the most effective way to deliver on Sections 18 and 19 are due to conclude shortly, and an evaluation report is expected to be published by MaPS this summer. We are working to deliver on the requirements of the Act as quickly as possible, and as such we are already preparing for a public consultation this year. The Financial Conduct Authority will also consult on rules that have regard to these regulations, to make sure that there is consistency between occupational pensions and personal and stakeholder pensions.
The noble Lord seeks to require a member to provide responses to questions before a transfer can proceed. The effect of the amendment is that trustees would have the power to refuse a transfer should members’ responses not meet the conditions which the amendment proposes should be set in regulations. I assure him that the Government are already introducing conditions that seek to safeguard members against the risk of being defrauded. That change will strengthen trustees’ discretion in respect of transfers. Transfers were discussed in the earlier debate on Clause 124. The Government are amending members’ statutory right to transfer, to allow conditions to be imposed for transfers between schemes. That is aimed at ensuring that transfers are made to safe destinations. Non-statutory transfers can still take place, if the scheme rules allow. However, the amendment puts responsibility on members, not trustees, to assess the appropriateness of the receiving scheme. If the questions to be asked of members are specified in regulations, as proposed new subsection (1)(c) requires, an unintended consequence could be that fraudsters will be enabled to game the system. Members could be coached to provide answers that lead to transfers that should have been refused.
As noble Lords will recall, we have banned cold calling on pensions in legislation and established Project Bloom: a joint task force between government, regulators and law enforcement to share intelligence, raise awareness of scams through communications campaigns, and take enforcement action when appropriate. The FCA and the Pensions Regulator launched the latest ScamSmart advertising campaign on 1 July 2019, which has targeted those approaching retirement, as they were identified as being most at risk from scammers. There is also an FCA warning list, an online tool that helps investors check if a firm is operating with the right authorisation and find out more about risks associated with investment.
The noble Lord raised a specific concern about transferring out of DB schemes. Since January 2018, following its work on the British Steel pension scheme, the FCA has been working closely with both the Pensions Regulator and the Money and Pensions Service to ensure that it monitors pension transfer activity in DB pension schemes that might be subject to increased transfer activity. Also since January 2018, the FCA has issued tripartite letters to over 50 defined benefit pension scheme trustees. The tripartite letter reminds scheme trustees of their responsibilities when issuing transfer values to members and requests them to provide data that allows it to monitor scheme activity. On 21 January 2019, the FCA published a new protocol for how the three organisations—the FCA, TPR and MaPS—will work together to share information and work with pension scheme trustees, and that protocol addresses many of the recommendations made in the Rookes report.
I want to touch on one other point raised briefly by the noble Lord, Lord Sharkey. He suggested that the new pension freedoms might be encouraging people to draw down savings too fast, putting them at risk of scams. In fact, the Financial Conduct Authority’s Retirement Outcomes Review did not find significant evidence of consumers drawing down their savings too fast. The study’s findings, published in June 2018, found that most of those withdrawing had some other form of retirement income or wealth.
Clearly, it is of the utmost importance that information and guidance are available to people and that they are aware of it. That is why there are now more opportunities for people to access guidance earlier in the pensions journey. Alongside the stronger final nudge trials, Pension Wise continues to run successful advertising campaigns across multiple channels, as well as working with employers nationally and locally to encourage them to engage with their employees at their place of work. The Financial Conduct Authority’s “wake-up” packs also encourage people to think about their pension options and include signposting to Pension Wise.
I reassure noble Lords that we are very aware of the importance of the need to make progress with implementing the requirements placed on government, the Money and Pensions Service and the Financial Conduct Authority, as set out in the Act. Our aim is to find an effective and proportionate way to do this.
To conclude, I accept that this work might not have progressed as quickly as perhaps noble Lords would like, but that is for a good reason. I believe it is very important to get this right and ensure that the policy is developed based on evidence. We always talk about evidence-based policy and this is a classic example of that. The trials will conclude very shortly and will be followed by an evaluation report. We will consult this year and will seek to lay regulations as soon as possible after that, alongside the rules that will be made by the Financial Conduct Authority.
For the reasons I have explained, I hope that the noble Lord will feel able to withdraw the amendment.
Lord Sharkey
I am very grateful to the Minister for that very comprehensive answer. There are one or two observations that I would like to make about components of the answer. We seem to disagree about quite what the reach of Pension Wise is. The Minister quoted a composite figure of, I think, about 52% in Pension Wise and other advice. The figure that I had was, as I said earlier, about 15% using Pension Wise.
I was also interested in the comment about whether the current drawdown rate was sustainable. The Minister might recall that in the original discussions on the pension freedoms Bill, the foreseen sustainable drawdown rate was 3%. Now, it is running at 6% and 8% for pots under £50,000. Although I admit that I might be mistaken about this, I think that the FCA may in fact have said that 6% was not sustainable in the longer term either. Therefore, I think that there are warning signs about the rate of drawdown.
I had one other question about the nudge programme. I know that two schemes are being tested against each other, in an absolute sense as well, but when this programme was designed, did it incorporate a level of success at which a rollout would be justified? I would be interested to know if that were the case—I think it should be—and what the number was for these schemes. What would trigger a rollout nationally of these two small tests? I mentioned the FCA and the investment pathways initiative. Can the Minister write to me with more detail of what is happening with investment pathways; that sounded a very promising way of coming at the problem.
Finally, there is the question of timing. Timing is behind a lot of what I was saying. It is a long time since we started on the Financial Guidance and Claims Bill and debated all this thoroughly here and in the other place. We are still not in a position to do as much as we wanted about providing guidance or advice at drawdown. A very long time has elapsed, and I have demonstrated the harms being done to consumers in the meantime by ill-judged drawdowns or transfers. I continue to worry that these timetables will slip and the harms will continue. I am reassured by the Minister expecting a result from the nudges in summer—which I take to be ending in September—and then to move as quickly as we can to implement it, if it is a success. Perhaps he and I can have a conversation later; I would be interested to know what plan B is, because it is possible that neither of those nudge trials produces what is needed. Having said all that, I beg leave to withdraw the amendment.
Pension Schemes Bill [HL]
Wednesday 4th March 2020
(4 years, 8 months ago)
Grand CommitteeRead Full debate Pension Schemes Act 2021 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 4-IV Fourth marshalled list for Grand Committee - (2 Mar 2020)
The Deputy Chairman of Committees (Baroness Fookes) (Con)
My Lords, I am obliged to make the usual announcement: that if there is a Division in the Chamber, this Committee will adjourn immediately for 10 minutes.
Amendment 80
Lord Balfe
“Compensation payments under Pension Protection Fund
In Schedule 7 to the Pensions Act 2004 omit paragraphs 26, 26A and 27 (compensation cap).”
Lord Balfe (Con)
This is a rather technical amendment in many ways. I declare my interest as the president of the British Airline Pilots Association, one of the unions that would be affected by a change in the law such as is suggested here.
Members generally pay into pension schemes on the basis of putting so much in for an accrual rate, which gives them a pension. But if pensions go into the lifeboat, the amount that people can get out is limited. This ruling was originally done for a very good reason: to stop boards of directors awarding themselves large pensions, then a company going bust while they transferred the liability for their excesses into the lifeboat. However, it had an effect which I do not think was foreseen. There are a number of people in the private sector who have quite high earnings and are in pension schemes—at that time largely in DB schemes—and they were affected by this ruling. In short, it meant that people were paying into a scheme but not getting out what they had been paying in for. They were given a promise but it was not honoured, because of the cap that was put in place.
Amendment 80 seeks to review this cap. I accept that it is a complicated matter and would be more than happy if, in responding, the Minister can say that she is prepared to have this added to the subjects we are to discuss at the meeting which has been promised. I recognise that if we were to change the law, we cannot just abolish it. We would need to look at things; in particular, I suggest that we would need to erect some safeguards with reference to accrual rates, so that we would not allow an accrual rate above a reasonable level—possibly 2%. Any person affected would also have to be able to demonstrate that they had paid into the pension scheme over a number of years, and had not been awarded a lump sum of years just before the company went under. There would also have to be maximum contributions for tax relief. In other words, you could not suddenly have a huge contribution going in and building up a large amount of pension.
The amendment is basically aimed at enabling workers who have paid for a pension scheme but happen to be high earners to look forward to getting what they have paid for. I point out that, at the moment, the main people affected would be those who used to work for Monarch. But I would not like to predict where, for instance, the British Airways pension scheme will be 10 years from now. The Spanish company that is now the owner of BA might well be in a position where, for some reason or other, it is not able to fully honour the pension agreement. It is better to look at it now than to do so then.
I also make the point that most high earners in society are covered by public sector pension schemes. The people who work in the health service, for instance, are covered by the health service scheme; senior civil servants are covered by the civil service scheme; most people in the nuclear industry are covered by a public sector scheme. It is often forgotten that even in private schools, the staff are actually in a government-backed scheme. There is a lot of debate going on at the moment because the costs for private schools that pay into the Department for Education-funded scheme have increased considerably. None the less, teachers in private schools are covered by a public scheme.
As I said at the beginning, I ask only that the Minister would kindly agree to add this to the agenda. It is a problem that is capable of being solved. It is not quite as simple as my amendment suggests—I accept that—but putting forward this amendment was basically the only way of dealing with the scheme as it stands. Quite a bit of legislation, in the form of statutory instruments, would be needed to cover the way in which any deviation or loosening of the scheme was governed, because it is emphatically not the intention of this amendment to free up pension schemes so that irresponsible boards of directors could award themselves large pensions. This is to do with workers who have paid into a pension scheme for many years and are unwittingly caught by the cap because their employer is unable to fulfil its pension obligations.
Baroness Altmann (Con)
I have added my name to this amendment. I support my noble friend and echo his request to the Minister for a meeting to discuss this issue further. I understand that it may not be possible to arrange immediately, and needs careful consideration, but, given the rulings in court cases and so on, it may be worth trying to address some of these issues, which are clearly causing distress to an important, albeit small, number of people.
Lord McKenzie of Luton (Lab)
My Lords, we have some difficulty with this amendment. We are more than happy to put it on the agenda for a meeting, although I recall earlier sessions when I think the noble Lord, Lord Balfe, convened a meeting with the pilots’ association for us to range over this. At that stage neither we nor the Government were particularly happy with any change—or the sort of change suggested here.
There is an issue about affordability for the PPF that has to be taken into account. We should also bear in mind that funding for the PPF comes from a levy on these other pension schemes, so the higher costs go the greater the hit on those schemes. As I understand it, the proposition is that it would cover not only those who receive a payment in future but all those currently receiving capped payments. It would free up those amounts, too.
I do not know whether the noble Lord has an impact assessment for this proposal; if so, we should certainly see that. Although he partially dismissed it in his speech, when the scheme was designed the moral hazard issue was very much in mind—heavy hitters and senior people in organisations are better able to control the destination of their pension funds and remuneration, and there should be a mechanism in there to ensure that the options were not open-ended. At the moment the cap bites, I think, at something like £40,000, so we are not talking about people with minimal pensions. I think the average payout from the PPF is about £4,000, so there is a big contrast. Having said that, I am more than happy to join a discussion to review these issues—but I am not convinced that we would change our position.
The PPF has done marvellous work over the years, enabling people to receive an income when there would have been nothing. It is a very good organisation. We may check to see whether its view now is different to its view previously, but I doubt it, so the onus is very much on the noble Lord to come forward with an impact assessment to say how much this would cost if we did it. Having said that, we on this side would not be able to sign up to it.
Baroness Altmann
I echo that praise for the Pension Protection Fund. It has been a marvellous success story and has rescued so many people. It is run efficiently and with care for those who claim on it. I cannot praise it highly enough.
Baroness Scott of Bybrook (Con)
My Lords, let me begin by thanking the noble Lords, Lord Balfe and Lord Sharkey, and the noble Baroness, Lady Altmann, for this amendment. I believe that the intention is to improve member protection in the event of employer insolvency. The amendment would remove the Pension Protection Fund compensation cap currently applied to payments for members who were under their scheme’s normal pension age when their employer became insolvent.
It might be helpful if I first explain that the Pension Protection Fund is a compensation scheme and, as such, was never intended to meet the full pension promise made to every member of a failed scheme. Members over their scheme’s normal pension age and those who were in receipt of survivors’ benefits or an ill-health pension broadly receive full protection. Everyone else receives broadly 90% of their scheme benefits, subject to an overall cap. This means that the cap applies to early retirees as well as deferred members, ensuring that Pension Protection Fund compensation is calculated on the same basis for members of the same age in the same scheme.
It is worth mentioning that the Government are defending the cap before the domestic courts. Their position in this litigation, and current policy, is that the cap meets important objectives and should be retained. First, the cap helps to give greater protection to those who have reached their scheme’s normal retirement age at the time of employer insolvency. These members are likely to have fewer opportunities to supplement their income in other ways. Secondly, the cap helps to control the costs of the fund—costs that may otherwise fall on levy payers. Finally, as we have heard, the cap is intended to encourage people with influence over the schemes to fund them responsibly and to discourage excessive risk-taking. Key decision-makers have an incentive to ensure that their schemes stay out of the Pension Protection Fund because the cap is likely to have a direct impact on the compensation that they would receive.
The level of the cap was set after much research and analysis. The current full amount is around £40,000 at the age of 65. Members under their scheme’s normal pension age initially receive 90% of the capped amount, which equates to around £36,000 at the age of 65. Nevertheless, this far exceeds the estimated average defined benefit pension of around £8,000. Only a few members of the Pension Protection Fund are affected by the cap. The nature of the cap means that it affects predominantly high earners; abolishing it would, therefore, mainly benefit those high earners.
In conclusion, the cap is a necessary and proportionate means of achieving a number of significant policy aims in relation to the Pension Protection Fund compensation scheme. I hope that this provides sufficient reassurance to noble Lords, and I urge the noble Lord to withdraw his amendment. At the same time, we would be more than happy to add this issue to the agenda for our meeting, which has been arranged for Thursday 12 March at 10 am.
Lord Balfe
I thank noble Lords for this short, but interesting, debate. An interesting part of my role is that when David Cameron said, “Try to be helpful to as many trade unions as you can”, I seem to have collected some of the higher paid trade unions such as those for hospital consultants, British airline pilots and one or two others in the TUC. It is always great fun to go down to the TUC Congress, meet them there and hear them muttering away. I take the points that have been made. The feeling arose largely out of the Monarch situation in which a number of people had paid a considerable amount in yet they were not getting what they saw as fair recompense. The point made to me, which I am sure will be made again, was that if they were in the public sector, there would be no case for them going into the Pension Protection Fund because public sector funds do not go there, but because they were in the private sector—
Lord McKenzie of Luton
The point the noble Lord makes about public sector funds is right, but in trying to make comparisons between somebody with a public sector pension and people who are not in that position, all sorts of differentials come into play, such as general levels of remuneration. With great respect, I do not think the noble Lord’s argument stands up in that respect.
Lord Balfe
Perhaps I mix with rather affluent members of the medical profession. I had a session recently with a hospital consultant staff association, which made some very firm points about how high earners were being discriminated against. I am not making the hospital consultants’ point here. I am making the point that the public sector basically has a system of protection so that when a Permanent Secretary or a member of the First Division Association retires, there is no case that the FDA pension will ever go into the lifeboat. I was making the point that was made to me, which was that members were paying into a fund that they were not receiving benefit from and that if they had been in the public sector they would. I am very pleased that the Minister has offered to discuss this, although having heard the response I am not sure that the discussion is going to lead very far. I am pleased that we have had this constructive debate and on the basis of what has been said, I beg leave to withdraw the amendment.
Baroness Stedman-Scott
Member’s explanatory statement
This amendment is consequential upon the Minister’s amendment to insert a new Clause after Clause 123.
Lord McKenzie of Luton
“Pension Schemes Commission
(1) Within six months of the passing of this Act, the Secretary of State must establish a Pension Schemes Commission to—(a) conduct a strategic review of public policy regarding pension schemes, and(b) make recommendations.(2) The Secretary of State must respond to reports from the Pension Schemes Commission with a written statement laid before each House of Parliament.”
Lord McKenzie of Luton
My Lords, it will not take us long to deal with this amendment. When it was conceived as an amendment, there was a fairly grand design behind it but, as time has moved on, it has perhaps condensed just to a statement of beliefs in the key issues. The amendment calls for the establishing of a pension schemes commission—I hesitate to raise that issue in the proximity of my noble friend Lady Drake; we live in awe of what that commissioner achieved. The idea of the commission would be to conduct a public policy review of pension schemes. There is plenty to reflect on without stepping on the policy responsibilities of the Minister, or indeed of any Select Committee.
In recent times we have experienced the implementation of a Pensions Commission and auto-enrolment; the new state pension; changes to state pension age; the so-called pensions freedoms; master trusts, CDCs, and the future of DB schemes; an increased focus on governance, transparency, levels of charges and the pension tax system. Some of this has reached a degree of maturity and some not; some has been seen in the strategic context, and some not. In respect of this, there remain the ongoing matters of gender equality, savings levels and, still, pensioner poverty. In addition, there is our consultation on investment principles and the important issue of climate change. Therefore there is scope in all of this to reflect in future pensions issues, and today I do no more than set down a list for consideration. I beg to move.
Lord Young of Cookham (Con)
My Lords, I see that on the website of an organisation called This is Money, published on 20 January, Mr Opperman, who is of course the Minister with responsibility, is quoted as saying that he
“believes a new commission should review the future of the automatic enrolment system”.
Noble Lords may also remember that on 17 January, two think tanks, the Fabian Society and Bright Blue, launched a report calling for a cross-party commission on pensions. Responding to that, an organisation called B&CE published the following comments:
“Commenting, Guy Opperman MP, Minister for Pensions, said: ‘Over the last decade, Conservative and coalition governments have made huge strides to improve pensions for the next generation, with the introduction of auto-enrolment, an enhanced state pension and the development of the Pensions Dashboard. For the next stage of pension reform, we need to continue the consensus that emerged following the Pensions Commission of 2003 to 2005. A new Commission has cross-party support, and will help us map out the future of auto-enrolment, so we can boost contribution rates in the coming decades, and explore how we can support savers with pensions freedom reforms. Let’s not give up on the progress we’ve made in pensions through cross-party working. It’s time to explore ideas for the next generation’.”
It therefore seems that the thinking behind the proposed new clause in the name of the noble Lord, Lord McKenzie, has some support at the moment within the DWP.
Baroness Bowles of Berkhamsted (LD)
My Lords, the noble Lord, Lord Young, has done the job for me, but broadly speaking, I support this amendment. As well as what has already been elaborated, it plays into the feelings that have come up several times as we discussed the Bill as well; namely that, although the noble Earl has said that there is policy, a lot of implementation is also yet to come, and perhaps some of us feel that some policy is also yet to come. I therefore hope that a commission could come along subsequently and that it would be able to have an overview of some of the newer things as well as reviewing older things and looking forward. Therefore, I also support the notion of having this pension schemes commission.
Baroness Neville-Rolfe (Con)
I look forward to hearing from my noble friend the Minister on this, but I confess that I have a little scepticism about this proposal. We have had many reviews of pensions, including the trailblazing Pensions Commission led originally by Adair Turner—the noble Lord, Lord Turner. Many changes have been made to the law, including auto-enrolment, which I think we in this Committee have all welcomed. Of course, those in the current Bill are important as we seek to tackle the issues raised by the BHS and Carillion cases and to introduce dashboards.
I am not convinced that this is the time for another commission and another review. I feel that this is the job of the Pensions Minister and the DWP. Quite a lot is going on in pensions, and the priority should be to make sense of the sort of issues we have discussed on this Bill or issues that arise on things such as exit from the EU, and to get on with those in a practical manner. I look forward to hearing from my noble friend. If she takes a different view, of course, I am happy to reconsider.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Stedman-Scott) (Con)
My Lords, I am grateful for the opportunity to respond to this amendment tabled by the noble Lord, Lord McKenzie. We do not think there is a need for this new clause to be included in the Pension Schemes Bill, as legislation is not needed for a pension schemes commission to be established. The pensions landscape has changed considerably since the 2006 Pensions Commission; there have been major reforms to the UK pensions system. We have successfully rolled out auto-enrolment, introduced the flat-rate new state pension, abolished the default retirement age and raised state pension age.
The first independent review of state pension age was published in 2017, and this Government have committed to undertaking a review of state pension age every six years, in accordance with statutory requirements, to enable consideration of various factors, including the latest life expectancy projections. This Government are committed to maintaining a pension system that enables financial security for current and future pensioners. Further refinement and evolution will no doubt be needed in future to take account of changes in the labour market, home ownership and debt.
However, a commission is not the only way to identify and make recommendations for the future. We continue to engage extensively with key stakeholders, including consumer and employer organisations and the pensions industry, working collaboratively to identify and take forward a robust programme of work that builds on the strong foundations now in place.
For example, the Government carried out a review of the automatic enrolment scheme in 2017. Implementation of the review measures will be subject to learning from the recent workplace pension contribution increases; discussions with employers and others on the right approach; and finding ways to make these changes affordable. Once the evidence on our reforms is clear, we will look again at the right overall level of saving and the balance between prompted and voluntary saving. We are monitoring the impact of pension freedoms and the effectiveness of regulation of the market and information and guidance.
It is right that individuals are trusted with their own hard-earned money and savings. They are best placed to manage their money throughout retirement. While it is not the Government’s role to monitor individual people and the decisions they make, we recognise that it is important to support individuals in making decisions for their retirement. That is why we established the Pension Wise service to provide free and impartial guidance to help consumers make sense of their options.
This Government are focused on delivering and improving aspects of the existing pensions system. We are open to looking at aspects of the current system, but do not feel that an examination of the fundamentals of the pensions system is appropriate at this time.
My noble friend Lord Young made the point that my colleague, the Minister for Pensions, has shown support for a commission. Noble Lords are right to pay tribute to those who were part of the Pensions Commission chaired by the noble Lord, Lord Turner, which was very successful at building consensus around the future of pensions policy. Although several individuals and groups have called for a pensions commission, there is currently little consensus about what the scope and structure of such a commission should be. We believe we can engage effectively with interested parties without needing another commission.
My noble friend Lord Young also mentioned Bright Blue and the Fabian Society calling for a pensions commission. Again, I understand that a number of key stakeholders have demonstrated their enthusiasm for a review of the pensions landscape.
I do not discount future reviews of some element of the pensions system. We have already undertaken some reviews and will no doubt undertake others. However, I believe that the fundamental structure of the pensions system, based on the recommendations from the Pensions Commission, is still valid.
Baroness Sherlock
I think I am right in saying that the argument for not proceeding was that there was no consensus around the aims or the remit. What attempt have the Government made to achieve consensus?
Baroness Stedman-Scott
The best answer I can give is that I will find out and write to the noble Baroness, because I do not have that information at the tip of my fingers.
The Bill will deliver further improvements, including strengthening consumer protections, improving scheme governance and communications, and facilitating the creation of pension dashboards. We will continue to review these improvements, including a contribution that a pensions commission could make in future. I respectfully ask the noble Lord, Lord McKenzie, to withdraw his amendment.
Lord McKenzie of Luton
I thank the Minister for her response on this matter and noble Lords who have spoken in favour of this proposition. For those who have felt unable to support it at the moment, I simply make the point that there is no particular timeline: it does not say that it must happen all at one time, or that it must happen tomorrow. There are clearly aspects of the current system which are unsatisfactory.
If I had to encapsulate that in two or three words, I would say that pensioner poverty and under-saving are still with us, big time. Somehow, we need to address that. Having said that, I beg leave to withdraw the amendment.
Baroness Neville-Rolfe
“Tapered reduction of annual pension tax allowance: review
Within 6 months of the passing of this Act, the Secretary of State must conduct a review of how legislation and policy governing pension schemes could be adjusted to mitigate adverse effects of the tapered reduction of annual allowance under section 228ZA of Finance Act 2004, and lay a report before each House of Parliament.”
Baroness Neville-Rolfe
My Lords, I have tabled Amendment 83, which sets a deadline for a review and is essentially probing in nature.
I am unashamed. I want to put pressure on the Government to do something—and fast—about the impact of the cap on senior or long-serving doctors and consultants. We have a mini-crisis here which dates back many months, and the situation is even more serious given the potential impact of Covid-19. I join others in commending the Secretary of State and the CMO for today’s all-party meeting, and for setting out all that is being done to manage this alarming virus—including encouraging clinicians out of retirement.
There is a pension problem. As my noble friend Lord Balfe told Parliament on 30 October, a BMA survey showed that 42% of GPs and 30% of hospital consultants were reducing their hours. There have been similar figures from the Royal College of Physicians. Doctors are attracting substantial tax bills to care for their patients, and are therefore reluctant to do extra sessions to clear waiting lists or to take on management. There are reports that as many as half our doctors are retiring younger than they used to and that the lowering of the annual allowance from £255,000 in 2010 to £40,000 today, and the increase in the retirement age to 65, may well be factors.
The situation is worse in hospitals than in GP practices, mainly because the latter earn less. However, GPs can be caught out if their practice income peaks temporarily because of a vacancy or because a doctor is missing. The reward for all the extra work and stress can be an extra tax charge. This is especially difficult for small practices, which, unfashionably, I have found to be the best, because they provide continuity of care, which saves on drugs bills and hospital costs. However, that is a matter for another day.
That brings me to hospital consultants, who are generally better paid than GPs but are critical to patient outcomes. I will never forget the lady consultant at King’s who managed me through the latter weeks of a pregnancy, when my youngest son refused to move.
The situation is serious. The impact of the coalition fix—to allow people to carry forward unused allowance from the previous three years—is, I think, running low. The DHSC consulted recently on proposals to allow senior medical staff to opt to build up a pension at a lower rate. This was, however, dismissed by the BMA as a sticking plaster. Understandably, it wants a change in the rules. As always, given the noises made by senior politicians, there is much hope—including on my part—about next week’s Budget.
What, therefore, can and should be done? I look forward to hearing from other noble Lords who have been kind enough to support this amendment, and from the noble Lord, Lord Warner, whose Amendment 86 proposes new regulations to ensure that NHS pension scheme members are reimbursed if they are worse off. I look forward to hearing how that would work.
Other approaches might include getting rid of the annual pension cap—the so-called annual allowance—and relying entirely on the lifetime allowance, which has been reduced over time. Alternatively, and perhaps more radically, we could move relevant senior medical staff on to non-pensionable pay, above a certain level, but pay them as salary the notional employer pension contribution that they miss out on. They would have a higher tax charge, but they would not be punished for working, which I think is the concern.
Many very intelligent people have spent hours trying to fix this problem, so it probably is not easy. There are ways to do it, and we must have a solution by the time this Bill reaches Report if the NHS is to overcome today’s growing challenges.
Lord Warner (CB)
My Lords, Amendment 86 is in my name and those of the noble Baronesses, Lady Altmann and Lady Janke. It is a rather simple amendment for tackling a complex problem that is, as the noble Baroness, Lady Neville-Rolfe, has said, causing a great deal of damage to the NHS and to patients.
I will not go into the intricacies of the interrelationship between pensions and tax policy, or repeat the data that I laid out at Second Reading about how this is affecting doctors. The noble Baroness, Lady Neville-Rolfe, has given a reprise of some of that data. There is plenty of data showing the impact on doctors and the NHS; you do not have to look very far to find it. Noble Lords will therefore be relieved to hear that I will not go over that ground again.
The point of this amendment is to address what is happening on the ground now in our NHS. We have arrived at a situation in which doctors can neither control their pension growth nor predict their tax bills; that is where we have got to. Tax bills cannot be calculated until the end of the tax year in which the tax has been incurred; by then it is too late for doctors to adjust their earnings. In some cases, the tax bill exceeds the entire take-home pay that the doctor would earn in a given tax year. We are getting to the point where doctors have to pay to work: that is the situation we have created.
The only way that they can avoid the tax bills is to reduce their work in anticipation, which is what they are doing. I have previously set out the implications of that form of workload reduction, so I will not repeat them, but they include, in many cases, taking early retirement. The serious implications this has for patients and the running of the NHS needs no exaggeration. Suffice it to say that there has been a very large decrease in NHS medical clinical capacity, with very serious implications for patients and the functioning of the NHS. The latest BMA survey of 6,000 doctors shows that even more doctors, in this year and in the past, are planning to reduce their work commitments in the tax year, which is only a month or so ahead. This is why the situation is incredibly urgent.
This problem was so serious that NHS England acted to take the unprecedented step of agreeing to cover annual allowance payments for NHS doctors for the current tax year to try to ease the significant winter pressures on the NHS. At present, as far as I know, there is no plan to suggest that this short-term mitigation will continue into next year, let alone the longer term. It is all very well for the Government to pass last week an NHS Funding Bill, but if there is a serious shortage of doctors, it will not do patients much good.
The Government have been reviewing this problem for some time, but my information from the BMA and others is that they have not so far offered any worthwhile mitigation scheme. All that is available is the option of paying these large tax bills from future pensions by generating a loan against your pension which attracts a high rate of interest and effectively reduces your pension. This option will not reduce the outflow of doctors. Amendment 86 requires the Secretary of State to extend the NHS England scheme on a permanent basis. It also prevents doctors incurring any interest-bearing loans that will reduce their eventual pensions. It has been prepared with the help of the clerks, for which I am grateful, and discussed and agreed with the BMA and other professional bodies.
I am not saying that my amendment is the only solution to the problem—the noble Baroness, Lady Neville-Rolfe, has given some other options—but it is an attempt to apply an urgent response to stop more doctors leaving the NHS or reducing their capacity. If the Government can come up with a better solution, I will be delighted. So far, there is no sign of a solution acceptable to the profession that would stop the NHS haemorrhaging doctors.
Let us remember again that the new tax year starts in a month, and that the coronavirus epidemic threatens all of us. I listened yesterday to the Prime Minister and the Health Secretary referring to bringing back retired doctors; that seems to be an important part of their emergency plan for dealing with a potential epidemic. I wonder how aware they and their No. 10 special advisers are of this own-goal lurking in the bureaucracy. We can ill afford to lose doctors from our NHS through a self-inflicted government muddle when a solution is to hand.
Baroness Janke (LD)
My Lords, I too have signed both amendments which, as has been said, relate to the current situation of the punitive pension taxation on doctors in the NHS. The annual allowance means that retired doctors working additional hours may incur large tax bills even if they have had only a modest rise in pensionable pay; and the taper results in a further problem, as there is an effective tax cliff edge where people can incur additional tax bills of up to £13,500 if they cross the threshold by as little as a pound.
This huge disincentive to retired doctors who are working to fill staff shortfalls in the NHS has exacerbated the existing pressure. As the noble Lord, Lord Warner, said, the impact was such that NHS England took the step of agreeing to cover the annual allowance payment for NHS doctors for this tax year as a temporary mechanism. As he also said, it seems that so far there are no plans for this to be a long-term solution.
Baroness Altmann
My Lords, I support Amendments 83 and 86. Noble Lords have already explained the problems in great detail. However, this crisis dates back more than two years. NHS hospitals and regional authorities have been trying for some time to deal with the fall-out of the taper and to find a resolution, but so far there has been no action. The Government promised action within 30 days last December, and we are still waiting. The doctors and medical staff in this scheme were given a promise, but it has not been honoured because of flawed attempts to save money on pension tax reliefs for so-called high earners. Yet the costs resulting from the unintended consequences of the legislation—I understand the thrust of that legislation—in paying locums, cancellations and inadequate NHS services may well outweigh any savings that might have been achieved by trying to clamp down on high earners.
I was at a BMA consultants’ conference today, giving a presentation on pensions. In a room seating around 400, those consultants decided to have an emergency vote and it was unanimous in favour of urgent government action, such as Amendment 86 being introduced. There was clear anger around the room at what they feel is a betrayal of their terms and conditions of service. They had no warning of the changes in tax relief, which were said to affect only those earning more than £150,000 a year; in fact, the way that the cliff edge and the threshold work means they have hit people earning a lot less than that. They were given no chance to mitigate their losses. In the private sector or in other government schemes some mitigations have been offered, but not for the NHS.
In any case, the rules of this taper make it impossible to predict what tax bill you might incur as a result of being asked to take on extra work because it depends on your current year’s earnings, which you will not know until the end of the current year. The Government could consider using last year’s earnings; at least one might have a fighting chance of knowing what extra work one might be able to take on. The scheme-pays arrangement, whereby it is possible that staff will not have to pay the charge, is a loan at around 6% interest that rolls up every year. Some consultants in their 40s were explaining to me today how that feels so penal. One could imagine changing that interest rate, for example.
The bottom line is that even the NHS pension scheme was unable to provide the staff with the information that they, or their advisers, would have needed to predict what the tax consequences of the work they were doing might have been. If they do not know what the impact will be, it is logical that they are not going to do the work. I understand that the plan in the Budget may well be for the Government to increase the threshold and introduce a bit more flexibility. I can assure the Committee that if that is the plan, it will not solve the problem.
The proposal in Amendment 86 is a practical way in which doctors can be reassured that if they carry out extra work, especially in the current extreme medical environment that we may well be facing, they will not be penalised taxation-wise and pension-wise for doing so. This amendment might not fit precisely in the Bill, but I would be grateful to hear from my noble friends what the reaction is to the proposed method of dealing with this problem. If the Bill represents, as the BMA said in its briefing, a valuable opportunity to find a resolution to this long-running problem then I hope that it will be able to address the issue, and put our NHS and our most valuable medical staff back on an even keel.
Lord McKenzie of Luton
My Lords, this issue has been rumbling around for far too long and it is time to try to get a solution to it, particularly, as many noble Lords have explained, because of the pressure that the NHS would have been under anyway but for the recent crisis. My noble friend Lord Warner made a strong case with his proposition and we would certainly like to reflect on it. I know that the problem is that lots of people have reflected from time to time on a possible solution. That reflection goes on, but we do not yet have a solution. But Report on this Bill will be coming up shortly, and of course we have a Budget of some sort not far in the distance.
I have a couple of questions. I do not know whether my noble friend Lord Warner or the Minister can help with them. Was the one-off payment that the NHS made to cover the annual allowance taxable, and what might the consequences of that be? Under the scheme-pays arrangement, as the noble Baroness, Lady Altmann, hinted, if the problem is the penal interest rate then what is to stop those rates being adjusted, and who controls them?
We also need to bear in mind in all this is that these rules, unless I misunderstand them, have general application in the tax system. We need either to find a way of having some special arrangements or to accept that the adjustments we make here would have to be run for the tax system generally. We will need to work through the consequences of that. I am conscious that this contribution has not added one bit of sense to a practical solution, which is what we need to reach. Maybe, at the end of the day, we simply need to rank the solutions that we have on the table and choose the best, even though that may not be optimisation.
I am sure we all remember the pressure about this—I certainly remember pressure from the old Luton and Dunstable Hospital about it—and the real adverse effect that it causes on the delivery of services. We cannot continue to allow that to go forward; we simply have to drive through a solution to this. That is the challenge; presumably, the Treasury has ultimate responsibility for meeting it. But if it will not then we should, with the help of my noble friend Lord Warner and his expertise in these areas.
Earl Howe (Con)
My Lords, the amendment from my noble friend Lady Neville-Rolfe would commit the Secretary of State for Work and Pensions to review the tapered annual allowance on tax-relieved pension savings and require the Secretary of State to set out how pension schemes could mitigate any adverse effects of the taper. On the other hand, the amendment from the noble Lord, Lord Warner, would commit the Secretary of State for Work and Pensions to make regulations to require the NHS pension schemes to reimburse members for pension tax charges and, in particular, annual allowance charges.
I will set out where matters currently stand on this. First, in recognition of the impact that the tapered annual allowance is having for some doctors this year, NHS England has announced—as has been mentioned —a special arrangement for 2019-20 only, which doctors in England can use to ensure that they will not be worse off as a result of taking on extra shifts this tax year. This arrangement allows senior clinicians to defer an annual allowance charge through scheme pays. Their NHS employer will make a contractually binding commitment to pay a corresponding amount on retirement, ensuring that they are fully compensated in retirement for the effect of the scheme-pays deduction on their retirement income.
Health is a devolved matter. This special arrangement applies only to England, but we are aware that the Welsh Government and NHS Scotland have also put arrangements in place for the current tax year.
The Government most certainly recognise that urgent action is needed to resolve the pensions tax issue, which has caused some doctors to turn down extra shifts for fear of high tax bills. We are committed to ensuring that hard-working NHS staff do not find themselves reducing their work commitments due to the interaction between their pay, their pension and the relevant tax regime. That is precisely why the Government are taking forward their manifesto commitment to carry out an urgent review of the pensions tapered annual allowance, to make sure that doctors spend as much time as possible treating patients. This builds on the Treasury’s review into the effect of the tapered annual allowance on public service delivery, announced last August. The Government have announced that these reviews will report at the Budget on 11 March.
I understand that the ongoing reviews have received evidence from the British Medical Association, the Academy of Medical Royal Colleges and other representative organisations from across the public and private sectors. The Economic Secretary to the Treasury has held round-table discussions with key health sector stakeholders, as well as representative organisations across the public sector. The evidence provided will ensure that the Government can consider fully the impact of the tapered annual allowance and its effects on the NHS and other public services.
The amendment from my noble friend Lady Neville-Rolfe would have the Government commit to yet another review of matters relating to the tapered annual allowance. I hope she will accept that there is no need for a further exploration of this matter when the two reviews are ongoing and have not yet concluded, especially as those reviews will report shortly.
The amendment proposed by the noble Lord, Lord Warner, would commit the NHS pension scheme administrators to reimburse their members to the extent they had incurred an annual allowance tax charge. The practical difficulty with this, which I am sure the noble Lord does not intend, is that reimbursement from the scheme for tax charges could trigger an unauthorised payments tax charge for the member and a scheme sanction charge for the scheme. Noble Lords will appreciate that this is a very complicated area of tax law and, as I have said, could result in further unforeseen tax charges arising.
The noble Lords, Lord Warner and Lord McKenzie, referred to the interest rate being applied in this area. Perhaps I could just explain the background to this. HMRC rules require that when scheme pays is used to pay a tax charge, an actuarially fair reduction is made to the value of the pension. The discount rate used to value this reduction for public service pension schemes is the SCAPE discount rate plus CPI. The SCAPE discount rate reflects the Office for Budget Responsibility’s forecasts for long-term GDP growth in line with established methodology. Due to recent changes to the SCAPE rate and the CPI, the scheme-pays discount rate has fallen in 2019 to 4.8%.
My suggestion to my noble friend and the noble Lord, Lord Warner, is that it is preferable to wait for the outcome of the two reviews, which are ongoing but have not yet concluded. As I mentioned, they will report shortly, on 11 March. Ultimately, this is a matter for my right honourable friend the Chancellor. I am sorry to have to leave matters in the air, but I hope that my noble friend and the noble Lord will take away from this a good degree of reassurance that the Government are taking seriously the question of what impact the tapered annual allowance is having on NHS pension scheme members and that reviews into this matter are already under way.
Baroness Altmann
I take my noble friend’s point on the specific proposals in Amendment 86 in the name of the noble Lord, Lord Warner, which I have signed. However, were the amendment to be redrawn to suggest that an extension of the current arrangements for 2019-20 be brought forward also into 2020-21, would that address my noble friend’s concerns about the unauthorised scheme payment and the charges to the scheme? We could time-limit this but also address the urgency, because even if something is reported in the Budget, it is unlikely that the staff will have the reassurance for the forthcoming tax year, which is only a few weeks away.
Lord Warner
I just want to amplify the point made by the noble Baroness, Lady Altmann. Those of us who have been around in government for some years know that the announcement of review reports in Budgets do not necessarily mean that anything in those reviews will be rapidly implemented. My suspicion would be that any such reviews would have a longish period of consultation and would not appear in the next finance Bill—that is a likely outcome. Building on what the noble Baroness said, I need to go back to my clients—if I may put it that way—who will want to know what the position is. If I prove to be right over what happens on 11 March, would the Government be willing to consider something along the lines of buying two to three years for the NHS doctors? Will they help me get the wording right, so that it does not fall into the elephant traps that the Minister has set out? When we get to Report, we cannot just leave this; we have to come back to this issue with some credible solution. I would be delighted if the announcement on 11 March delivered a quick response, but if we do not deliver a response that covers the next two financial years, we will put the NHS in great peril.
Earl Howe
My Lords, my answer to my noble friend and the noble Lord, Lord Warner, has to be exactly the same as that which I have already given. I can do no other than urge all noble Lords to wait for the Budget announcement. I cannot comment on what ideas the Chancellor has in front of him on this issue. Those ideas may or may not include those that have been articulated by my noble friend and the noble Lord—I do not know. I suggest that we get past next week and then take stock. No doubt noble Lords will consider how best to approach this on Report, if they feel that to be necessary.
Baroness Janke
The Minister said that these two reviews will be reported in the Budget. Is he talking about the intention to conduct a review or saying that the outcomes of reviews that have already been conducted will be announced in the Budget?
Baroness Neville-Rolfe
My Lords, we have had a good debate and I think we have made it very clear that action is urgently needed in the NHS area. It goes wider, as the noble Lord, Lord McKenzie, said, but my amendment was a probing amendment—of the kind that I could get through the clerk—about these problems in the NHS, particularly now that we have the added threat of coronavirus. The noble Lord, Lord Warner, put it very well. It is an own goal lurking in the bureaucracy, although if you look on the internet it is quite easy to find the scale of the problem.
Doctors are having to pay to work and can hit a tax cliff-edge, as the noble Baroness, Lady Janke, said—through no fault of their own, it seems to me—and are not able to forecast exactly when that cliff-edge might occur. It is an unsatisfactory state of affairs. My noble friend Lady Altmann, with her forensic knowledge of the sector, has pointed out that the problem is now some two years old and that the Government made a promise to resolve it. As the Deputy Leader made clear, we must wait to see what the Budget says, but I would like to be clear that I think all of us will want to return to this issue if we feel that we have not made progress in the Budget on 11 March. I beg leave to withdraw the amendment.
Lord Warner
“National Health Service Pension Schemes: tax charges
(1) The Secretary of State must by regulations made by statutory instrument make provision to ensure that the National Health Service Pension Schemes reimburse their members for pension tax charges to the extent necessary to fulfil the objective of subsection (2).(2) The objective of this subsection is that in any tax year, for a member of the National Health Service Pension Schemes, the member’s income less annual allowance pension tax charges is not smaller if the member’s income is greater.(3) A statutory instrument containing regulations under this section may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament.”
Lord Warner
I wish to respond to the Minister before I withdraw my amendment.
The Deputy Chairman of Committees
Once the noble Lord has spoken, the question has to be put.
Lord Warner
I thought that I am allowed to say whether I am withdrawing the amendment.
Baroness Fookes
It has not yet technically been moved, and you are now moving it. Perhaps I should clarify for the Committee that where there is a group of amendments being debated together, only the first amendment is moved. If a noble Lord wishes to move an amendment, it has to come in its numerical order. The noble Lord was not moving his amendment, he was speaking to it.
Baroness Fookes
Yes, he must move it, because he has started to speak to it.
Lord Warner
I beg to move Amendment 86. In response to the Minister, I think we will need to have some kind of meeting after 11 March, which may involve some of the parties who are very anxious about this. I hope the Minister will take away that thought and get back to me, and to others, when he has had time to consider.
Baroness Fookes
If no member of the Committee wishes to respond, the noble Lord may withdraw the amendment.
Baroness Fookes
I am sorry about the schoolmistressy lesson on the subject.
Baroness Janke
“Automatic enrolment age
In section 3(1)(a) of the Pensions Act 2008, for “22” substitute “18”.”
Baroness Janke
My Lords, I have three amendments in this group. Amendments 87 and 88 relate to auto-enrolment to reduce the lower age limit to 18 and introduce a review of auto-enrolment which could also examine the possibility of removing the lower earnings limit.
As many noble Lords have said, the success of auto-enrolment is clear, with 87% of eligible employees participating in a workplace pension in 2018. However, by reducing the lower age limit to 18 and removing the lower earnings limit, a further £2.5 billion could be added to savings.
There would also be advantages for younger people in starting to save for pensions earlier in their working lives. It is estimated that the average 18 year-old will end up with a pension pot at retirement around £18,000 lower if they have to wait until 22 to be automatically enrolled. Given that we want people to start saving for a pension as soon as possible, an age limit of 22 seems increasingly hard to defend. Even employers would generally have a simpler system were they to enrol everyone, rather than having different rules for those above and below different age thresholds.
Moreover, further extending the coverage of auto-enrolment by reducing the earning threshold to the national insurance primary threshold would bring 480,000 people, mostly women, into pension-saving. It would also help to improve the gender pensions gap, which is the subject of Amendment 96 in the same group and a growing matter of concern. A woman aged 65 has one-fifth of a 65 year-old man’s pension.
Private pension schemes seem to be the main reason for the gender gap, placing women at a disadvantage, mainly due to domestic roles and lower pay. Among 65 to 74 year-olds, median private pension wealth is £164,700 for men and £17,300 for women, who have just over 10% of the private pension wealth of men. Among the population as a whole, women’s median pension wealth is £4,300, less than a quarter of the £19,800 held by men.
Although auto-enrolled private pensions include all employers, they exclude low-paid employees. Like other private pensions, they make no allowance for periods of caring, hence they perpetuate further the pensions gender gap. New modelling has shown that a family carer top-up in an auto-enrolled pension would substantially boost women’s private pension wealth. Also, the suggestion of a voluntary earnings-related state pension addition—a fully portable auto-enrolled option that allows carer credits—would be simpler and would better meet women’s need for extra pension savings. Amendment 96 provides the opportunity for an early review of issues affecting the pensions gender gap in CMP schemes.
I support the amendments in the group in the name of the noble Baroness, Lady Drake, which address similar and related issues. I beg to move.
Lord McKenzie of Luton
My Lords, Amendment 95 in this group is in my name. It seeks to press the Minister to make three important changes to the current auto-enrolment scheme—there are some overlapping issues in this. The changes are: to remove the threshold requirement for earnings over £10,000 to be auto-enrolled; to remove the qualifying earnings deduction; and to extend the threshold down to the age of 18 for workers. As NOW: Pensions points out, these would be positive steps in helping to narrow the pensions gender gap and would be a significant step in boosting participation in pension saving. This should be uncontroversial, as it goes with the flavour of the deliberations of the 2017 automatic enrolment review.
However, on timing, the Government’s ambition is to phase in the abolition of the LEL, with broader changes to the framework, until the mid-2020s. We suggest that this is a weak ambition and urge the Government to reconsider. We recognise that the changes cannot all happen overnight, but the longer we wait, the more difficulty there will be in getting younger people into the savings habit. Abolition of the LEL and making contributions payable from the first £1 of earnings will help to build financial resilience. If implemented, these measures would eventually—I stress “eventually”—bring an additional 910,000 workers into auto-enrolment with, as we have heard, an additional £3.8 billion of pension savings. It would be a good first step in addressing the pensions gender gap.
Baroness Drake (Lab)
My Lords, I shall speak to Amendments 90 and 91, which carry further the spirit of Amendment 96, which was tabled by the noble Baroness, Lady Janke. My amendments call on the Secretary of State, within six months of the passage of the Bill, to conduct two reviews: on how legislation could provide for people to receive a contribution towards auto-enrolment pension savings when they are relevant carers—what is now popularly called the carers’ top up—and on the sex equality impacts of auto-enrolment in workplace schemes and how legislation and policy could correct any inequalities identified.
I start by giving recognition to the DWP and the Pensions Regulator for the successful rollout of auto-enrolment. It is true that many more people, including women, are now saving, but various sources of data evidence show a persisting gender pensions gap. The message, whatever the source of the data, is the same. The gap arises from design features in the pension system and as a consequence of the systemic problems that too many women and carers face. In summary, carers are subject to a financial penalty in their income and pension because they are undertaking caring responsibilities, which is reinforced by stereotyping, cultural norms and employer behaviour.
Some newly published research on pensions by the Pensions Policy Institute, which was sponsored by the master trust Now: Pensions, puts the case for further reforms and reveals that on average, women have 55% lower pension income than men. The average annual private pension income for men aged 55 plus is £8,620; for women, it is £3,920—a considerable gap. Despite the record number of women in employment—now 72.4%—many will reach retirement age with significantly less. The figures vary, but they are in the same ballpark of £100,000 less saved than men. Women are more likely to work part-time or take time out of work while caring for children or, further down the line, to care for elderly or ill relatives, leaving them with interrupted pension contributions and limited earnings opportunities. Inequalities experienced during working-age life deliver lower incomes in retirement. Even when women work full-time, they still, on average, earn almost £6,000 less than men.
There are compelling figures here: 36% of women in the labour force work part-time. Of the 13.4 million employed women in the UK, around 3 million—23%—fall below the qualifying earnings threshold of £10,000 in any given job to get access to the benefits of auto-enrolment. Only about 37% of the population eligible for auto-enrolment are women.
The noble Baroness, Lady Altmann, is campaigning on how the tax system disadvantages a significant number of low-paid women and men, consequently reducing their pension pots. Millions of people at some point in their lives will have given up work or worked part-time to care, most of them being women. Carers’ savings pots are not only smaller, but evidence shows they are often used to cover the cost of the caring they are undertaking. The economic contribution of carers is still insufficiently recognised in UK public policy.
We need women to have children. If they did not, the economic consequences would soon become apparent. We need carers to take responsibility for kinship children, saving the taxpayer considerable cost. If carers did not look after their elderly or disabled relatives, the health and social care cost borne by the state would rise exponentially. In fact, Carers UK estimates that the economic value of the contribution made by carers in the UK is £132 billion a year.
Caring responsibilities impact carers’ participation in the labour market, but they also damage their long-term earnings potential—it just carries on through. It is estimated that for each year out of employment, the hourly wages of women decrease by approximately 2% for women with A-levels or above, and 4% for women with fewer qualifications. Amendment 90 is directed at a reform whereby a carer’s financial credit is paid through the social security system towards their private pension. I will take a little time on this because there is quite a big community out there which believes that this is an important issue and really wants Parliament to hear its strength of feeling on it.
Prior to the introduction of the flat-rate new state pension in 2016, carers were credited with entitlements in both the first-tier basic state pension and the second-tier state earnings-related pension. However, now that the earnings-related system has transferred out of the state to the workplace pension provision through auto-enrolment, that second-tier carer’s pension has been lost, It has just gone; it sort of fell through the crack in the totality of reforms. We had a hard-fought victory for women to secure the public policy principle that caring was an economic contribution for which pension credits were given in both tiers of the pension system—the basic tier and the earnings-related tier. Until that principle was restored, carers had been relatively disadvantaged, adding to the pensions gap. I am a bit reluctant to start in 1902, but if we start with the fight to get women these carer’s credits in both the pension systems, when the earnings-related system was introduced in 1975, something called the home responsibilities protection was introduced, It was not as good as a full carer’s credit but it was a start, although it applied only to the basic state pension. Then in the Conservatives’ Social Security Act 1986 they planned to extend that home responsibilities protection to the second-tier earnings-related pension but they never laid the regulation, so it never happened.
Rowing forward, we had the Child Support, Pensions and Social Security Act 2000, which introduced the second state pension to replace the existing SERPS earning-related element. It provided for carer’s credit for the second earnings-related pension in addition to the state pension. That was a victory. A lot of hard work went into winning that principle, and it applied to carers who looked after a disabled person for more than 35 hours a week or a child under six, but still people argued that it should be improved again beyond that. In the Pensions Act 2007, which, importantly, brought in a major part of the state and auto-enrolment reforms, carer’s credits and how they operated for the basic state pension and the earnings-related element were improved considerably for carers of children up to the age of 12 and the qualifying threshold for carer’s credits for caring for disabled people was lowered to 20 hours.
Those principles, that you credit carers because it is an economic activity—it is a real contribution to the economy—and that you do it in both the basic state pension and the earnings-related pension, were a victory that people thought they had banked, but suddenly, as a consequence of the reforms, that crediting is only in the basic state pension—it no longer exists through auto-enrolment and workplace pensions. The Fawcett Society, along with an increasing number of other organisations—there is quite a build-up of consensus around this—supports the introduction of a carers’ top-up, re-establishing the principle that people thought had been achieved and consolidated in 2007.
A seminal report from Insuring Women’s Futures, the product of a voluntary market-led programme under the Chartered Insurance Institute, looked at improving women’s financial resilience. It has brought in a range of people—business leaders, policy experts, regulation experts, academics and so on—and looks at the root causes of women’s lack of financial resilience.
I am probably using a lot of words to say it, but the report basically says that more needs to be done to allow all women access to pensions, to support women in attaining an adequate pension—reflecting their whole contribution to society and the economy—and to allow them to enjoy pensions parity in the workplace. It also says that the complexity of pensions, together with the wider financial risks in life that have an impact on women’s pensions journey, means that women need differentiated support and guidance at moments that matter, such as when they step out from or step down in their engagement with the labour market because they are doing the economically important job of caring.
Much was achieved by auto-enrolment—it is tempting to say that I would say that—and the Government were right to focus their energies on its successful implementation. I never argued with a Conservative Minister who said, “That is the priority and that is what we must do”; that was right. However, this gap in the pension position of many women relative to men persists, and there is a growing consensus—it is not just a few arbitrary voices—saying that the issue needs fresh attention.
A principle embedded in the reform of state and private pensions is that women should accrue retirement income in their own right. That is reflected in the fact that, since 2016, women no longer accrue state pension rights through their spouse’s entitlement and that, in a DC world and with pension freedoms, women’s hopes of depending on their partner’s accrued long-term savings are much weaker. The environmental factors shout out that the Government have been successful in consolidating auto-enrolment. However, this is an area of outstanding weakness and needs a new look because, in summary, women make a huge economic contribution by caring, for which they face financial penalties. There is an expectation that they will accrue pensions in their own right, but the support given to them to achieve that still has significant weaknesses.
My amendment and that of the noble Baroness, Lady Janke, ask the Government to review and report on the nature of the pensions gap and on further measures to address it, because the demographics clearly show that the one thing that the state depends on is that women will be carers—even more so going forward. However, as a consequence, they end up with reduced financial resilience when they come to retirement.
I am conscious of there being competing issues on Report; there are some very important issues in this Bill that noble Lords wish to return to. I am trying to take that into account. There is, however, a growing consensus. It is not aggressive; it is just saying—as I saw when I ran through the history of how we built up the carer’s credit—that the Government need to give this attention. There is consolidated auto-enrolment and a range of areas where the Government are reviewing what they can do, but they have not put centre stage how efficiently this is working for carers; they need to look at that.
Again, conscious of the competing demands on Report, I urge the Government to respond to the noble Baroness, Lady Janke, and myself as positively as they can to show those communities that are building up together—the gender alliance can be quite formidable when it gets truly organised—that there is a responsiveness that says, “Yes, we will review these issues.” I have loads of emails that say, “I am so glad you are raising this”, and, “Say this and say that.” I have probably overindulged and not covered half the list of things that people want to say. They will, however, be listening to the Government’s response because they want the Government at least to accept that they should give some attention to this issue again.
Baroness Sherlock (Lab)
My Lords, I want to ask a few questions on the back of that. I thank my noble friend Lady Drake and the noble Baroness, Lady Janke, for raising these issues. It is good to hear some attention being given to the fact that we have a significant problem about women and pensions. I would have liked to see the Bill take the opportunity to do something for the women born in 1950s who lost out so much when the state pension age was raised so sharply. Given that it has not done that, at least the calls for review may give an opportunity to look at the wider range of issues.
The statistics we have heard are really quite stark. If there is that huge a gap in pension wealth between men and women, the situation will only get worse. It is clearly something that the Government need to do something about.
I want to pick up on a couple of specifics. One is the issue of people with multiple jobs below the earnings threshold. This is the point at which I miss most acutely my friend Lady Hollis of Heigham, who raised this at any given opportunity. I feel that her memory is forcing me to do so now, otherwise I could not go back to my office and sit down with any peace. I ask the Minister to comment on that. We see people with multiple jobs—many are women, of course—none of whom make the threshold but who would be over the threshold if their incomes were added up, not getting into auto-enrolment. I worry that this group will keep rising as a result of part-time working and zero-hours contracts. Even the DWP, for example, encourages those on universal credit to take extra jobs to top up their hours or income. What are the Government doing about this? Do they have a sense of the scale of the problem and the direction of travel?
Secondly, I want to say a word about my noble friend’s case on carers. Clearly, women are more likely to work part-time because of caring responsibilities. That is a clear issue for public policy. A society needs women’s reproductive capabilities and their caring work. Women, in turn, deserve to be able to live adequately in retirement. I was delighted to hear my noble friend detail how we got here, not just because I probably have more of an appetite for social security detail than is strictly socially acceptable. If we do not take the time to work out how we got here, we will lose this in future. Those rights were hard-won. It took a long time, step by step, to get the caring responsibilities of women recognised in all parts of the state pension system; then they somehow got lost in the Government’s reforms. I am sure that that was not the intention and I have no doubt that the Government will come back and say, “Yes, but people will get these bigger amounts and more of them will get a full pension”, but that makes no difference. One would get those whether one was a carer or not. They have still lost any recognition of those caring responsibilities in the second state pension. Have the Government looked at the idea of a carer’s top-up, which has been around for a while? If so, what is their response to it? If they do not like it, what is their proposal for addressing this issue?
On Monday, we discussed in Committee Amendment 78 in the name of the noble Baroness, Lady Altmann. It recommended that a member of a scheme should not be allowed to use the pension freedoms to transfer out without the consent of his or her spouse or civil partner. I asked whether the Minister would go away, talk to the department, take some advice and return to it during today’s debate, which she kindly agreed to do. Can the Minister give us a reaction? Has the department established that there is an issue, and what is it doing about it? That would be really helpful.
My noble friend Lady Drake said the gender pay gap will not close until 2050 and pension parity will therefore not be reached until something like 2100. We just cannot wait that long. This is a matter of public policy, economics and societal need, but it is also a basic issue of justice. What are the Government going to do about it?
Earl Howe
My Lords, the amendments tabled in the names of the noble Baronesses, Lady Janke and Lady Drake, and the noble Lord, Lord McKenzie, all concern automatic enrolment into workplace pensions.
Amendment 87 would lower from 22 to 18 the minimum age at which a qualifying worker would be eligible to be automatically enrolled by making a change to the Pensions Act 2008.
Amendment 88 would require the Secretary of State to lay a report on the effectiveness of our pension reforms within six months of this Bill becoming law. That review would mandate government to consider the minimum age at which qualifying workers must be automatically enrolled, the minimum level of pension contributions and whether existing legislation offers sufficient opportunity for low-paid workers to save for retirement. The Secretary of State would then have to make a recommendation about whether to bring forward new legislation in the light of its findings.
Amendment 95 would make changes to the criteria for a qualifying worker in automatic enrolment, known as a jobholder. These would lower the minimum age for a worker to be automatically enrolled from 22 to 18, abolish the £10,000 automatic enrolment trigger and make pension contributions payable from the first £1 of earnings.
Perhaps I may begin with the proposed changes to the automatic enrolment criteria. The amendment of the noble Lord, Lord McKenzie, would abolish the £10,000 automatic enrolment trigger. The Government review the operation of the trigger annually under the statutory automatic enrolment thresholds review. That approach means that a range of factors can be assessed, including affordability for employers and whether it pays to save for individuals. Since 2014-15, we have frozen the trigger at £10,000, which has expanded coverage each year due to wage growth. In the tax year 2020-21, this will see an extra 80,000 people brought into pension saving, of whom around three-quarters will be women. This is surely one policy area where we should aim to ensure that we proceed on the basis of sound evidence. We do not have evidence at this time that would support the abolition of the trigger. So, I am afraid that the Government cannot support this amendment.
Turning to the amendments in the names of the noble Baroness, Lady Janke, and the noble Lord, Lord McKenzie, which would reduce the minimum age to 18 and require pension contributions to be paid from the first £1 of earnings, the Government’s 2017 review of automatic enrolment—Maintaining the Momentum —has already set out our next steps in this area. The core proposals are a reduction in the minimum age for being automatically enrolled to 18 and the removal of the automatic enrolment lower earnings limit.
Our review involved extensive engagement with interested parties, including consultation, and was supported by an expert advisory group. Its conclusions were robust and remain correct. However, we have also been clear that these ambitions must be subject to learning from the contribution increases and finding the right approach to implementation. The timetable cannot be forced without risking both the consensus that we have achieved and the very significant policy achievements that have, rightly, been lauded across this House. Therefore, again, the Government cannot support these amendments.
I turn now to Amendments 90 and 91, tabled by the noble Baroness, Lady Drake, and Amendment 96, tabled by the noble Baroness, Lady Janke. They relate to the gender pensions gap and automatic enrolment. Since the introduction of automatic enrolment, workplace pension participation for all women employed full-time in the private sector— not only those eligible for automatic enrolment—has increased from 35% in 2012 to 83% in 2019. This is now the same as the participation rate for men, compared with 2012 when the participation rate for men was six percentage points higher. Our aim remains to increase the level of retirement saving across all groups. The 2017 review ambitions strengthen the framework of workplace pension saving for lower-paid workers, many of whom are women working part-time. As I have already made clear about the implementation, we will remain guided by evidence.
Amendment 90 would require the Secretary of State to undertake a review within six months of passing the Bill. The review would consider how to legislate to provide automatic enrolment contributions to people with caring responsibilities as parents or carers, with reference to a target group.
The new state pension system—introduced for people who reached state pension age from 6 April 2016 onwards—took forward the existing national insurance crediting arrangements. These included the credits brought into effect by Section 23A of the Social Security Contributions and Benefits Act 1992. The majority of people providing care and those who build a qualifying year for their state pension through the carer’s credit are women. The design of the new state pension means that, on average, women, those in lower-paid work and self-employed people receive higher outcomes than under the previous system.
More than 3 million women stand to receive an average of £550 more per year by 2030 as a result of the recent reforms. Women benefit most from the new state pension. Average weekly state pension payments for women are £152.44 under the new system, compared with £135.24 under the previous system. Outcomes are projected to equalise with those for men more than a decade earlier than they would have done under the previous system.
Under the system that operated from 2010 to 2016, people who were caring for more than 20 hours a week could claim the carer’s credit for additional state pension in addition to building qualifying years of the state pension. The full rate of the new state pension is more than £40 a week higher than the full basic state pension. As a result, unless someone had received carer’s credits for the majority of the 35 years of national insurance needed for the state pension, it is unlikely that they would have been in a better position than they will be now under the new state pension.
A key objective of the new state pension was to increase outcomes for women and lower-paid earners, accelerating the equalisation of state pension outcomes for men and women. The new state pension is successfully achieving these objectives. The settlement made in 2016 is building a clearer, simpler foundation for people’s private pension saving and we do not intend to reopen it.
I understand that the noble Baroness, Lady Drake, is concerned that parents and carers who are not working will miss out on automatic enrolment. Most parents and carers will work before or after periods of caring, or will combine part-time work with caring. The introduction of automatic enrolment has helped workers to build on the foundation of the state pension, while implementation of the 2017 review measures will enable them to build up more savings when they are working, improving their financial resilience in retirement. The amount being saved would be transformative: a national living wage earner with a 10-year career break could see an 88% increase in their pot size at retirement.
Amendments 91 and 96 would require the Secretary of State to conduct a review within six months of the Bill becoming law, concerning the sex equality impacts of the current framework. I always read amendments carefully but, if I may speak on a slightly lighter note, Amendment 91—tabled by the noble Baroness, Lady Drake—shows how important it is to read to the end of every sentence. When I first looked at it, I thought that it sought to ensure that the Secretary of State conducts a review of differences between men and women, which, it struck me, could be rather a lengthy exercise—but that is not the case at all. If one reads the amendment in full, it is a model of clarity in referring to a number of specified groups and I want to be serious in addressing it.
Amendment 91 would require the Secretary of State to make recommendations on how legislation and policy could correct any inequalities in automatic enrolment. Amendment 96 relates to the impact of public policy regarding pension schemes on women and the action being taken by government to close the pensions gap between men and women, with recommendations for possible further legislation.
The Government already carry out and publish a range of analysis and evaluation in relation to these matters, and benefit from valuable external evidence. The department currently evaluates the gender impact of changes to automatic enrolment policy on participation—in our annual thresholds review, for example, where this year we estimated that three-quarters of the employees made eligible by the freezing of the trigger were women. We measure and publish statistics on participation rates by gender. We carry out regular monitoring of the rates of stopping saving by gender. We also draw on a wide range of evidence across and outside government on the gender pensions gap, while working closely with the Government Equalities Office.
All that should, I hope, indicate to noble Lords that this is not a matter that we will just let drift and then monitor at some point in the future. We do so regularly as we go along, and in some detail. Outside of DWP’s evaluation of automatic enrolment—AE, if I may call it that—data and analysis of the gender pensions gap is produced from various sources across government. We will continue to draw on this evidence alongside our developing evaluation of AE, post phasing, to assess the impact of AE on the gender pensions gap.
Baroness Drake
I want to take the first opportunity to come back on this because I am conscious that a lot of people are interested in this debate.
I am a little disappointed that the major part of the Minister’s contribution was a bit of a push-back, saying that the Government are all over this and that this is fine when evidence for that is not there. He did become more conciliatory at the end; I hope that the department find a way to bring together an eclectic group of people.
I simply disagree with some of the things that the Minister said. In reference to the small pots, the DWP did a great deal of work on the earnings threshold. It was set at a much lower level based on the DWP’s work, though perhaps not under the current Administration. In the review that led to that threshold going up—originally, it would have gone up to as high as £12,500 if a stroppy group of Peers had not turned up every time automatic enrolment earnings threshold regulations came before the House; in the end, somebody waved the white flag and said, “Oh, freeze it, we can’t face that lot every year”—the reason given, which is on the record, is that if you take it lower than £10,000, it produces small pots, which are inefficient to the industry. Well, that is irrelevant. This is a piece of public policy for mass coverage. That is what made me so angry. It was not based on a gender analysis; it was based on inefficiency in the industry. I invite noble Lords to go back to the report that gave the reason for raising that earnings trigger. There is evidence there. It may be that more modelling or more debate about the behavioural impact of coming significantly below the trigger is needed, but that work was done by the DWP. It may have a different view now but its view a few years—perhaps 10 years—back presented the evidence in a different way.
I do not disagree with the Minister that automatic enrolment has had a real benefit for women—if they are in the eligible population. If they are not, they cannot be among the people gaining from the upside of auto-enrolment. Many carers are precisely the people who are not in the eligible population.
I entirely accept that for a lot of women, an absolute improvement arose as a result of the new state pension, but the pension gap—the pay gap—is about relativity. If you give a man a pay rise of £10 and you give a woman a rise of £5, you can stand up and assert, “The woman is £5 better off: let us celebrate!”. What you have missed is that the pay gap has increased, because the man got £10. The benefits of the single state pension improve the relative position of a lot of people, not just the low-paid but huge numbers of people right across the public sector in DB schemes and generous DC schemes who, for a most modest increase in their national insurance, got that improvement in the state second pension together with the benefits of auto-enrolment or their defined benefit pension system as well. Therefore the relative position of carers was disadvantaged. Yes, their absolute position over a certain period—or after a certain period, although that is not the case—has improved, but the relative relationship did not, because everybody had that benefit from the reform to the state second pension.
I do not want to dwell on that, but there is a community out there who, if I did not do them justice and push back, would say, “Jeannie, why did you just accept those arguments?” I take the Minister’s final remarks about working for the Government. There are groups out there in industry, employers, academics and gender groups who want to work this out with the Government. I hope that the Government can find a way fairly soon to bring together a working group, or whatever. There is a feeling, “How does one communicate to the Government the growing feeling on the gender pension gap?” I felt that I had to push back, because there was a slightly dismissive approach that there was no gender pension gap problem, and there is.
Earl Howe
I hope that the noble Baroness will not go away with that impression. We are aware that there is a gap to be bridged. The key point I would ask her to reflect on is that, despite the desire to go faster in this area, there is a risk in doing so. We have learned lessons from the phased approach that we have already adopted. It was the right approach. The gradual approach brought everybody on side. We gathered evidence in the process; we are still gathering that evidence, and the evidence-based approach is the other watchword to bear in mind.
Baroness Sherlock
I will follow up a couple of questions that I asked the Minister: one was about mini-jobs, and I do not think that he responded to the other—I am sorry if I missed it—on the issue of spousal consent and pension freedom sharing. In Grand Committee on Monday, we were having a conversation about this. The Minister pushed back quite hard. I suggested that she go back to the department to establish whether there was a problem, and the noble Baroness, Lady Stedman-Scott said:
“The suggestion made by the noble Baroness, Lady Sherlock, is very helpful. I would be happy to do that before we come back to this on Wednesday”—[Official Report, 2/3/20; col. GC245.]
The reason I suggested that is that I knew we were going to have a debate on women’s pensions and therefore we could have it informed by some information. There is not much point in our having assurances if they do not happen. Is there anything to be said on that?
Earl Howe
I understand from officials in the Ministry of Justice that there has been a relatively small number of cases where the pension scheme member has taken advantage of the pension freedoms to act in a way that frustrates the intention of an attachment order. However, I would like to establish what evidence there is of the scale of the wider problem, as outlined by my noble friend Lady Altmann and the noble Baroness, Lady Drake, in our debate on Monday, before deciding on the appropriate government response. I can tell the noble Baroness that my officials will work with others across government to gather the available evidence.
Baroness Janke
I thank the Minister for his assurances and for the information he gave. I am sure that the Government want to pursue the evidence-based approach, but the actual situation is very hard for many women at this moment. I welcome his offer to work with the Government on this. As the noble Baroness, Lady Drake, said, many groups will be interested in doing so; I hope that we can engage them in positive working on this issue.
A much larger proportion of those now in pensioner poverty are women because their caring responsibilities were never represented in the past. I feel that there has to be a recognition of the current situation while agreeing that we must move forward and take people with us on this.
On the amendments in the name of the noble Baroness, Lady Altmann, it is not only a question of spousal consent to an attachment order. It is often not possible to make a pension settlement because it takes place before the process reaches that stage. Spousal consent is essential because, as others have said, once the money has gone, it is extremely difficult to recover it. The ABI has written a briefing on divorce and pensions; I recommend it to the Government. Pensions in divorce is another issue that is extremely important to women.
Again, I thank the Minister for his response. I beg leave to withdraw the amendment.
The Deputy Chairman of Committees (Lord Geddes) (Con)
My Lords, I understand that Amendment 89 has already been debated even though it did not appear on the groupings.
Baroness Altmann
“Suitability of pension schemes for automatic enrolment
(1) The Secretary of State must by regulations made by statutory instrument make provision to require that, where an employer makes arrangements by which a jobholder to whom section 3 of the Pensions Act 2008 applies, or a worker to whom section 9 of that Act applies, becomes an active member of an automatic enrolment or other pension scheme, the employer and the trustees, managers and administrators of the scheme have ensured that it is suitable for low-paid jobholders or entitled workers such that they are treated fairly in connection with their contributions. (2) A statutory instrument containing regulations under this section may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament.”Member’s explanatory statement
This amendment aims to ensure that employers, trustees, managers and administrators have assessed the scheme they use for auto-enrolment to ascertain that it treats low paid staff fairly and does not force them to pay additional contributions to replace tax relief they have lost.
Baroness Altmann
My Lords, noble Lords will understand that I believe that this amendment is vital to the ongoing success of automatic enrolment.
I add my congratulations to the noble Baroness, Lady Drake, for the work that she did with the original Pensions Commission, which set up automatic enrolment. It has been a success. My amendment seeks to build on auto-enrolment by introducing protections particularly for low earners—at least 70% of whom are women—and provides that the Secretary of State must make regulations that require the trustees, managers, administrators and employers of these workplace pension schemes to ensure that the scheme is suitable for low earners and treats them fairly.
I seek to introduce this into the Bill because, currently, more than 1 million women who are earning below the personal tax threshold, which is around £12,500 in any one job, are required to pay—unwittingly and unknowingly in probably all cases—25% more for their pension because their employer has chosen a particular pension scheme that is not suitable for them because it charges them so much extra.
The noble Lord, Lord McKenzie, referred to addressing pensioner poverty and undersaving. Clearly, the fact that the lowest earners in the country have an extra 25% added to the cost of their pension, which has to come out of their pay, makes them more likely to have affordability issues and could, potentially, lead to them opting out of the pension because of the extra costs. These are, generally speaking, the people who most need help to build up a pension for later life and who are at greater risk of pensioner poverty. That is what the auto-enrolment system was meant to address, given that we have the lowest state pension in the developed world.
Baroness Bowles of Berkhamsted
My Lords, I signed this amendment and I do not think there is a great deal to add to what the noble Baroness, Lady Altmann, has said. I am sure we are all familiar with the phrase that two wrongs do not make a right. As has been explained, this is one of those instances in which two rights have ended up making a wrong, in that auto-enrolment and raising the tax thresholds were right but have resulted in more and more people falling into this trap. If we are to believe all the things we read in the newspapers about the Budget, it may be that more right things will be done, in terms of tax thresholds, that will then trap more people in this wrong of paying more than they should for their pension. These people would be better off if they were not in the scheme but in a private pension scheme because there would be mechanisms for them to get that tax relief.
The problem could be adjusted through the tax system because it knows who they are. There are various ways in which it could be addressed. The noble Baroness, Lady Altmann, has put forward one in which it is up to employers to seek out the solution. If that is regarded as too onerous, something else must be done because this really is very bad, once again hitting the people who always seem to be at the rough end of every deal and are predominantly women. I am not quite sure how it is taken into account in universal credit—whether it asks, “Are you paying more for your pension than you should?”—but I would not mind betting that many of them will be the same people who suffer at every twist and turn. I therefore strongly support this amendment.
Lord McKenzie of Luton
My Lords, I, too, support this amendment. We should congratulate the noble Baroness, Lady Altmann, on the diligence with which she has persisted on this matter for quite a long while. As she hinted, she was responsible for convening an industry group that spent a lot of time digging into this to make sure its focus was right.
The reality is clear. There are two systems giving tax relief and no reason in principle why they should not both deliver the same result. One does not for low earners at the moment. Which of the two systems you are in depends on your employer’s choice. That simply cannot be right. As the noble Baroness said, there are ways of dealing with this. I understand that the Treasury has set its face against that to date. Of course, for the Treasury, the downside is that providing a bit more tax relief means having a little less revenue. However, we are talking about the lowest paid, who are being disadvantaged by this. It is about time that this was brought to a halt.
Earl Howe
My Lords, I am grateful to my noble friend Lady Altmann for her amendment. I am well aware that she is a passionate and long-standing campaigner on the issue of lower-paid workers automatically enrolled into a workplace pension who may not benefit as much as other lower-paid workers for their pension saving.
As my noble friend will know—I hope she will not mind my saying this en passant—pensions tax relief is a matter for the Treasury, with the differing treatment of people in net pay arrangements and relief at source pension schemes determined by the Finance Act 2004 which, strictly speaking, is outside the scope of the legislation before us. That does not prevent me giving her as full an answer as I can.
Automatic enrolment legislation defines which qualifying workers are to be put into workplace pensions by reference to their age, earnings level and their being working or ordinarily working in the UK. I appreciate that this is essentially a probing amendment and that the precise wording is of secondary importance, but its reference to the low paid is not a definition recognised in the Pensions Act 2008. It would make it very complex and burdensome for employers accurately to identify the group to be covered by the proposed regulation-making powers.
Automatic enrolment has always sought to balance its core aim of helping working people build up their retirement savings with an implementation approach that recognises the costs and administrative burdens that will inevitably fall on employers. We are mindful that those duties must be proportionate and restricted to the minimum necessary to achieve our policy objectives. That is why pension scheme choice under automatic enrolment is reserved to the employer, who is required to use a scheme that meets minimum quality standards set out in legislation. Tax relief is only one of the factors that an employer should be considering when choosing a scheme for its employees, alongside whether it will accept all its staff, how much it will cost for the employer to administer and whether it will work with the existing payroll systems.
The employer’s decision will be informed by detailed guidance provided by the Pensions Regulator via its automatic enrolment compliance website, including information about the tax implications of different types of scheme. We should remind ourselves that there is guidance on the Pensions Regulator’s website to help employers understand the impact of scheme choice on lower earners below the personal allowance. I am well aware of how much assistance my noble friend gave on this when she was Pensions Minister.
Consequently, the current legislative framework is not set up to allow government to impose broad, undefined requirements on pension scheme trustees, managers or administrators in the way proposed by the amendment. Employers have duties under automatic enrolment, and they select a pension provider from the marketplace, based on their legal obligations towards qualifying workers and the commercial needs of the organisation.
The suitability of an automatic enrolment scheme is determined primarily through statutory quality requirements. Many employers will choose a master trust scheme, which is subject to an additional regulatory framework. All automatic enrolment schemes are registered pension schemes and their members are further protected by the broader legislative framework for occupational and personal pension schemes.
Baroness Altmann
I thank my noble friend for his response. I welcomed, very much, the commitment in the manifesto to look at this issue. However, I hope he will forgive me if I suggest that this is not necessarily a matter just for the Treasury. Tax relief is, of course, a matter for the Treasury but the duties of schemes, trustees, IGCs and employers is a matter for the Pensions Regulator. Also, auto-enrolment falls under the Department for Work and Pensions. Might it therefore be possible—I humbly request this of my noble friend—to go back to the department to consider whether this issue of suitability could go broader than just tax relief? It could include all sorts of other areas: for example, an employer might choose a scheme that the majority of the workforce might not like to be in, but there is no mechanism for them not to be put into it.
If that is considered too difficult, I certainly take the point on low earners. This is a probing amendment and I would, for example, be happy to specify those earning below the personal tax threshold—that is really what we are talking about and it could be addressed. I understand and recognise that there is guidance for employers on the Pensions Regulator’s website but the requirements for master trust authorisation, or the requirements put on IGCs and trustees of these pension schemes, do not include taking any concern for the extra costs imposed on those earning below the personal tax threshold. One wonders how value for money could be confirmed by those running pension schemes if many people in those schemes pay 25% more than they would if they were in an alternative scheme. There is a requirement for a value-for-money assessment but it does not seem to take account of these low-earning women.
I would be delighted to help the Government fulfil their aim of addressing this issue. Notwithstanding that, I would be grateful if my noble friend might consider whether there should be some extra duty. If it is not just on employers—I take that point and I mentioned it in moving the amendment—at the very least the trustees, the IGCs and the regulator know what is going on, even if in most cases the small employer does not. I have seen the wording on the Pensions Regulator’s website; it is not really clear, if you are someone who does not know what this is all about, that actually it means that because of the scheme you have chosen, your low earners will pay 25% more than they otherwise would.
Whether or not we can address this in the Bill—I hope that maybe we can—I am grateful to noble Lords who have supported the amendment. I am also grateful to my noble friends the Ministers, and the department, for having taken the time to continue to discuss the issue. I beg leave to withdraw the amendment.
Lord McKenzie of Luton
I heard the Minister’s reply, which seemed a recipe for no action—not this year or next. Given all the hard work that has gone into developing thoughts on this, that does not seem fair. If we are saying that the legislation—or the regulation—is not fit for purpose as it is, why do we not change it? Whatever happened to taking back control?
Earl Howe
I promise that nothing I said was intended as a recipe for no action. The problems that my noble friend articulated well relates to how we solve this problem, not whether we are committed to doing so. Unfortunately, it does not admit of a straightforward answer. If it did, we would have solved it long ago.
Baroness Altmann
“Multi-employer pensions scheme
The trustees of a multi-employer pension scheme may cancel a debt which became due from a departing employer before the coming into force of this section in relation to the scheme under section 75 of the Pensions Act 1995 if—(a) failure to pay the debt would not materially reduce the scheme’s assets relative to the estimated debt in relation to the scheme,(b) the majority of the debt relates to liabilities in respect of members working for employers no longer participating in the scheme,(c) the employer has not done an act or engaged in a course of conduct that detrimentally affected in a material way the likelihood of accrued scheme benefits being received (whether the benefits are to be received as benefits under the scheme or otherwise),(d) at the time of the cessation of the employer’s participation in the scheme, the scheme was estimated to have sufficient and appropriate assets to cover its technical provisions and the employer had no reason to believe there was a significant scheme deficit,(e) the employer has been operating as an unincorporated business and the owner would face personal bankruptcy, or the employer has been operating as a small business which would become insolvent, if required to pay the debt,(f) the debt is below a de minimis threshold in relation to the size of the overall scheme liabilities, as estimated by the trustees or managers on advice of the scheme actuary as if the whole scheme had been winding up at the time the debt was treated as becoming due, and(g) the employer has always taken all reasonable steps to fund the scheme as demanded by the trustees before the employer cessation event.”
Baroness Altmann
My Lords, perhaps I should apologise for taking the Committee’s time on issues that I feel have an opportunity to be resolved in the Bill. I hope that noble Lords will understand that I am doing this because I want to see pensions work better, and I care passionately about a system which I believe works really well in general. but there are areas that are causing significant problems which we may be able to address.
The issue at hand in this amendment is directly relevant to the Bill. It is about multi-employer pension schemes, where the current legislation has unintended consequences and causes significant damage in ways that it was never designed to do. There may be a way in which we can try to address that. I am not claiming that the wording of this probing amendment will fit the bill, as it were. However, in the plumbing multi-employer pension scheme—the one I have most experience of, but by no means the only one; there are a number of charity schemes as well—the trustees seem to be trying to force good employers into personal insolvency and homelessness to pay into the scheme the cost of buying annuities for workers who never worked for them. This is in a scheme which has always been said to be fully funded, with enough money to pay all its pensions: in the December 2019 employer update it was reported to be funded to 108%. It had an 8% surplus at its last measure. The scheme will not buy the annuities that these people’s homes will be taken away to pay for, while the employers have paid every penny of the contribution ever requested by its trustees.
In this pensions Bill we are dealing, quite rightly, with new measures for the Pensions Regulator to deal with recalcitrant employers, who may have deliberately decided—or the regulator may believe have deliberately decided—not to put enough money into the pension scheme. We are introducing measures which I have tried to build upon in my amendment, which gives reasons why the regulator may not impose a contribution notice, for example, on such a recalcitrant employer. I am trying to look at the conditions we might able to introduce in multi-employer schemes, which go back some time—for example, the ones I have looked at go back to the 1970s—and used to have 4,000 employers. Many of them have been allowed to leave or have failed. Now there are around 400 left. These are responsible for all the people who worked for those thousands of other employers, as well as the very few who worked for them.
I wonder whether we can find ways that mimic the easements for recalcitrant employers to salvage the situation for these often unincorporated businesses, such as partnerships which have been in a family for decades or very small companies. If the owner or the individual retires, they crystallise the Section 75 debt. If they try to pass the business to their son, they trigger the Section 75 debt. If they incorporated from a partnership to a company, they triggered the Section 75 debt but nobody ever told them. The size of the debt they owe is immaterial to the survival of the scheme. I am trying to see whether we can use a materiality test, a solvency test or a reasonableness test to deal with this unintended consequence of Section 75 debt, which had a strong and right purpose: if an employer was to walk away from a pension scheme, it needed to make sure that it had put enough money in to meet its promises to all its staff.
I have tried to introduce conditions through this amendment which would permit trustees not to collect the Section 75 debt. They are: if failing
“to pay the debt would not materially reduce the scheme’s assets relative to the estimated debt”;
if
“the majority of the debt”
owed by the employer is for orphan assets—workers who never worked for that employer, so the main employer could not try to use this provision; if the employer has never tried to avoid the debt or to damage funding; if
“at the time of the cessation”—
the Section 75 crystallisation—the scheme was fully funded on technical provisions; if the employer is unincorporated or a small business, and we may need to add partnerships, and faces personal bankruptcy or insolvency; and if the employer has always paid all the contributions asked for, then the trustees would explicitly be permitted not to collect the debt.
The total debt for the employers which I have seen suffering particularly from this is £7.2 million. That may sound a lot of money, but this scheme is worth well over £2 billion, so whether it collects that extra few million pounds will not make a difference to its solvency and survival in the long term. We seem to have lost sight of reasonableness. I hope we might define the circumstances tightly so that other employers cannot use this provision as a precedent. I completely understand concerns that we do not want it to be used as a precedent. The size of the debt is immaterial, relative to the solvency of the scheme.
I have deliberately worded Amendment 94 so that it follows new Section 58B(2) on page 91 of the Bill. Under that provision, the Section 75 debt or contribution notice will not have to be imposed. It says:
“A person commits an offence only if (a) the person does an act or engages in a course of conduct that detrimentally affects in a material way the likelihood of accrued scheme benefits being received”.
Clearly, in the case I described, in multi-employer schemes that test would not be met for imposition of the debt. The new section continues:
“(b) the person knew or ought to have known that the act or course of conduct would have that effect”.
These employers have paid everything that they were ever asked for and were always told that the scheme was fully funded, so they would never have known that there was a problem. The trustees of the scheme did not even try to collect Section 75 debt between 2005 and the past couple of years. The new section then says:
“(c) the person did not have a reasonable excuse for doing the act or engaging in the course of conduct”.
Again, if someone is paying everything that is due, the size of the debt is not material to the solvency of the scheme and the scheme is not buying annuities anyway, can we not inject some reasonableness? There are already easements but they do not meet these circumstances.
Baroness Bowles of Berkhamsted
My Lords, I have added my name to this amendment because the circumstances that have been outlined are distressing and there seems to be no easy way for the affected people to address them. If they were bigger and more powerful, it is certain that they would not be pursued—not least because the instructions for pursuit, if I can call them that, are that you have to be able to recover more than it costs you to do so. It would not take a great deal of litigation for that to be backed off from.
It is another example of how unfair it is when people who have run a business as a partnership, unincorporated, are at a disadvantage compared with those who take advantage of limited liability. You are not doing anything bad by putting yourself and your livelihood on the line. It may be that it has not been done in the way that it should have been in small practices, such as plumbing companies, but when you find yourself in this kind of situation—which you would not be in if you had been incorporated—it has always been difficult to see fairness in the law.
The noble Baroness, Lady Altmann, has produced a tightly composed amendment. I have studied it and it seems to fit the bill. Obviously, if someone can improve on it that would be fine. Otherwise, I do not see how there will be fairness for those who do not have equality of arms with the larger companies, which have sometimes been allowed to leave schemes without necessarily paying up as much as they should. In such cases, the burden falls on smaller firms. The trustees should have taken that into account long ago. If they have not, why should the burden fall on those who cannot find the means to take the matter to court? Basically, that is what this is about. A large employer in the scheme would fight the case and perhaps there would be claims for negligent behaviour for some of what has gone on. This solution avoids quite a lot of unpleasantness and untidiness that might otherwise be the only way. If there is any way that the Government can pursue this amendment, it would be a very good thing.
Baroness Stedman-Scott
I thank my noble friend Lady Altmann for tabling this amendment and congratulate her on her tenacity in continuing her campaign to resolve this situation. If we were giving awards for tenacity, she would win, I am sure.
The Government understand the difficulties facing employers in these situations, especially where, in the past, they have taken all reasonable steps to fund the scheme as requested by the trustees. The amendment seeks to amend Section 75 of the Pensions Act 1995 to allow trustees further discretion to cancel a departing employer’s debt in certain circumstances. It raises a number of issues that I will address.
The effect of this amendment would be that every time it is applied, the employer covenant would be weakened, increasing the risk of thousands of members not getting their benefits in full. It is hard to envisage a scenario where trustees could agree to such an arrangement and still be compliant with their fiduciary duty to act in the best interests of scheme members. In particular, the proposals for a new de minimis threshold raise significant issues. Even if the threshold is set at a very low level, it could enable a large number of small employers to depart schemes without payment. The aggregate impact of this could be significant. Passing this level of debt on to employers who remain could make them insolvent.
It is worth noting that some flexibility already exists for trustees to collect reduced employer debts as long as the scheme is funded above a Pension Protection Fund level basis. It is set at this level to ensure that schemes do not place an additional burden on the Pension Protection Fund and, ultimately, the levy payers.
The amendment also proposes that debts could be compromised if the majority of the debt relates to orphan members whose employers no longer remain in the scheme. This would be very difficult for the scheme trustees, who have a duty to ensure that orphaned members’ rights are protected and that their scheme is properly funded. Removing orphan debts from the employer debt calculation would ultimately worsen the scheme’s funding position, putting thousands of members’ pensions at risk.
Further, this amendment would impose different statutory requirements on unincorporated and small employers, creating a number of challenges. For example, if all or the majority of the scheme’s employers were either unincorporated or small, it could mean that none, or very few, employer debts would ever be collected; in the long term, that could create a severe underfunding situation, with all the risks that entails.
The Government’s Green Paper and subsequent White Paper, which was published in March 2018, on defined benefit pension schemes looked very closely at this issue and considered carefully what could be done to relieve the pressure that some employers face from their obligation to pay an employer debt. The White Paper concluded that the existing arrangements in legislation, along with the deferred debt arrangement introduced in April 2018, provide enough flexibility for employers to manage their employer debts. Further, the current full buyout calculation method is the most secure and effective way of protecting members and remaining employers in a multi-employer scheme.
While the Government recognise the difficulty facing companies in managing this debt, they cannot, at this time, offer any easements beyond those already provided for in legislation. However, recognising the many representations that the Government have received supporting a change that would assist employers in this difficult position, we will keep this under review and continue the dialogue.
My noble friend Lady Altmann raised the issue of retired employers triggering a debt and being unable to pass it on. Flexibility in the rules enables retired employers to pass their scheme on to another employer without triggering an employer debt. The scheme has a streamlined, flexible apportionment arrangement, which could help employers in this situation.
My noble friend also made the point that some people find themselves in extreme difficulties, with the potential to lose their home. The employer debt regime is designed to protect employers who remain in a multi-employer scheme. It would be unfair to burden remaining employers with additional unplanned costs to cover the shortfall that would be created by relaxing requirements for one group of employers. The flexible apportionment arrangement currently available in legislation can be used to help unincorporated employers who wish to incorporate.
My noble friend Lady Altmann also asked whether the scheme is fully funded. My noble friend the Minister mentioned that the scheme is fully funded on a technical provision basis. However, I understand that the scheme is underfunded on both a budget basis and a PPF basis. The next scheme valuation is due in April 2020, which will give us a clearer picture of the scheme’s funding position.
I thank my noble friend and other noble Lords for their contributions to the debate on this amendment. I know how important it is to my noble friend, but, on the basis of my response, I respectfully ask her to withdraw the amendment.
Baroness Altmann
I thank my noble friend for her response, but I confess to being extremely disappointed with the robust refusal to address the issue. The current easements are not working, otherwise I would not be trying to press this amendment. The deferred debt arrangement does not remove the debt; it just pushes it into the future, so the person will still be made destitute at some point. Trustees are refusing a flexible apportionment arrangement, so clearly that is not an option.
We seem to have lost sight of the materiality issue and of what we are trying to do with the bigger employers. There are already some ways in which trustees can not collect Section 75 debt. I am just trying to extend those very slightly; it will not apply to the majority of employers in the scheme and it will not materially impact on the solvency and survival of the scheme.
I beg leave to withdraw the amendment, but I urge my noble friend to go back to the department to see whether there are any ways in which we might be able to inject some further easement for multi-employer, non-associated schemes, which were never designed to do this to good employers.
Baroness Stedman-Scott
“11A_(1) The Pensions (Northern Ireland) Order 1995 (S.I. 1995/3213 (N.I. 22)) is amended as follows.(2) After Article 41 insert—“41A Climate change risk(1) Regulations may impose requirements on the trustees or managers of an occupational pension scheme of a prescribed description with a view to securing that there is effective governance of the scheme with respect to the effects of climate change. (2) The effects of climate change in relation to which provision may be made under paragraph (1) include, in particular— (a) risks arising from steps taken because of climate change (whether by governments or otherwise), and(b) opportunities relating to climate change.(3) The requirements which may be imposed by the regulations include, in particular, requirements about—(a) reviewing the exposure of the scheme to risks of a prescribed description;(b) assessing the assets of the scheme in a prescribed manner;(c) determining, reviewing and (if necessary) revising a strategy for managing the scheme’s exposure to risks of a prescribed description;(d) determining, reviewing and (if necessary) revising targets relating to the scheme’s exposure to risks of a prescribed description;(e) measuring performance against such targets;(f) preparing documents containing information of a prescribed description.(4) Regulations under paragraph (3)(b) may, in particular, require assets to be assessed by reference to their exposure to risks of a prescribed description and may, for the purposes of such an assessment, require the contribution of such assets to climate change to be determined.(5) In complying with requirements imposed by the regulations, a trustee or manager must have regard to guidance prepared from time to time by the Department.41B Climate change risk: publication of information(1) Regulations may require the trustees or managers of an occupational pension scheme of a prescribed description to publish information of a prescribed description relating to the effects of climate change on the scheme.(2) Regulations under paragraph (1) may, among other things—(a) require the trustees or managers to publish a document of a prescribed description;(b) require information or a document to be made available free of charge;(c) require information or a document to be provided in a form that is or by means that are prescribed or of a prescribed description.(3) In complying with requirements imposed by the regulations, a trustee or manager must have regard to guidance prepared from time to time by the Department.41C Articles 41A and 41B: compliance(1) Regulations may make provision with a view to ensuring compliance with a provision of regulations under Article 41A or 41B.(2) The regulations may in particular—(a) provide for the Authority to issue a notice (a “compliance notice”) to a person with a view to ensuring the person’s compliance with a provision of regulations under Article 41A or 41B;(b) provide for the Authority to issue a notice (a “third party compliance notice”) to a person with a view to ensuring another person’s compliance with a provision of regulations under Article 41A or 41B;(c) provide for the Authority to issue a notice (a “penalty notice”) imposing a penalty on a person where the Authority are of the opinion that the person—(i) has failed to comply with a compliance notice or third party compliance notice, or (ii) has contravened a provision of regulations under Article 41A or 41B; (d) provide for the making of a reference to the First-tier Tribunal or Upper Tribunal in respect of the issue of a penalty notice or the amount of a penalty;(e) confer other functions on the Authority.(3) The regulations may make provision for determining the amount, or the maximum amount, of a penalty in respect of a failure or contravention.(4) But the amount of a penalty imposed under the regulations in respect of a failure or contravention must not exceed—(a) £5,000, in the case of an individual, and(b) £50,000, in any other case.(5) In this Article “First-tier Tribunal” and “Upper Tribunal” mean those tribunals established under section 3 of the Tribunals, Courts and Enforcement Act 2007.”(3) In Article 113 (breach of regulations), in paragraph (3)(b), after “10” insert “or under provision contained in regulations made by virtue of Article 41C”.(4) In Article 167 (Assembly, etc. control of orders and regulations), after paragraph (3) insert—“(3A) Paragraph (2) also applies in relation to the first regulations made by virtue of Article 41A or 41C (whether made alone or with other regulations).””Member’s explanatory statement
This amendment makes provision for Northern Ireland that is equivalent to the provision made by the Minister’s amendment to insert a new Clause after Clause 123.
Baroness Stedman-Scott
Member’s explanatory statement
This amendment makes provision for Northern Ireland that is equivalent to the provision made by the Minister’s amendment at page 118, line 11.
Baroness Neville-Rolfe
“Impact assessment
Within six months of the passing of this Act the Secretary of State must lay an impact assessment before each House of Parliament setting out the expected costs of its provisions for businesses, and governmental and non-profit organisations.”
Baroness Neville-Rolfe
My Lords, my noble friend Lord Howe took great trouble in Grand Committee on 2 March—at column GC237 in Hansard—to respond to my earlier amendment on impact assessment. He made an admirable commitment to transparency, both on costs and benefits, on the range of measures in the Bill. Time is passing and I see no need to delay the Committee further. If it is in order, I will not move the amendment.
“Regulations
Regulations under this Act may not—(a) create a new criminal offence,(b) create a regulator,(c) create multi-employer collective money purchase schemes,(d) significantly restrict the powers of trustees, or(e) amend primary legislation.”
Baroness Bowles of Berkhamsted
My Lords, in Committee there has been broad resistance by the Government to positive amendments suggesting what could be put in the Bill to give reassurance about many of the issues raised. The Government claim that that needs to be the case to preserve flexibility, but that does not get over the fact that there are very broad delegated powers in the Bill, as pointed out by my noble friend Lord Sharkey on the first day in Committee and by the Delegated Powers Committee. There is no certainty about how far those broad powers will be used. They are not called Henry VIII clauses for nothing, although delegated powers nowadays put Henry VIII in the shade. I believe the noble and learned Lord, Lord Judge, elaborated on that last year.
This amendment goes the other way. Instead of making suggestions to clarify what needs to be done, it clarifies five things that the Government may not do under the delegated powers. It is, of course, a probing amendment. I could have made a longer or different list, and a couple of matters are in it specifically to enable further discussion. However, despite the probing nature of the amendment, its form is not novel. It has appeared in other legislation, and I believe it appears several times in the withdrawal Act. It is a known way of addressing issues of concern in skeleton legislation. I may have helped it into a few pieces of legislation, but I consider that such a clause should always exist.
I shall take each of my points in turn. Proposed paragraph (a) states:
“Regulations under this Act may not … create a new criminal offence”.
That provision has been used before to constrain broad powers in legislation. A new criminal offence should always come to Parliament in such a way that it can be amended or rejected. I believe there are examples of finding a new criminal offence within a set of regulations with no amendment possibilities; indeed, I have been on one of the Secondary Legislation Scrutiny Committees, and there were examples. That should not happen. It would be a disproportionate use of delegated power—that has been suggested when I have run such a proposed clause—yet it has been used and therefore it is reasonable to suggest that it should not be. In the instance of pensions, and despite the fact that I have argued on this Bill that the criminal offences are not drawn wide enough, so I am certainly not a dud with regard to them, I do not believe that it would be reasonable to make new ones by regulation. The relevant clauses in the Bill are easily wide enough to do that.
Proposed paragraph (b) is about not creating a regulator. There appears to be a strong danger of that here because the wording that enables powers to be conferred on any person could enable the creation of a regulator. I think the wording is “discretion”, but my noble friend Lord Sharkey inquired as to what it meant and the reply came back that it could be any powers to any body, therefore it would enable the creation of a regulator. There is an example of that in Clause 51. If the person who is designated is already a regulator which has been set up under primary legislation, it is not a problem to expand its powers appropriately, but if a new regulator is created, that would be wrong. So why are there clauses in the Bill that are wide enough and of a description that would enable that? My wording here does not capture all the wrongs that could happen under any power to any person provisions, but at least it draws a line.
Proposed new paragraph (c) prohibits the creation of a multi-employer collective money purchase scheme through regulations. I refer back to issues that have already been discussed with regard to problems in the plumber pension scheme. There are other examples of difficulties caused by withdrawals from collective DB schemes. It can come around in particular when large and small employers are put together. Our discussions with regard to collective money purchase schemes have already made it clear that there are issues on which we are still uncomfortable in the context of the employee risk, even in a single CDC scheme. The Post Office scheme is not an everyday case; they will start out with some advantages. There will be even more unknowns in the multi-employer scheme. For example, the pool for risk-sharing is larger, which might seem attractive, but the risk of a larger group leaving is then an awfully large matter for the remaining pensioners to take on board.
Proposed new paragraph (d) is not to
“significantly restrict the powers of trustees”.
I do not mean to override the powers the regulator has to sanction trustees for improper behaviour. I put this point in because there has already been discussion as to whether some of this Bill’s provisions are encroaching on the day-to-day decision-making of trustees—for example, with regard to investment policies. There are noble Lords here who have far more experience of pension trustees than I do, and I particularly value thoughts on the usefulness of this provision. I want to be clear: I am not suggesting that this is anything to do with preventing regulators having the right balance of powers to do things. It is where they would intervene on day-to-day matters.
Proposed new paragraph (e) prevents amendment of primary legislation. I am aware that this is in conflict with the powers the Government have given themselves in Clause 47(5). It is a matter of principle. Pensions are a highly sensitive policy area, and it would be wrong if a Government could selectively change or revoke significant consumer protection provisions without scrutiny at the level of primary legislation. The clause says:
“Regulations under this section may among other things … amend, repeal or revoke a provision of this Part or any other enactment.”
A short while ago, when we were discussing one of the amendments from the noble Baroness, Lady Altmann, I think I heard that the Minister did not think there was the power to do certain things. Actually, the Government jolly well have it here, because they can “amend, repeal or revoke” anything they like—any enactment—so I think that was not a valid excuse, if I can put it that way.
Of course, the real problem here is that parliamentary procedures are deficient in that departments have to enter into a bidding process to get Bills and, because of time constraints, they do not come around superabundantly. The only other option, regulations, is not really democratic on the level on which they have become used. It is possible for the Government to do something about that, but it is my view that, until it is done, restraints must be placed on powers in the manner I propose—all the more so when there is lack of policy guidance.
I know we have had exchanges before on whether there is adequate policy guidance. Some of us think there is not, and the noble Earl has said it is all about implementation and the policy is there. I cited Clause 47(5), and Clause 51(3) says:
“Regulations under this Part may … confer a discretion on a person”.
When that was discussed—when the noble Lord, Lord Sharkey, raised the clause stand part debate on Clause 51—my immediate scribble was “may not create a regulator”, which was directly in response to what could be covered under “discretion”. That, therefore, is the reasoning. I could give more reasons and find many more examples of where discretion is conferred: a failure to really tie it down to the policies. Given that where helpful suggestions have been put forward that would perhaps have given more reassurance on the true nature and scope have been resisted, there is no alternative but to outline what may not be done. I beg to move.
Baroness Altmann
My Lords, I add my support to many aspects of the amendment from the noble Baroness, Lady Bowles. She is trying to do something very helpful for the Committee and the Bill. We have all expressed concerns about the wide-ranging powers in this Bill, which seem to go a lot further than normal for such Bills. I recognise that pensions Bills tend to have wide powers added to them, but it makes sense to identify areas where we would not wish the legislation to allow a Minister to do things that would normally come back to Parliament for our scrutiny or further legislation.
Baroness Sherlock
My Lords, I, too, share the aspiration of the noble Baroness, Lady Bowles, to constrain somewhat the use of the extensive powers that the Government are blessing themselves through this Bill. I will not, however, reopen that debate in any great detail, although there is a temptation to say “We have another whole hour of Committee, we can debate this at great length”. The danger of a list is that some noble Lords will have concerns about particular aspects, such as constraining trustee power, while some will be in favour of multi-employer collective money purchase schemes. Most of us, however, would have reservations about the ability to amend primary legislation.
Although it may not feel as though Bills come along in super abundance, in the field of pensions it feels like they come along all the time like the number 19 bus, but I take the point. In fact, if we are going to have a list I would like to add to it: I would start with not allowing dashboards to do transactions without covering that in primary legislation. I have a long list in my notes which I will develop at length should we return to this. What might be helpful is if the Minister, in replying, would tell Committee whether the Government intend to do any of these things.
Baroness Stedman-Scott
My Lords, the question of delegated powers has already been extensively discussed in relation to the relevant clauses. My noble friend Lord Howe has already eloquently covered the Government’s position on these powers. As I said before to this Committee, the use of secondary legislation to set out more detailed technical matters, or to amend primary legislation for specified purposes, is consistent with the general approach in pensions legislation.
As with other pensions legislation, the provisions in the Bill embody the fundamental policy, while provisions of a more technical nature, or which are by their nature liable to change, are delegated to secondary legislation. This staged approach has two benefits. First, it enables flexibility to ensure that the legal framework remains appropriately tailored to developments in the pensions industry. Secondly, it enables government to provide legal certainty more quickly. This is important for the pensions industry and for member protection. It is a common feature of pensions legislation, which is by its nature very technical and can be subject to change.
Baroness Bowles of Berkhamsted
I thank the Minister for her responses. Referring to the question put by the noble Baroness, Lady Sherlock, as to which of these the Government may be doing, I think the answer has come back: all of them. I will go through them.
With proposed new paragraph (a), to
“create a new criminal offence”,
I was not focusing on fine-tuning Clause 107. We are used to how fine-tuning of an existing offence is done. If you look at some other areas, such as sanctions and anti-money laundering, you will see that it is a new criminal offence every time a new sanction is created, but the framework for what has to be done to create such a sanction is laid out in the Bill. If the right kind of policy direction is given in the Bill, you can be allowed to do more. I beg to differ with the assumption that there are no powers here, when the Government can amend any enactment. It puts no restriction on what they may do, so I do not think there is any legal certainty around not creating something that is a completely new idea of a criminal offence.
I am pleased to hear that there is no power here to enable the creation of a regulator. I would be interested to look again at the Hansard from the first day of Committee, because under the requirement to
“confer a discretion on a person”,
the person can be a body corporate and the discretion was specifically referenced as “powers”, if I remember rightly. I would be happy to accept a Pepper v Hart statement that there is to be no creation of regulators, if the Minister felt able to make one.
It has been made clear that there is the intent to create multi-employer collective money purchase schemes. This worries me greatly: having looked at it further, I am now less than certain about the general benefits and there is a risk to pensioners and employees. So many of the points put forward over the four days of Committee debates show that we have not got sufficient guidance as to what that shape will be. It worries me quite a lot that although we cannot yet work out how to do it fully for one, we are going with the more risky multi-employer system.
The requirement to
“significantly restrict the powers of trustees”
is, I suppose, a trick point. If anything does not deserve to be in the list, it is that, but I have drawn out a debate around the point, as I hoped to. Perhaps we have to be able to do that, but maybe there is some other way to make sure that it is framed with care.
My amendment then comes back to the amending of primary legislation. This is a wide power and I know that it can be used usefully, but such wide powers are never based on a single regulation. An individual regulation that could amend or revoke primary legislation would mean that Parliament could then reject it without being accused of always throwing the baby out with the bath water and losing all the other good things in the regulations. That might be a more reasonable way to approach things, but we know that that is not how it happens: we find ourselves doing something that we do not like because it is a small element of a much bigger thing. It is always done when the Government can make the case that it is urgent and that it will be a total disaster if it is booted out.
Baroness Sherlock
I am grateful to the noble Baroness for giving way, especially as I am about to abuse her generosity by asking a more general question. It is directed across the table, and is something that I forgot to ask in my own contribution.
The noble Baroness asked for assurance on various points. At various times during the Committee, the Minister has kindly agreed to write to noble Lords. Can the Minister confirm that those letters will come before Report?
Baroness Stedman-Scott
I can absolutely ensure that those letters will be with all Committee members before Report. We have debated these issues and I have listened to the concerns raised by noble Lords. We believe that all the powers are suitable and appropriate.
Baroness Bowles of Berkhamsted
I am not convinced, but we will await those letters—that was a very useful intervention. This is a matter that, one way or another, we may have to return to in some guise on Report. For now, I beg leave to withdraw my amendment.
Pension Schemes Bill [HL]
Tuesday 30th June 2020
(4 years, 4 months ago)
Lords ChamberRead Full debate Pension Schemes Act 2021 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 104-I Marshalled list for Report - (25 Jun 2020)
15:27 - Division conducted remotely on Amendment 32 - Ayes: 270 / Noes: 246 - Amendment 32 agreed.
19:00 - Division conducted remotely on Amendment 52 - Ayes: 281 / Noes: 244 - Amendment 52 agreed.
20:03 - Division conducted remotely on Amendment 63 - Ayes: 270 / Noes: 236 - Amendment 63 (to Amendment 62) agreed.
20:58 - Division conducted remotely on Amendment 71 - Ayes: 263 / Noes: 227 - Amendment 71 agreed.
Baroness Stedman-Scott
Member’s explanatory statement
This amendment and the Minister’s amendment at page 7, line 18, make all regulations under Clause 11(3)(a) subject to affirmative resolution procedure (see Clause 51(5)).
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Stedman-Scott) (Con)
My Lords, perhaps I may start by addressing the government amendments. I recognise that in Committee and in subsequent meetings, some noble Lords expressed concern over the regulation-making powers in Part 1 and how they might be used. I have considered those arguments carefully and am persuaded that your Lordships are, in many instances, right. Following your Lordships’ helpful comments, I am now persuaded that it would be more appropriate to make certain regulation-making powers subject to the affirmative procedure on all usages. I recognise that CDC schemes are a totally new form of pension provision in the UK and it is right that Parliament is, as a matter of course, able to debate changes to key parts of the regulatory framework surrounding them.
Your Lordships will recall that Clauses 11 to 17 set out the authorisation framework that all CDC schemes must meet. I know that the House was concerned by the delegated powers in respect of these clauses, as they provide for the core foundations of the authorisation regime. I am pleased, therefore, to announce that those delegated powers which were subject to the affirmative procedure only on first use will now be subject to the affirmative procedure on each use. In addition, the transfer-related regulations for CDC schemes, introduced by Clause 25, will now always be subject to the affirmative procedure rather than the negative procedure.
The relevant provisions contain two powers to amend the timeframes set out in primary legislation which govern when action must be taken by trustees once a transfer out of the scheme has been requested. First, there is a power to extend the time in which trustees must facilitate a request to transfer out of a CDC scheme to a period longer than the specified six months. Secondly, there is a power to amend the three-week “cooling-off” period, during which trustees may not facilitate the requested transfer unless they receive written instruction from the member to do so. Given the importance a decision to transfer out of a CDC scheme may have for a member, it is right that regulations in respect of the timeframes for related action are debated in Parliament under the affirmative procedure as a matter of course.
Amendments 35 to 38 make changes to Clause 47 to make it clearer that this power is not as wide as it may have appeared on first reading. I understand noble Lords’ concern about this clause: it contains a Henry VIII power and as such it should be as clear as possible when and for what purpose it can be used.
Our amendments make it very clear that the power can be used only to provide for non-employer established schemes, such as master trusts, and other non-connected multi-employer CDC schemes as and when concrete scheme designs come to light over the next few years. Noble Lords may recall that the Work and Pensions Select Committee in its report on CDC schemes called for our legislation to be extended to provide for CDC master trusts at the earliest opportunity, and organisations from commercial pension providers to trade unions and even the Church of England have made similar requests.
However, there are clear administrative differences between a scheme with one closely involved employer and a master trust with many more distant employers. The authorisation and supervision legislation will therefore need to be tailored to reflect the risks posed by such schemes and providers so that members and participating employers are to be adequately protected.
This is what Clause 47 seeks to do. It is intended to allow us to make the necessary changes via regulations in a timely fashion so that master trusts and other non-connected multi-employer CDC schemes can be up and running as soon as possible, and employers and employees can benefit at the earliest opportunity. Without this clause, it is likely that the extension of CDC provision to master trusts and other non-connected multi-employer models would be delayed.
However, I assure noble Lords that any such changes required would be considered carefully and consulted on thoroughly before being brought before the House to ensure that they covered the right ground. Such changes would also be subject to the affirmative procedure, which would give the House opportunity to scrutinise the regulations.
The amendments before the House are intended to address concerns in key areas— authorisation, transfers and the provisions relating to the future expansion of CDC—and I am grateful for the informed and thoughtful comments that have led us to this point. The points that I have made also apply to the corresponding Northern Ireland provisions in Part 2 of the Bill. I hope that noble Lords are reassured by the amendments. I beg to move.
Lord Sharkey (LD) [V]
My Lords, I shall speak briefly to government Amendments 1, 3 to 7, 9 to 12 and 14 to 31, as well as to my related Amendment 2. First, I thank the Minister and her team for their close engagement with us on the Bill and their time, patience and occasional willingness to change their minds.
The government amendments are a good example of mind-changing. As the Minister said, they remove the instances in Part 1 of first-use-only affirmative procedures; that is a very good thing. The DPRRC’s report on the Bill in February this year was concerned about the use of these procedures. It pointed out that the powers in the regulations remain exactly the same on subsequent use. In Committee, I strongly urged the Government to remove this type of procedure; I very much welcome the fact that they have now done this. All the subsequent uses of the negative procedure have been withdrawn by these amendments.
However, one negative procedure remains: what is left of Clause 11(8) in line 18 on page 7. This is the subject of my probing Amendment 2. Subsection (8), as amended by government Amendment 3, prescribes the negative resolution procedure for regulations under Clause 11(2)(e). Subsection (2)(e) seems a little opaque. It seems to allow the Secretary of State to add persons or categories to those whose fitness and propriety TPR must assess. On 22 June, the Government confirmed to me in writing that this was the case. They believed that this was largely an operational matter and that the negative procedure provided
“appropriate scrutiny as well as opportunity for debate if desired”.
This is a mischaracterisation of the negative procedure, which in practice barely merits the label “scrutiny” at all. Possibly because I did not ask them to, the Government did not address why subsection (2)(e) was necessary at all or give examples of what kind of persons or categories of persons are envisaged in subsection (2)(e) and what role they may play in the schemes themselves. Any additional involvement of these persons or categories of persons may give them significant influence over the conduct of the schemes.
It is obviously desirable to have these new entrants assessed for fitness and propriety. The issue here is the Secretary of State’s decision to add persons or categories to the list without constraint, restriction or proper scrutiny. I would be grateful if the Minister could address these points when she replies.
Baroness Altmann (Con) [V]
My Lords, I very much welcome the Government’s amendments to this Bill and congratulate my noble friend on her initial speech, in which she so clearly explained what the Government intend to do. I also congratulate her on the way in which she has engaged with Members across the House and, together with the Bill team, has listened to the concerns expressed at previous stages of this Bill. I particularly welcome the change from the originally proposed first-use-only affirmative procedure and the comments made by my noble friend on the importance of, for example, the cooling-off period before pension transfers occur.
I must admit that I also support Amendment 2 in the name of the noble Lord, Lord Sharkey. I share his concerns and would welcome an explanation, such as he has requested from my noble friend when she comes to respond, of why only this area—assessment of whether somebody is fit and proper to run a CDC scheme—should be left to the negative resolution procedure and be wholly at the discretion of the Secretary of State without what we would normally consider to be appropriate parliamentary scrutiny in this important area. The CDC framework is completely new for this country. I therefore think that colleagues across the House who have expressed the same concerns are right in suggesting that it is important that we have as much scrutiny as possible.
I have an amendment in this group—Amendment 13—regarding the accuracy of pensions data that needs to be submitted to a CDC scheme. I will not move it at this stage; I will come back to this subject during debate on a later group with my other amendments.
I welcome the current government proposals and hope that my noble friend will listen to some of the concerns expressed. I look forward to hearing contributions from other noble Lords and colleagues as we go forward in this debate.
The Deputy Speaker (Baroness Garden of Frognal) (LD)
We will move on because we cannot hear the noble Baroness, Lady Bennett. We will perhaps try to get her back later. I call the noble Baroness, Lady Janke.
The Deputy Speaker
I did not have a note of that. I call the noble Lord, Lord Balfe.
Lord Balfe (Con)
My Lords, this is the first time for two months that I have been in this Chamber. It is a bit emptier than normal but it is good to be back.
I hoped to speak after the noble Baroness, Lady Bennett, because I want to say a few words about her Amendment 33, which is about trustees. It seeks to require trustees to take age, gender and ethnicity into account. I will certainly not support or oppose this amendment but I want to make a few points on trustees and where I think she is trying to get us to. The fact of the matter is that the whole area around the appointment of trustees could do with a close look.
There are a number of problems. The first problem for any pension scheme, particularly a small one, is getting trustees from among the membership. You can always get a professional trustee because they are normally paid £1,000 or more a day for coming to the meeting, so it is not too difficult. The difficulty is getting representatives of the pensioners. The second and even greater difficulty is getting representatives of the pensioners who actually know what they are talking about, because many people are completely bewildered by pensions.
When I read through both this amendment and the amendments about ESG and environmental safeguards, I was reminded very much of pensioners who come to me and say, “All I want, Richard, is for you to pay my pension. I couldn’t care less where it comes from.” I say, “Presumably you wouldn’t like us to invest in gas ovens,” and they say, “Well, no, but you’ve got enough common sense not to do that. You don’t need me to tell you.”
So I come to the point that, when we are looking at the age, gender and ethnicity of trustees, we also need to look at their qualifications and the way in which they are allowed to come forward, because some trustee boards are effectively self-perpetuating because they govern who is allowed to stand. You are invited to apply to become a trustee, and then you are assessed as to whether you are able to become a trustee. Often, people who come forward are not highly professionally qualified, but they are qualified in one thing, which is common sense. My experience of pensions, which goes back quite a long way, is that certainly some members on a board—not a majority—who can demonstrate common sense are extremely good.
I would also like to say that dealing particularly with gender and ethnicity can lead you into many problems. My wife gets a pension from the Workers’ Educational Association pension fund. It got itself tied into complete knots trying to deal with ethnicity and gender. It ended up asking people to vote for trustees who were anonymised. They were anonymised by taking out not only their name, age, gender and ethnicity but also most of the other things about them. So the great game in this case was to look back at previous reports and try to work out which trustee was the anonymised one. Of course, that gets you nowhere and in fact is a bit of an insult to the members who have applied.
So I say to the noble Baroness, Lady Bennett, and to the Minister that this is a subject that is much wider than this amendment, but it is certainly one that needs looking at. The way in which pensioners are represented on the governing boards of pension funds is haphazard, to put it mildly. It varies enormously between funds. Although there is a great cry from professional trustees that you clearly need professionals in the room, I counsel the Minister and everybody else to beware of the cry for the professional. It is very easy to get a professional to sit there and give you advice as an employee or if they are hired for the purpose. You do not necessarily need more than the odd one of them actually on the board. They have nothing great to add than cannot be added by a professional adviser. They do not need a place on the board, although sometimes—note the word “sometimes”—having a professional trustee as a chair can add a certain amount of discipline, knowledge and structure to the way that debates go. But it can be overestimated and, particularly since the pensions industry is dominated by the professionals, there is a great danger that it gets overemphasised because it is precisely the people who write in the pensions papers who are the experts and who then promote themselves for the jobs.
So I welcome the amendment in the name of the noble Baroness, Lady Bennett; I see it just as a probing amendment, laying down a few guidelines that we could look at. I say to the Minister that when there is an opportunity, it would be well worth while to set up some sort of study or working group to look at the way in which trustees are chosen or appointed, how they work and how they are remunerated.
Lord Hain (Lab) [V]
My Lords, I thank the Minister for the way in which she introduced these amendments, and particularly for the concessions that she granted on affirmative procedures for the issues that are contained in the government amendments. This is a very welcome response by Ministers to the feeling that was in the House.
I will speak to Amendment 1 and associated amendments in the name of the Minister concerning the authorisation criteria for collective money purchase schemes. I warmly welcome the introduction of these schemes, also known as collective defined contribution—CDC—schemes, as they represent an attractive third way in workplace pension provision, with a capacity to deliver significantly better outcomes for savers than individual DC—direct contribution—schemes. However, in order for the CDC schemes to be widely trusted, we need to get the legislative and regulatory framework right. To give one example, it is vital that the authorisation criteria are appropriate. A balance must be struck in ensuring that requirements are not so cumbersome as to deter employers who might offer these schemes from doing so, while ensuring that there are robust protections in place for employees saving in these schemes.
If we can get this right, there is a significant prize to be had in the introduction of CDC schemes, and the case for this is only strengthened by the current Covid-19 crisis. The virus has had many negative consequences for our society and economy. One of those consequences is directly relevant to the Bill before us today: there has been significant negative impact on the defined contribution pension savings of many individuals as a result of the financial markets’ reaction to Covid-19. I am afraid that, as the noble Baroness, Lady Altmann, so compellingly pointed out, the Bank of England’s recent injection of quantitative easing will make this much worse. A drop in asset values and bond yields has led to more expensive annuities and resulted in pension reductions of around 8% to 10%. This has caused much consternation and led a significant number of people to defer their retirement during this period.
In my remarks at Second Reading, I welcomed the introduction of CDC schemes and cited, among other factors, their enabling of the pooling of risk between savers. This can, in turn, enable higher-yield investment strategies, as well as less volatility and greater predictability for savers. It begs the question, therefore, of how CDC schemes might have fared in comparison with individual DC schemes in the light of the recent crisis and the sharp economic downturn that has so negatively impacted DC pension savers.
Royal Mail, which in conjunction with the communication workers—CWU—has been leading the push for the introduction of CDC for its 143,000 employees, asked its actuarial advisers to look at precisely this question. The resulting analysis, carried out by pension consultants Willis Towers Watson, was conducted in the context of the 20% fall in the global equity market in the first quarter of this year. The modelling looked specifically at how the CDC scheme design proposed by Royal Mail would have been affected. The conclusion reached by Willis Towers Watson was that the CDC would have performed significantly better than an individual DC scheme. In this scenario, a scheme member close to retirement would have been able to retire as planned, with no reduction in their retirement income. This is because the Royal Mail scheme is designed with a certain amount of headroom in contributions, intended to fund future pension increases. As Willis Towers Watson has written,
“it is only if the funding health suffers very materially that the headroom could run out and pensions would be reduced … in the vast majority of scenarios, it would only be the level of future pension increases that would be at risk.”
Even with the severe level of market shock experienced in quarter one of this year, therefore, the modelling shows no effect on current pension levels for CDC scheme members, and that is very welcome. Future pension increases would be impacted, but only by a modest 0.25% per year, as this market shock was nowhere near severe enough to remove the significant headroom that the scheme would hold. In contrast, an individual DC pension saver, due to retire by starting to draw down benefits in the near future, would expect their pension pot to have fallen in value by approximately 10% over the quarter. While they would have the option to keep the pot largely invested, this saver would potentially have to rethink their retirement plans, such as changing their planned pace of drawdown, or even deferring their retirement altogether for a period. Those considering an annuity would find that the price levels had increased by around 8% over the quarter.
This analysis provides a timely and powerful illustration of just one of the benefits that CDC schemes will bring to savers through the pooling of risk and the capability to build up significant headroom to smooth out the impact of shocks, even those as severe as we have recently experienced. CDC therefore represents an attractive third way in workplace pension provision, offering better value and greater certainty for savers than individual DC schemes. With that in mind, I welcome the Government’s commitment to ensuring that the appropriate processes will be in place around authorisation criteria. I commend the Bill to noble Lords, and I hope that we will see its swift passage through its remaining stages in this House and its early introduction and passage through the other place.
Baroness Fookes (Con) [V]
My Lords, I join other noble Lords who have already spoken in saying how pleased I am to see that my noble friend the Minister has listened to many of the recommendations made by the Delegated Powers Committee, which were warmly endorsed by the committee to which I belong, the Constitution Committee. We have had two powerful committees of one mind, so I am extremely pleased by this turn of events. Perhaps I may make one or two points because I know that the chairman of the Delegated Powers Committee, my noble friend Lord Blencathra, is to come in later in this debate, and I am sure that he will want to go into much more detail than I am minded to do.
The first-time-only procedure has happily now been abandoned in Clauses 11 to 17. It is not simply that the current Administration may well want subsequently to bring forward massive changes, but that they cannot know what use a future Administration might make of them. That is all the more reason to be careful about what powers are given to any Government.
I confess to some disappointment about the negative procedure being used where urgent changes need to be made. The Government seem to be suggesting that that is absolutely essential because otherwise delay would be difficult. Have they not heard of the “made affirmative” procedure, which allows a Government to put a regulation into action immediately, and then after 40 days Parliament has the opportunity to confirm it or possibly to reject it altogether? I hope that the Government, and the departments which support them, will no longer continue to use this weak argument in favour of the negative procedures. That said, I am pleased with the way things have gone and I offer my noble friend a bouquet—a modest bouquet—for what she has done.
Lord Naseby (Con)
My Lords, it is entirely appropriate that I should first declare my interest. I am a trustee of the Parliamentary Contributory Pension Fund; I have been one for the best part of 20 years. I am also 83, and all I can say in reflection is that I was formerly the chairman of three financial companies, and I have been a pension trustee on two schemes prior to the one—the only remaining one—that I am on now. It is not my intention to comment too much on the Bill; rather, I see my role in the interests of the membership—I am a member and there certainly will be others in Parliament who are members—to keep a watching brief and, if appropriate, to make some comments to my noble friend on the Front Bench. I should also say to her that I was the Chairman of Ways and Means in another place and I too was not in favour of the negative procedure for really serious things. She has taken a very wise decision on Amendment 1; I am sure that it is the right one and should be applauded on all sides.
I will listen to my noble friend’s answer on Amendment 2 because, if it is right in the round, there would need to be a specific reason for its not being appropriate in leaving out subsection (8). Amendment 33 is in this group and has been commented on. I have given my age and I think that my gender is obvious, as is my ethnicity. It is appropriate that every set of trustees should have a range of people as regards age, experience, gender and so on, but in my judgment the key issue is commitment. We are very lucky on the Parliamentary Contributory Pension Fund because the members, almost to a man and a woman, turn up regularly to meetings, ask good questions and are good advisers, so that, at the last point, as a fund we were very much in positive territory. As I say, I am not going to make too many comments, so without further ado I once again congratulate my noble friend on the Front Bench.
Lord Holmes of Richmond (Non-Afl) [V]
My Lords, I congratulate my noble friend on the Front Bench on the clarity with which she has introduced this Report, and I thank her and the Bill team for the time, effort, care and consideration they have taken with Members, which is best illustrated by the number of government amendments which have rightly been brought forward at this stage in our proceedings. She has clearly demonstrated what can be achieved collaboratively in the legislative process when it is approached with such openness. She and her team absolutely epitomise a truth that everyone should constantly remind themselves of: two ears, one mouth.
The pensions proposition is one of the greatest creations of civilisation, but just in my lifetime—without giving away my age, I am only slightly younger than my noble friend Lord Naseby—we can see that the proposition has changed, not so as to be unrecognisable but significantly. It started out with a commitment by employers to have defined benefits where they would take the risk. The fund was rightly separated from the employer under the governance model of a trust. That clear separation of powers was eminently sensible because something as significant as someone’s retirement nest egg should be separated from the corporate entity so that if, God forbid, anything should happen to the corporate entity, the pension fund would remain. What has occurred in recent years is an extraordinary shift of that risk, if not a wholesale one, from the employer to the employee, hence the explosion of defined contribution schemes. In reality, neither position is where an individual, a group or even a society would wish to be, given that so much of the risk falls on to one or other of the parties. That is why CDCs have a lot to recommend them, not just in the combining of resources and the pooling of risks, which is a great advantage, but in the positive implications that the initials “CDC” have in other areas of our lives. Let us consider the Commonwealth Development Corporation and the United States Centers for Disease Control and Prevention. We should take something from the positivity of the acronym because it has a lot to recommend it.
This would certainly not be necessary had we not seen some of the changes, not least to how schemes were funded and how the funds were treated, particularly from the taxation point of view. That was one of the biggest nails in the coffin of defined benefit schemes. However, that is water long under the bridge. CDC schemes will become increasingly significant to pension provision as we go forward. They are a positive contribution to this area and I wish this Bill a speedy passage through your Lordships’ House, and its equally speedy consideration and passage through the other place.
Lord Foulkes of Cumnock (Lab Co-op) [V]
My Lords, I, too, thank the Minister for her introduction and for returning to her usual helpful mode on this occasion, unlike during questions the other day. I hope that it does not do her any harm with her Whips, but we are very grateful to her.
I want to speak in support of Amendment 33, which has not yet been moved, although I hope that we will hear later from the noble Baroness, Lady Bennett of Manor Castle. I nearly said “Barnard Castle” but that is a more notorious place.
Diversity, whether based on ethnicity, gender, sexual orientation, age, socioeconomic background or disability, continues to be a key issue facing our society today. Indeed, diversity is still lacking across many FTSE companies in key sectors such as engineering, science, technology and banking, not to mention in this House and the other place.
In the pensions sector, many pension fund trustees and the top levels of executive teams also lack diversity. Some progress has been made. Nevertheless, data from the Pensions and Lifetime Savings Association indicates that, overwhelmingly, private sector pension fund trustees are male. The Pensions Regulator also found that about half of the chairs and a third of the trustees are over 60 years old. With no disrespect to my noble friend Lord Naseby—whom I must be nice to as he is doing a good job on the board of the Parliamentary Contributory Pension Fund, in which I must declare an interest—I think that this is a bit of an imbalance.
Of course I am concerned. In other areas, older people are discriminated against on grounds of age, but in this instance it is younger people who are underrepresented on boards, which make decisions of importance to them as well. With the introduction of auto-enrolment, which has brought about more and more young savers, as well as a greater focus on those in society who are “under-pensioned”, such as women and ethnic minorities, it is important that trustees managing the increasingly diverse pension profile also become increasingly diverse to reflect these savers. Requiring pension schemes to provide information on the diversity of the boards helps to provide some form of greater transparency and opportunities for the better governance of pension schemes.
To add to that, I believe that, although reporting on diversity is important, it may be of equal, if not greater, importance for schemes to be required to provide plans on how they hope to achieve better diversity on their boards of trustees. I hope that the Minister will continue in the helpful manner with which she started and that she will give the House, and me, some encouragement in this direction in her reply.
Baroness McIntosh of Pickering (Con) [V]
My Lords, it is a pleasure to follow the noble Lord, Lord Foulkes. I should say that I grew up near Barnard Castle and it was not notorious at that time.
I echo the tributes that have been paid to my noble friend the Minister. It plays to her strength, charm, innate graciousness and wisdom that she has listened to the concerns expressed at the earlier stages of the Bill. Therefore, I, too, pay tribute to her and thank her most warmly for the work that she and her team have done in this regard.
I also echo the comments about the remaining instruments that will be taken by the negative procedure, particularly where they have an impact and perhaps have to be taken urgently. It is always important to have proper parliamentary scrutiny of these instruments.
For a year—I think at the invitation of my noble friend Lord Blencathra or his successor—I was asked to look at, and shadow, the impact on women’s pensions. During that time, I learned how difficult it is for women to seek advice at the earliest possible stage. I take this opportunity to ask the Minister to reassure the House today that, not just on the face of the Bill but particularly in the regulations that we are empowering under it, trustees, board members and all those concerned, including financial advisers, will be asked to urge women —particularly younger women at the start of their careers—to take advice at the earliest possible opportunity. Never is that more appropriate than with CDC schemes, which are a new form of pension scheme. Echoing the thoughts of my noble friend Lord Holmes of Richmond, I suppose that pensions from defined benefit schemes were deemed to be a sort of deferred income. Now, the situation is completely different with defined contribution schemes and with a generation coming through, many of whom will have student loans to repay and difficulty in entering the workplace at this time.
Lord Blencathra (Con) [V]
My Lords, I will speak to this group and pass observations briefly on other issues raised by the Delegated Powers Committee that are covered by other amendments, so that I do not have to speak again and take up the time of the House.
I begin by saying how nice it is to see my noble friend and roommate Lord Naseby back in the Chamber. I also see that we share the same non-barber. In contradiction to the noble Lord, Lord Foulkes, I want pensioners, not youngsters, on my pension board.
As chair of the Delegated Powers and Regulatory Reform Committee, I give a very warm welcome to these concessions from the Government in Clauses 11 to 17 and Clause 25. As noble Lords will know, our report was highly critical of a number of delegated powers in the Bill, and it would be churlish of me not to acknowledge that the Government, and particularly my noble friend the Minister, have listened to quite a bit of what we recommended. I am sure that the whole committee would be delighted if the Minister would go one step further and accept our remaining recommendations, but that might be a bridge too far for her.
The government amendments to Clauses 11 to 17 now mean that all regulations, and not just the first ones, made under the provisions will have to be affirmative. We said in our report that the Government had failed to justify the first-time affirmative regime. We accept that there will be measures where the first regulation is major and should be affirmative and that subsequent ones might be just little tweaks where the negative procedure might be appropriate. However, that is not always the case, and we see a growing tendency among government departments, in addition to bunging highly inappropriate Henry VIII clauses into every Bill, to use this ploy of applying the first-time affirmative procedure and then the negative procedure for all subsequent regulations. The subsequent regulations here could be as important as the first regulation and I thank the Minister for making the change. The same reasoning applies to Clause 124, and I regret that the Government will not make that affirmative too.
We all accept that speed is often essential, but there is an alternative to the negative procedure which is just as speedy: the made affirmative procedure, whereby the Government lay the regulation, it comes into force immediately and then Parliament has 40 days to confirm it. That is a far better procedure than the Opposition having to put down a Motion against a negative resolution. This procedure would deal also with the amendment of the noble Lord, Lord Sharkey, on the negative procedure. I pay tribute to my illustrious predecessor, my noble friend Lady Fookes, as chair of the Delegated Powers Committee. Today, she made very telling points on the made affirmative procedure and first-time affirmatives.
I welcome the government amendment to Clause 25 too. We generally deplore Henry VIII powers, and for very good reasons: they deprive Parliament of the opportunity to scrutinise properly legislation that should go through all the procedures applied to Bills and Acts of Parliament. It is quite wrong to use the negative procedure, where there is no discussion whatsoever, for Henry VIII powers. At least with the affirmative procedure there is 90 minutes of debate.
As for the government amendment to Clause 47, we said:
“The fact that the Government have not yet worked out how multiple-employer collective money purchase schemes should be regulated has led to very wide powers being conferred by clause 47(3) to (5). Subsection (3) confers a power on the Secretary of State to make further provision in regulations about multiple-employer collective money purchase schemes. Although specific things are mentioned in subsection (3) as to what the powers may be used for. These are not exhaustive of the things which may be dealt in the regulations.”
We therefore recommended that the delegation of powers was inappropriate.
My noble friend the Minister’s amendment goes some way to flesh out the details of the plans, but we are still concerned that they give extensive powers to the Secretary of State. I was going to award the department and my noble friend eight out of 10, but in view of her generosity of spirit, graciousness and courtesy today, I will upgrade that to nine out of 10. While I would have liked all our recommendations to have been accepted, I congratulate the department and my noble friend for moving on so many of them when other Ministers and departments have obstinately refused to budge on anything.
Baroness Bennett of Manor Castle [V]
I thank your Lordships’ House for allowing me to speak. I apologise for the earlier confusion. I also apologise in particular to the noble Lord, Lord Balfe, for upsetting the rhythm of his speech. I thank him and other noble Lords for providing an introduction to Amendment 33. I must pay tribute to the campaign group ShareAction, which has done a lot of work on the amendment. I know that it has informed other noble Lords about it.
I moved the amendment in Committee. In response, the Minister pointed to the consultation on the future of trusteeship, which concluded that, due to a lack of consensus on how to address the issue, it would look at setting up, and is setting up, an industry working group to look at the diversity of pension boards. While this is welcome, we need the data to inform that work. I ask the Minister to consider incorporating this into future versions of the Bill.
A further development has happened since we last debated the Bill. There has of course been a great upswelling of frustration and understandable anger, represented by the Black Lives Matters movement. The issue of ensuring that all voices in our society are heard and have decision-making powers is particularly pressing. I urge Members of your Lordships’ House to consider it.
In response to the amendment in Committee, the Minister stressed that she wanted the pensions dashboard to focus on the provision of basic information. That is why the amendment has been amended so that it does not refer to this information being on the pensions dashboard, but rather that it would simply be reported. Information on diversity could be published elsewhere. That might be on the Pensions Regulator’s website, or as an annexe to its planned SIP repository.
Other noble Lords have referred to the level of inequality in our society and the lack of diversity. I will finish by reflecting on what the noble Baroness, Lady McIntosh, said, and the fact that a 2016 survey showed that on average 83% of pension boards are male and that a quarter are all male. That reflects another crucial disparity: we all know that there is a very large pay gap between men and women, but the pensions pay gap, at 40%, is double the pay gap. These inequalities have to be tackled in our society along with levels of inequality and poverty. We have had a lot of discussions about intergenerational fairness, but we must not forget that there are already a lot of people at pension age now who really are struggling to get by in this difficult world.
I thank your Lordships’ House for the debate that we have had thus far and I look forward to further debates.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, like other noble Lords, I appreciate the government amendments to make regulations by the affirmative procedure. Having thanked the Minister for that, I will move on to speak on noble Lords’ amendments.
Amendment 2, in the name of my noble friend Lord Sharkey, would delete reference to negative procedure regulations being used to change the rules around fit and proper persons. It has been laid out how that might change who becomes a fit and proper person. My question is: would it also affect who might not become a fit and proper person and potentially elaborate further if it is found that people are doing things that should disqualify them? I sense that that might be a possibility. Although, under Clause 11(3)(b), regulators can take into account other such matters as they consider appropriate—I presume that that can be in the negative sense as well as the positive—it would be useful to know whether such powers in other areas as well as this are, in general, used. I detect that regulators are often reluctant to go beyond things that they can specifically point to in regulations. If that is the case, maybe the Minister has an excuse to have these powers. That is the area that I am interested in, but it would certainly be a much more significant move for this to be made by the affirmative, rather than the negative, procedure.
The noble Baroness, Lady Altmann, has tabled an amendment about data that I support, but like her I think that it is probably best to have just one debate on data. I will make my intervention on that later.
I also support the intention of Amendment 33 on diversity. I recognise, as the noble Lord, Lord Balfe, did, that it links to the wider issue of how trustees are appointed and where from. Many trustee appointments will link back to present or former workforces and therefore carry through any historical lack of diversity for quite a long time. Despite the fact that there might be costs to professional trustees, I still think that there should be scope to ensure that there are more additional independent external trustees, without necessarily going to people who are so embroiled in the making of regulations. It should be possible to find objective people who are not necessarily charging the equivalent of full professional rates.
Finally, my Amendment 45 is a simple one that says that regulations may not create a regulator. That might not be the intention, but Clause 51(3)(a) says that regulations may
“confer a discretion on a person”.
A discretion to do what: to allow, not allow or approve certain things? What kind of things and what kind of person? That could be wide enough to allow or disallow the doing of things regarded as being a regulator, yet there are none of the constraints in the Bill that would normally appear in such circumstances. I therefore seek some clarification about what “discretion” means and what powers it might conceal or cover.
Baroness Sherlock (Lab) [V]
My Lords, I should declare a historical pecuniary interest as a former independent director of the Financial Ombudsman Service. I should also declare that my home is in Durham so I have often visited Barnard Castle, but solely for the purpose of visiting the wonderful Bowes Museum. My eyesight is okay for the moment. I will save my remarks on data issues until a later group, but I will briefly address the other two issues raised by amendments in this group.
On regulations, concerns were expressed on all sides in Committee about the use of Henry VIII powers and the skeleton nature of much of the Bill, especially Part 4, but I am grateful that the Minister has engaged with us throughout this process on these and other issues. I think that it will make for a better Bill in the end.
I am grateful to have had sight of the draft regulations under Part 1, even if I would have preferred to see all the remaining draft regulations before Report. I am very glad to see the government amendments clarifying the scope of some of the regulations and those which make regulations affirmative or confirmatory. If nothing else, it saves me from tabling endless Motions just to ensure adequate scrutiny. However, I will be interested to hear the Minister’s answers to the points raised by the noble Lord, Lord Sharkey, the noble Baroness, Lady Fookes, and the noble Lord, Lord Blencathra, about the retained use of the negative procedure and other matters related to delegated powers.
Baroness Stedman-Scott
I start by responding to some of the points that noble Lords have made, for which I thank them. On the point raised by my noble friend Lady Altmann, who questioned whether it should be for Ministers to decide who is running a scheme under negative procedures, let me clarify that the power in Clause 11(2)(e) does not determine who is running a scheme. It simply means that such people as prescribed are subject to regulatory scrutiny.
My noble friend Lady Fookes is obviously highly regarded on the issue of delegated powers. The “made affirmative” procedure is for use where there is a need to legislate in an emergency; here, we are talking about acting urgently, so the negative procedure is appropriate. I also thank her for the bouquet.
I agree with the noble Lord, Lord Hain, about getting regulations right, especially on authorisation. On the points made about the recent market changes and the impact on pension schemes, we will have to keep that under constant review but his support for CDC schemes is much appreciated. He also raised how pension members’ benefits would be impacted by the recent downturn—I have already referred to this—in asset values during the coronavirus pandemic under Royal Mail’s proposed CDC scheme. Like the noble Lord, I welcome the fact that the latest modelling conducted by Royal Mail’s actuaries, based on market performance during the first quarter of 2020, indicates that the downturn in the value of its anticipated asset portfolio would not have resulted in cuts to pension benefits and had only a small impact on next year’s inflation increase.
My noble friend Lord Naseby is not in favour of the negative procedure. This point was made by many noble Lords across the House and I can say only that we have listened. This brings me to the contribution of my noble friend Lord Holmes. The Bill team has been outstanding—they have been very patient with me—and I liked his reference to two ears and one mouth. We have definitely used our ears on this. On the comments of my noble friend Lady McIntosh of Pickering, we would of course urge everybody to take advice before committing to a pension scheme.
I am really pleased that my noble friend Lord Blencathra is pleased, and I am grateful for the increased mark of nine out of 10. I am sorry that I have not pleased the noble Lord, Lord Foulkes, this week but I promise to try harder.
My noble friend Lord Blencathra and other noble Lords raised the point about Clause 47 still being a Henry VIII power and asked why we have not changed it. A Henry VIII power to amend the CDC framework through regulations is necessary if we wish to see CDC provision opened up to master trusts and other non-connected multiple employer schemes sooner rather than later. I can confirm to the House that all regulations made under this power will be subject to the affirmative procedure. We would not want to make any regulations under this clause without proper debate.
My noble friend Lord Blencathra referred to Clause 124. As the supplementary delegated powers memorandum explains, the Government need to be able to respond to the constant development of industry best practice. It is expected that the Government will periodically amend requirements to ensure that they reflect those developments. These updates will focus not on a fundamental redesign of the policy, but evolution in light of emerging methodologies. We therefore believe that the negative procedure is appropriate.
The noble Baroness, Lady Bowles, mentioned Clause 11(2)(e) and queried the power for people to be excluded from regulatory scrutiny. No—the power can be used to include people but not to exclude them from scrutiny.
The noble Baroness, Lady Sherlock, asked whether there is enough urgency about increasing the diversity of boards. I will talk in my concluding remarks about the work that we want to do on diversity. We must inject as much energy as we can.
The amendment tabled by the noble Lord, Lord Sharkey, to Clause 11 is intended to enable discussion of the Government’s retention of the negative procedure in relation to regulations made under its subsection (2)(e). I have already demonstrated our willingness to listen to and address the concerns expressed about delegated powers in Part 1 of the Bill. We are confident that the list of persons, as set out in Clause 11(2), will capture necessary persons who should be subject to this test. However, should it become evident during live running that a person who has a significant role in the scheme is not captured, we would want to address this omission promptly so that members and their pensions are not put at risk. The power in subsection (2)(e) allows regulations to extend the reach of the “fit and proper persons” requirement to other people acting in a specified capacity in relation to a CDC scheme. It is in the interests of members for the regulator to have the power to assess the fitness and propriety of such persons without unnecessary delay. Time may be critical, and it is right that the fit and proper requirements apply effectively. We therefore consider that the negative procedure is appropriate in this instance.
My noble friend Lord Balfe raised the issue of the quality of trustees. The Government’s primary focus is on ensuring that trustees in all occupational pension schemes meet the standards of honesty, integrity and knowledge appropriate to their role. However, the Government are aware that the regulator plans to establish a working group aimed at developing additional guidance and supporting material to help the diversity of trustees. We welcome this development and look forward to seeing the outcome of this work.
Amendment 33, tabled by the noble Baroness, Lady Bennett, and supported by the noble Lord, Lord Foulkes, and my noble friend Lord Balfe, is intended to promote diversity in trustee recruitment. As I mentioned in Committee, the Pensions Regulator will look at trustee board diversity across all schemes and, as I have said, is planning to set up an industry working group to help pension schemes and employers improve the diversity of scheme boards. Unfortunately, the launch of this working group has been interrupted by Covid-19, as the regulator’s resource has had to be diverted quickly to deal with emerging issues from the pandemic.
I believe it was my noble friend Lord Balfe who talked about a study to see how trustees were performing and how they were doing. I will certainly take that back to the department and I endorse the point raised by the noble Baroness, Lady Bowles, about independent and objective trustees. I hope noble Lords will understand this delay to the working group, given the unprecedented situation we find ourselves in. However, I have been assured by the regulator that it intends to move forward with the working group as soon as is practical. I recognise the importance of diversity; however, it would be premature to pre-empt the outcome of the regulator’s work in this area. We will of course consider any outcomes from the working group as the CDC regulations are developed.
Finally, I turn to Amendment 45, tabled by the noble Baronesses, Lady Bowles and Lady Janke. This amendment seeks to ensure that regulations in Part 1 of the Bill cannot be used to set up a new regulator. I recall that the noble Baroness, Lady Bowles, was concerned that the powers in Clauses 47 and 41 in particular could be used for this purpose. I hope that the amendment to Clause 47 that I have just discussed has reassured both the noble Baronesses, Lady Bowles and Lady Janke, on this point. Clause 47 cannot be used to establish a new regulator. Clause 51 cannot be used to create a new regulator. The power it gives to confer a discretion on a person cannot be used for the purposes of setting up a regulator. The powers in Clause 51 are intrinsically linked to the specific powers in the Bill under which the regulations are made, and they do not permit an unrestricted power of delegation. This power is commonly found across pensions and other legislation; it is not wider than normal. More widely, I repeat the assurance I gave the noble Baroness in Committee: there is no need to rule out the creation of a regulator through regulations, as there are no powers in this Bill to create a regulator.
I apologise for the length of my response and hope that the explanations I have provided will help noble Lords not to press their amendments.
Baroness Stedman-Scott
Member’s explanatory statement
See the explanatory statement for the Minister’s amendment at page 7, line 16.
Baroness Stedman-Scott
Member’s explanatory statement
This amendment and the Minister’s amendment at page 7, line 32, make all regulations under Clause 12(2)(b) subject to affirmative resolution procedure (see Clause 51(5)).
Member’s explanatory statement
See the explanatory statement for the Minister’s amendment at page 7, line 30.
Baroness Stedman-Scott
Member’s explanatory statement
This amendment and the Minister’s amendment at page 8, line 30, make all regulations under Clause 13(3) subject to affirmative resolution procedure (see Clause 51(5)).
Member’s explanatory statement
See the explanatory statement for the Minister’s amendment at page 8, line 28.
Baroness Drake
“(c) specifying requirements to be met by an employer using or intending to use a qualifying scheme under section 3(3) in respect of the costs under subsection (2) of this section.”Member’s explanatory statement
This amendment would give a power to the regulator to seek a contribution from an employer, using or intending to use a qualifying scheme, to the financial resources available to meet the costs of setting up and running the scheme or resolving a triggering event.
Baroness Drake (Lab) [V]
My Lords, I refer to my interests in the register. I move Amendment 8 in my name and that of my noble friend Lady Sherlock and the noble Baroness, Lady Bowles of Berkhamsted. Collective money purchase schemes—CMPs—seek to share risk collectively and more efficiently between their members. There is no employer promise under- pinning that risk. The Bill currently restricts CMP schemes to those set up by an employer or connected employers such as the Royal Mail. It would require the Secretary of State, exercising powers under Clause 47, to extend the qualifying definition to include CMP schemes that cover a lot of unconnected employers.
A function of the legislation is to understand the risks that members face in a CMP scheme, and to put in place appropriate measures to mitigate them. One of those risks is that a scheme becomes financially unsustainable and has insufficient resources to meet the costs of dealing with a triggering event where it occurs, and the cost of continuing to run on the scheme for a period while the problem is dealt with. These costs may include the cost of transferring members’ assets to another pension scheme and winding up.
Baroness Bowles of Berkhamsted [V]
My Lords, I have signed my name to both these amendments, which follow on from significant debate in Committee. I agree with what the noble Baroness, Lady Drake, said about how Amendment 8 bolsters the importance of ensuring adequate finance for the administration of a scheme in all circumstances. It is necessary to have certain requirements specified and agreed in advance rather than to rely on negotiation at what might be a difficult time or, indeed, where it might be impossible. I therefore wholeheartedly support Amendment 8.
Amendment 32 is important and reflects the matter of general fairness and, in particular—although it is not specified—intergenerational fairness, which was discussed in Committee. My noble friend Lord Sharkey will explain further, but I wish to make the point that we should remember that CDCs have shared risk, that their strength is that returns can be more predictable, and that there is intergenerational solidarity so that good times and bad are to some extent smoothed. That solidarity cannot be undermined by allowing market highs to be carried away by those who may chose to leave the scheme. It surely must be possible to devise mechanisms, whether by way of buffers, conservative valuations, a delayed retained part or something else, to prevent the problem that those wishing to transfer their pensions out essentially ruin what is left for everybody else. The point is that fairness has to extend over more than a snapshot in time. That is the only way that you will have fairness in the sense of shared risk to all the members.
Lord Vaux of Harrowden (CB) [V]
My Lords, I wish to support Amendment 32, tabled by the noble Lord, Lord Sharkey, to which I have added my name. I should add that I also wholeheartedly support Amendment 8, but I will restrict my comments to Amendment 32.
While there seems to be general support for the introduction of this new type of pension—collective money purchase schemes, or CMPs; I am going to try very hard not to call them CDCs as we go through this—they are not without risk. As we discussed at some length in Committee, one of the greatest risks that is often raised in respect of CMPs relates to intergenerational fairness. Indeed, at the extreme, in a situation where no returns are being earned but pension levels are maintained for existing pensioners, the pensions being paid would be dependent on the funds being put by new joiners, as in a Ponzi scheme. That is very extreme, as I say, but it demonstrates that there is the possibility of one cohort being disadvantaged by the treatment of another cohort. If existing pensioners are paid too much, those currently paying in will suffer, and if the scheme is overcautious in what it pays out to pensioners, pensioners will suffer and current workers will gain.
This is not theoretical. We only need to look at what is happening in the Netherlands to see that the question of whether to cut benefits when returns are not as good as expected is a real and current issue. In a standard defined contribution scheme, the risk is not pooled, so the issue does not arise. In a defined benefit scheme, the matter is dealt with by the employer making up the difference. However, in a CMP, there is no possibility of that happening. If you want to maintain the level of pensions when returns are low, the future pensions of those still contributing will be impacted and vice versa, so the issue of intergenerational fairness is specific to CMP schemes.
It is also worth pointing out that CMPs have implications for not only intergenerational fairness but fairness more generally. For example, as the noble Baroness, Lady Bowles, pointed out, if someone wants to transfer their fund out of a scheme, how do you value their share? The benefits that arise from the scheme are uncertain, being targets only, so if you value a transfer based on the target benefits, which seems to be what is proposed, that will not take account of the risk that those benefits may not be achieved. In that situation, the person transferring out is getting a better deal than those staying, unless that risk is taken into account in the transfer valuation. The issue is complicated further because of the pooling of longevity risk in a CMP. For example, if someone has just a couple of years to live, there would be a strong incentive for them to take their money out to the detriment of those staying in.
Given that fairness is the single most commonly raised risk that relates to CMPs, it is curious that there is no explicit mechanism in the Bill to deal with it. In our previous discussions, we were pointed in the direction of Clause 18 to see how the matter is dealt with, but in fact that clause sets out only how benefits and so on will be calculated and says that regulations will be made in that respect; nowhere does it mention the critical question of fairness. I imagine that that is because it has been based on other pension legislation, which, as I said, does not suffer from this risk.
Amendment 32 introduces as very simple means by which to ensure that intergenerational fairness and fairness more generally must be assessed by the trustees. Given the importance of this issue, I urge the Minister to consider it really seriously.
Baroness Altmann [V]
My Lords, I have enormous sympathy with the aims of the two amendments in this group. Amendment 8, in the names of the noble Baronesses, Lady Drake, Lady Sherlock and Lady Bowles, was expertly moved by the noble Baroness, Lady Drake, and deals with situations where a pension scheme may not have enough money to meet its obligations and there is a risk that it will need to draw on the funds in the members’ pension pot rather than have money coming in from outside.
As I mentioned in debate on earlier stages of the Bill, I am particularly concerned about the situation where a scheme has had a triggering event or is winding up and may not have sufficient administrative budget to cope with, for example, a significant IT failure in which member records are lost or transposed from one to another so that it is an enormous job to unscramble each member’s entitlement. The costs of that work can be significant; if no reserves are in place to meet those costs and the employer is in financial difficulties, what will a CMP scheme be able to do to fund the costs of sorting out the records? It is true that the aims of the CMP scheme as set out in the Bill will be to have central estimated assumptions for guiding benefit adjustments to ensure that there is no difference of treatment between different members, but on the particular issue that I am referring to and that Amendment 8 refers to, the continuity strategy outlined in the Bill is supposed to have money to meet a triggering event, including its costs, but may not do so.
Therefore, as I understand it, the thrust of this amendment is to ensure that the Pensions Regulator requires a separate capital buffer, or that an insurance arrangement will cover the costs incurred in winding up, or that, in exceptional circumstances, the costs required to administer the scheme are met other than from members’ funds. When we set up this new regime, it is important that we make sure that we cater for eventualities that we do not expect to happen but which we know could in theory happen. Having seen with defined benefit schemes the devastating impact of scheme wind-up without sufficient resources and the amounts of money taken out of defined benefit schemes when an employer has failed or walked away from the scheme—those cases have reduced the amounts available for pensioners, in some cases to zero—there is a real need to look at some catastrophe insurance, disaster-type insurance or capital buffer of some kind to make sure that we have catered for that before it happens.
I think it would be wise for my noble friend to consider what else might be done over and above what is in the Bill. I also look forward to her answer to the specific question asked by noble Lords about what would happen in practice should a scheme require money that does not currently exist within the fund, other than in members’ entitlement pots, to cover the costs of wind-up. Of course CMP does not give each person an individual pot, but if the overall assets have to be raided to meet these costs, their pensions will be impacted.
Lord Blunkett (Lab) [V]
My Lords, I will not detain the House for very long. I draw attention to the interchange and interface between the insolvency legislation that has now passed into law, on which I spoke a short time ago, and this Bill. The reason for that is that we are at a moment of the trigger events being more likely than in our recent history. The noble Baroness, Lady Altmann, referred to the pension freedoms. It struck me as I was listening to the debate today how relevant that is because five years ago the then Chancellor decided to provide a stimulus to the economy as PPI out-payments were drawing to a close, and he did so with an understanding that that would not destroy the pension entitlement or, as provided in Amendment 32, the balance of fairness between generations.
I am supporting both Amendment 8, moved extremely well by my noble friend Lady Drake, and Amendment 32. Anything that puts people and the wider scheme at risk, including these CMP schemes, is dangerous not only to the individuals concerned but in the dislocation of something broader—that is, the commitment that I commenced when my noble friend Lady Drake, along with John Hills and the chair of the commission back in 2005, Adair Turner—the noble Lord, Lord Turner—proposed auto-enrolment.
We are at a moment when, following the withdrawal of the furlough schemes, we face enormous unemployment, great insecurity and risk. At this moment we need to be able to secure not just the present but the future, and that future has to be about those young people contributing, as has already been said in relation to Amendment 32, and the danger that those who find themselves in temporary need of funding will withdraw funds at a moment that is deeply inappropriate for the viability of the programme as a whole. I hope that the Minister will respond positively and, if not, that we will press Amendment 32 to a vote.
Baroness Janke [V]
My Lords, I support Amendment 8 but I will address my remarks to Amendment 32. The amendment seeks to ensure fairness for all members of CDC schemes, especially between different generations who may stand to gain or lose from future circumstances, as noble Lords have already referred to.
In Committee we debated this issue at length and a number of issues emerged. The Bill states that the scheme provides for intergenerational fairness among its members, specifically in connection with the amount of benefits paid to pensioners, proposed adjustments to annual benefits and cash-equivalent values provided to members wishing to transfer out of the scheme. A requirement of collective money purchase schemes requires outperformance or underperformance to be reflected in the benefits paid to all members. However, there is usually a reluctance to deliver pension cuts, as in the Netherlands example that the noble Lord, Lord Vaux, described in Committee: when the Government intervened temporarily to avoid a cut in pensions, younger members of the scheme lost out as pensions were kept higher than the scheme could afford.
CDC schemes are required to agree a pension target rather than a firm outcome, and the expectation of pensioners may be different in the event of the underperformance of investments over time. So unless pensions were to be cut, which is a decision that is largely avoided, younger members of the scheme could lose out in the interests of existing pensioners. In the instance of a large number of people choosing to cash in their pensions, as others have said, there is a risk to new and younger entrants to the scheme, particularly if the value of the scheme is significantly reduced.
Our Amendment 32 seeks to press the Government into being more explicit and much clearer in their commitment to fairness across the board to all members of the scheme by requiring the trustees to make an assessment of the fairness of the scheme. The amendment addresses the interests of transparency and fairness and the welfare of all members of the scheme, and I support them.
Lord Naseby
I think the amendments have been extremely well aired and I await the response from my noble friend on the Front Bench.
Lord Sharkey [V]
My Lords, I will restrict my remarks to Amendment 32, which is in my name and the names of the noble Lord, Lord Vaux of Harrowden, and my noble friend Lady Bowles. I thank them for their support. In Committee, we spent a long time discussing intergenerational fairness in CDC schemes. We did this partly because we knew from the Government’s excellent briefing note that concern about intergenerational fairness was raised by many respondents to the consultation and because it seemed clear that the risk to intergenerational fairness was an almost inevitable feature of such schemes.
We pressed the Government to legislate the requirement for intergenerational fairness into the schemes. We knew that the Government themselves were deeply concerned about the issue and seemed to be choosing mechanisms for intergenerational fairness over benefit stability; but as I remarked at the time, it was hard to tell how they might work, since the mechanisms for bringing this about were not yet explicit and no real assessment of effect was possible.
In her response, the Minister made it clear that she shared our commitment to ensuring intergenerational fairness and that the mechanisms for achieving it would be introduced, after extensive consultation, by regulations under Clause 18. This will be long after the Bill has become an Act, and leaves open the question of how we will assess the success or otherwise of these mechanisms. It also leaves open the question of how the assessment of any such mechanisms will be communicated to members and potential members of the scheme.
Our Amendment 32 proposes a way of addressing these issues. It provides that, whenever TPR issues a notice requiring a scheme to submit a supervisory return, the notice must include a requirement that the trustees
“make an assessment of the extent to which the scheme is operating in a manner fair to all members.”
The amendment speaks of fairness. Intergenerational fairness is a critical subset of fairness, but there are other kinds of fairness, too. For example, there is gender fairness, and single versus married status and the fairness implicit in that, or not. The amendment makes no attempt to define fairness; it relies on the trustees to do that, as they should in the normal operation of the scheme. Their definitions and assessments will help members of all classes, and potential members, understand the working of their scheme and the success of the trustees in operating it fairly in the interests of all members.
As I mentioned in Committee, AJ Bell noted that the DWP leaves little doubt that it will not allow schemes to be skewed in favour of one cohort of members over another. I am sure that is the intention, but AJ Bell also noted that fairness could make outcomes in CDCs less predictable and raises the spectre of pension cuts. It goes on to say:
“The DWP itself notes any reductions in benefits will not be well received, and so clear communication of this – not just upfront but on an ongoing basis – will be absolutely essential.”
Our amendment will bring some communication and transparency to the balancing required to produce, and to the consequences of producing, fairness across all member cohorts.
In Committee, the Minister explained how the proposed headroom mechanism for the Royal Mail scheme would be fairer than a capital buffer. All classes of members and potential members of the scheme need to know how well this headroom mechanism or other mechanisms generated by Clause 18 are working. Our amendment will require the trustees to explain these things and to assess their success in managing the scheme fairly for all members.
Given the acknowledged risks to fairness inherent in the scheme, and that Parliament’s opportunity to influence the mechanisms that might arise in regulation will be as small as usual, it is vital that scheme trustees are open and transparent about their success in producing fair outcomes for all members. That is what our amendment would help bring about, and I intend to test the opinion of the House.
Baroness Sherlock [V]
My Lords, I say at the outset that Labour supports Part 1 of the Bill and the move to create CMP schemes, provided, of course, that they are not used as a means of downgrading good DB schemes. The two amendments in this group deal with different concerns that have been expressed about CMP schemes. Amendment 32 acknowledges that there may be a divergence of interests between different sets of members in a scheme of this kind. It does not prescribe any particular action but it does require trustees to surface the issue and to assess the extent to which the scheme is fair to all members.
Baroness Stedman-Scott
My Lords, I begin by addressing the amendment to Clause 14 tabled by the noble Baronesses, Lady Sherlock, Lady Bowles and Lady Drake. In doing so, I want to stress that ensuring members are treated fairly has been a central part of our work on CDC schemes since we began. As I explained in Committee, and in more detail in the letter sent to your Lordships on 5 March, the financial sustainability requirement will mean that CDC schemes are established on a sound financial basis and members are adequately protected from unfair and excessive administration charges.
I understand the intention behind this amendment but I do not consider it to be a necessary addition. For the financial sustainability requirement at Clause 14 to be met, the trustees must provide evidence that they can access sufficient financial resources to cover the costs associated with setting up and running the scheme, as well as those associated with dealing with triggering events. If the regulator is not satisfied about the security of these resources and that they can be accessed as needed, the requirement will not be met and the scheme will not be authorised. It may well be that, in the early days of a CDC scheme, initial funding comes from the employer, but our approach does not just rely on employer-provided financial support; it enables trustees to draw on other options, including funds held in escrow, insurance policies or contingent assets. These should be available to cover any costs arising from a triggering event.
The noble Baroness, Lady Drake, asked who can be required to meet the cost of triggering event. The regulator will work with the trustees, employees and others connected to the scheme to ensure that the scheme always has secure access to sufficient assets so that members’ funds are not affected. My noble friend Lady Altmann made the point that transfer values should be adjusted for future risk. Our legislation will require benefits and transfer values to be calculated based on long-term factors such as longevity, inflation and investment returns. This has the effect of smoothing outcomes and will mean that transfer values will not suddenly rise and fall, making cashing-in not as attractive as my noble friend suggests.
Once authorised, the scheme will need to continue to have access to sufficient financial resources so that it continues to meet the financial sustainability requirement. The regulator will monitor this through ongoing dialogue between the trustees, intelligence work and the significant events framework in Clause 28. This will ensure that it can intervene if it is concerned about a scheme’s financial sustainability and that, where necessary, a scheme could be de-authorised and wound up using the financial reserves. Our approach means that a CDC scheme must remain financially sustainable and able to deal with situations such as an employer withdrawing from the scheme or becoming insolvent.
As we set out in the letter that we sent to noble Lords, we are also taking additional steps to protect members. The CDC charge cap will help to protect members from excessive administration charges if the usual running costs of a scheme increase significantly for any reason. In addition, the continuity strategy at Clause 17, the implementation clause at Clause 39, and the prohibition on increasing charges during a triggering event at Clause 45 are all designed to protect members’ interests when things go wrong.
I now move on to address Amendment 32, tabled by the noble Lords, Lord Sharkey and Lord Vaux, and the noble Baroness, Lady Bowles, which is about intergenerational fairness—a matter raised by many noble Lords and the subject of extensive discussions. We have been mindful of the problems that other countries have experienced, for example in their approach to adjusting benefits. We have learned from these. That is why envisaged regulations under Clause 18 will mean that the CDC’s scheme rules must require that there is no difference in treatment between different cohorts or age groups of scheme members when calculating benefits and applying benefits adjustments.
The noble Baroness, Lady Janke, raised a point about issues experienced by CDC schemes in the Netherlands. We have been mindful of the problems that other countries have experienced. UK CDC schemes will not be required to have a buffer to smooth out fluctuations in the value of the benefits. Members’ benefits will be adjusted each year in light of the most recent actuarial valuation. This protects members from the need to fund a surplus and means that adjustments to benefits are provided for each year rather than hidden and stored up.
I welcome the sentiment behind the proposed amendment; it is something to which we want to give further consideration. We need to give careful thought to how such reporting might work in practice and would want to work with trustees, administrators and the regulator to ensure that any such requirement is proportionate, appropriate and clear. We would also want to consult on any such approach to make sure that it is effective. I reassure all noble Lords that we will give this matter careful consideration. Should we need to bring forward such a requirement in regulations, we already have sufficient powers in existing legislation to require schemes to report on fairness in CDC schemes if warranted. This includes powers under Section 113 of the Pension Schemes Act 1993 and Clause 46 in Part 1 of the Bill. There are also equivalent Northern Ireland provisions. For the reasons that I have set out, I ask the noble Baroness to withdraw the amendment.
Baroness Drake [V]
My Lords, I support Amendment 32, but I shall direct my comments to the Minister’s response to Amendment 8. The Minister has been very courteous in the face of my persistence on this issue and I have listened carefully to what she has said. In listening, I noted four things: first, that the powers in the Bill mean that the regulator can require initial funding from employers in the setting up of a CMP scheme; secondly, that those funds can be used to buy an insurance policy or be put into an escrow account; thirdly, that they can be available to fund triggering-event costs; and fourthly, should a triggering event occur, the regulator will work with both the employer and the trustees to ensure that sufficient financial resources are available to meet the costs of a triggering event. That is my understanding of what the Minister has said; I would, of course, expect the final regulations presented to Parliament to reflect that. On that understanding, I shall not push Amendment 8 to a vote. I beg leave to withdraw it.
Baroness Stedman-Scott
Member’s explanatory statement
This amendment and the Minister’s amendment at page 9, line 12, make all regulations under Clause 14(3) subject to affirmative resolution procedure (see Clause 51(5)).
Member’s explanatory statement
See the explanatory statement for the Minister’s amendment at page 9, line 10.
Baroness Stedman-Scott
Member’s explanatory statement
This amendment and the Minister’s amendment at page 9, line 43, make all regulations under Clause 15(4)(a) subject to affirmative resolution procedure (see Clause 51(5)).
Member’s explanatory statement
See the explanatory statement for the Minister’s amendment at page 9, line 41.
Baroness Stedman-Scott
Member’s explanatory statement
This amendment and the Minister’s amendment at page 10, line 31, make all regulations under Clause 16(2) subject to affirmative resolution procedure (see Clause 51(5)).
Member’s explanatory statement
See the explanatory statement for the Minister’s amendment at page 10, line 29.
Baroness Stedman-Scott
Member’s explanatory statement
This amendment and the Minister’s amendment at page 11, line 20 make all regulations under Clause 17 subject to affirmative resolution procedure (see Clause 51(5)).
Member’s explanatory statement
See the explanatory statement for the Minister’s amendment at page 11, line 18.
Baroness Stedman-Scott
Member’s explanatory statement
This amendment and the Minister’s amendment at page 47, line 8, make all regulations under Clause 62(3)(a) subject to confirmatory procedure (see Clause 102(5)).
Member’s explanatory statement
See the explanatory statement for the Minister’s amendment at page 47, line 6.
Baroness Stedman-Scott
Member’s explanatory statement
This amendment and the Minister’s amendment at page 47, line 22, make all regulations under Clause 63(2)(b) subject to confirmatory procedure (see Clause 102(5)).
Member’s explanatory statement
See the explanatory statement for the Minister’s amendment at page 47, line 20.
Baroness Stedman-Scott
Member’s explanatory statement
This amendment and the Minister’s amendment at page 48, line 21, make all regulations under Clause 64(3) subject to confirmatory procedure (see Clause 102(5)).
Member’s explanatory statement
See the explanatory statement for the Minister’s amendment at page 48, line 19.
Baroness Stedman-Scott
Member’s explanatory statement
This amendment and the Minister’s amendment at page 49, line 3, make all regulations under Clause 65(3) subject to confirmatory procedure (see Clause 102(5)).
Member’s explanatory statement
See the explanatory statement for the Minister’s amendment at page 49, line 1.
Baroness Stedman-Scott
Member’s explanatory statement
This amendment and the Minister’s amendment at page 49, line 33, make all regulations under Clause 66(4)(a) subject to confirmatory procedure (see Clause 102(5)).
Member’s explanatory statement
See the explanatory statement for the Minister’s amendment at page 49, line 31.
Baroness Stedman-Scott
Member’s explanatory statement
This amendment and the Minister’s amendment at page 50, line 22, make all regulations under Clause 67(2) subject to confirmatory procedure (see Clause 102(5)).
Member’s explanatory statement
See the explanatory statement for the Minister’s amendment at page 50, line 20.
Baroness Stedman-Scott
Member’s explanatory statement
This amendment and the Minister’s amendment at page 51, line 8, make all regulations under Clause 68 subject to confirmatory procedure (see Clause 102(5)).
Member’s explanatory statement
See the explanatory statement for the Minister’s amendment at page 51, line 7.
Lord Sharkey
Member’s explanatory statement
This amendment would require any notice from the Secretary of State to CDC scheme trustees to include a requirement to report on the fairness to members of the operation of the scheme.
Lord Sharkey [V]
My Lords, I wish to test the opinion of the House on Amendment 32.
The Deputy Speaker (Lord Bates) (Con)
We now come to the group beginning with Amendment 34. I remind noble Lords that Members other than the mover and the Minister may speak only once and that short questions of elucidation are discouraged. Anyone wishing to press this or any other amendment in this group to a Division should make that clear during the debate.
Amendment 34
“( ) require information to be published relating to actions taken by the scheme with regard to how scheme investments take environmental, social, and governance factors into account.”Member’s explanatory statement
This amendment adds requirements for reporting on broader environmental and social issues. It does not require it to be included on the dashboards, but it could be published elsewhere.
Baroness Bennett of Manor Castle [V]
My Lords, I rise—at least metaphorically—to speak to Amendment 34. I will also refer to Amendments 73 and 79, to which I have attached my name. I pay tribute to the Minister, who has been very generous with her time on those two later amendments addressing the climate emergency. Her department has paid a great deal of attention to them; this is an area on which progress has been made, which is appreciated. It is a positive sign.
However, Amendment 34 addresses the fact that the climate emergency is only one of the critical factors facing our society today. “Environmental, social, and governance” is one of those buzz-phrases that does not exactly trip off the tongue. It means this: how does a company perform as a steward of the natural world and as a part of the society from which it makes, hopefully, its profits? What is its impact on its employees, suppliers, customers and the community in which it operates? We are talking about systems thinking of the kind that lies behind the sustainable development goals, to which this Government and most others around the world have signed up. It means having a decent life within the physical limits of this one fragile planet.
You might say that that is a pretty good goal that we should write into pensions legislation anyway. Even if you do not think that it is something this legislation should try to achieve, if you consider the narrower situation of the direction and risks of investments, there is increasing awareness in the investment community that environmental, social and governance issues are also a very good measure of risk. In some of the great financial and natural disasters of recent times, such as the BP Deepwater Horizon oil well blow-out in 2010 that had such enormous environmental impacts and the Volkswagen “Dieselgate” scandal, we have seen a problem with a company’s actions, but with a narrow focus on the climate emergency and not considering other factors that proved to be a real issue.
On the technicalities of this amendment, I stress that it has taken on board the Minister’s comments in Committee. The amendment then suggested that this information be included in the pensions dashboard; it now proposes that it could be included elsewhere when supplied to the Pensions Regulator—perhaps on its website or the SIP repository.
I know that the noble Baroness, Lady Ritchie of Downpatrick, will say later in the debate on this group of amendments that some of the amendments relate to Northern Ireland and that pension Bills have previously been left to the Assembly. I would appreciate it if the Minister would address that in her response. I would also appreciate a response on the fact that, while the climate emergency is one of the critical issues we face, we are in an age of shocks. There are many others: the nature crisis, the social emergency and the big impacts some of our largest companies are having around the world, as we see in the protests and extreme distress in garment factories in countries such as Bangladesh, India and Cambodia. Pension investors should be able to take account of these issues.
I suggest to your Lordships’ House and the Minister that taking account of the climate emergency is a necessary condition in this Bill, but for the Bill to be sufficient for the 21st century, we also need to include the broader environmental, social and governance issues. I beg to move.
Baroness Janke [V]
My Lords, I thank the noble Baroness, Lady Bennett, for her speech and her amendment. I also thank the noble Baroness, Lady Hayman, for her work on this issue and the Minister for all her work in achieving the government amendments on this important matter. While I recognise the major progress that has been made, I shall speak in support of Amendments 72 and 74, which are signed by my noble friend Lord Sharkey and myself. I shall speak also in support of Amendments 73 and 79 from the noble Baronesses, Lady Hayman, Lady Jones and Lady Bennett. I had also intended to sign these amendments and I apologise for not doing so.
In Amendments 72 and 74, the intention is to strengthen the obligation to ensure that the regulations of the scheme reflect the importance of the issue. Replacing “may” with “must” in the amendments to the Pensions Act strengthens the requirement on trustees to ensure that there is effective governance of the scheme with respect to the effects on climate change.
Amendment 73 strengthens the regulations and adds to our Amendments 72 and 74 by ensuring that relevant information in relation to climate change must be considered as part of the regulations.
Amendment 79 aims to ensure that the regulations place an obligation on trustees or fund managers to report on and publish how they have taken into account relevant treaties and other government commitments on climate change. The improvements to the Bill already made are very much welcomed, and we support these amendments today in the spirit of strengthening them. It has been well documented that more and more savers are keen that their savings should serve to strengthen ethical policies, particularly on climate change. As a result, they require more transparency on how their savings are invested.
Pension funds have huge economic power and must play their part in meeting our 2050 targets. UK pension funds hold more than £1.6 trillion in assets. The size and influence of pension schemes means they have a vital role to play in ensuring that the UK meets its climate commitments. It is essential that the Bill enables that to happen.
Baroness Hayman (CB)
My Lords, I remind the House of my interests as a co-chair of Peers for the Planet. I should perhaps also declare that my son works for a new campaign, Make My Money Matter, which is being launched today by Mark Carney and Richard Curtis. It encourages all of us to be more active to ensure that our pension schemes reflect our values and that they protect both our financial and environmental future—an indication perhaps that consumer pressure on issues like climate change in relation to pensions is on the rise from that described by the noble Lord, Lord Balfe. In that context, perhaps I should warn the noble Lord, Lord Naseby, that as a pensioner under the parliamentary fund, I may come and discuss these issues with him later.
As the noble Baroness, Lady Janke, said, I have Amendments 73 and 79 in this group, which are cross- party. I will also speak to government Amendments 75, 76, 77 and 78, which cover the same ground—I know that the Minister would say “cover that ground more comprehensively”.
At this stage, it is appropriate that I join others in thanking and praising both the Minister and her officials for the amount of work and careful consideration they have given to these issues and for their responsiveness to the issues that have been raised. We have moved some distance from the start of the Bill, from a position where there was no provision on climate risks to provisions for a regulatory framework that takes into account our objectives under the Paris agreement and which will ensure that trustees and managers are required to assess and report on their scheme’s alignment with the objective to keep global warming to 1.5 degrees centigrade. That includes assessing and reporting on how their schemes are exposed to the effects of climate change and on how the assets of the scheme themselves contribute to climate change.
Improving disclosure in this way is essential for consumers, who need to understand the risks attached to their personal investments. It is also essential for trustees, as greater transparency will help drive their behaviours and decisions, and trustees will need clarity on what is required of them and a clear signal of the long-term trajectory that the sector will need to follow if we are to achieve our net zero targets.
The two amendments that I have tabled are drafted very simply—some might say simplistically. They are broad and would apply to any regulations made under the Bill. Amendment 73 ensures that, in making regulations, the Government take account of international climate change treaties of which the UK is a signatory. It also ensures in turn that regulations require trustees or managers to take account of such treaties in addition to the existing general provisions to secure effective governance of a scheme with respect to the effects of climate change.
Amendment 79 ensures that regulations can place requirements on trustees or managers to publish information about how schemes have taken into account the objective to keep global warming well below 2 degrees centigrade or any other future targets under international treaties. That is critical, because disclosure will create pressure on trustees to reduce schemes’ contribution to climate change.
As I have said, the Minister has been extremely responsive, and we have had a constructive dialogue about these amendments. She has put down Amendments 75 to 78, which are, I hope, more comprehensive but slightly less comprehensible to the lay person. I will ask a couple of more technical questions, which I would be very grateful if she could respond to.
The first question is on Amendment 75 and addressing climate risk. Although the most significant climate-related risks which pension schemes face long-term are not idiosyncratic to particular companies, sectors or geography, they arise from system-level macroeconomic and financial stability risks caused by the impacts of climate change and a disorderly transition. Yet in fact the three material climate risks to portfolios that managers identify tend generally to focus on the risks associated with the transition to a low-carbon economy over the physical risks of climate change. I therefore hope that the Government will confirm the broadest possible definition of the risks in the Bill, meaning transitional, physical, financial and systemic.
On Amendment 76, I would be grateful if the Minister could confirm that proposed new Clause 41A(4A) and (4B) apply across all the regulations to be made under the Bill, rather than applying only to regulations referred to in new Clauses 41A(3)(b). That is essential if consideration for international and other climate change goals is to permeate the regulatory framework as it should.
On Amendment 76, again I would like some confirmation. There is reference to
“or other climate change goal.”
Can the Minister confirm that that includes our domestic net zero target—I think that was very much the intention—and that there will not be any diminution of our targets?
On Amendment 77, again, the reference is to Article 2(1)(a) of the Paris agreement, but does that encompass provisions in Article 2(1)(c) as well, which relate to financial flows and therefore seem to be relevant?
Lastly—the Minister will be glad to know—on technical issues, can the Minister assure me that Amendment 78 does not limit publication requirements to information on the effects of climate change on schemes but that it also covers the contribution of the assets of schemes to climate change?
Baroness Jones of Whitchurch (Lab) [V]
My Lords, I am speaking to Amendments 73 and 79, to which I have added my name. I will also speak to the government amendments in this group.
We have come a long way since we first raised at Second Reading the issue of pension scheme obligations to address the risks associated with climate change. I say at the outset that, along with other noble Lords, we have been heartened by the response of the Minister, who, from the very start, has taken our concerns seriously and sought to address them.
Our aim all along has been to protect savers from the risks associated with climate change by requiring UK pension schemes to align their investment activities with the objectives of the Paris agreement, to which the UK Government are a signatory. This requires the Government to hold the rise in temperature to well below 2 degrees centigrade. Our amendments would require regulations to ensure that trustees take account of our international treaty obligations on climate change and publish information about how this is to be achieved.
There is an increasing realisation among financial regulation that such action is necessary, and a number of leading pension schemes are already taking action on this issue. They have already begun to follow the advice of the Task Force on Climate-related Financial Disclosures. This Bill enables us to raise the bar, so that the best practice becomes the standard practice and all funds play their part equally in delivering on their obligations.
Since we started the dialogue with the Minister and her advisers, we have made considerable progress. We very much welcome the government amendments that have now been tabled. They spell out in more detail how the funds should address their exposure to the risk of climate change and assess the impact of their assets on climate change. The most obvious example of this is investment in fossil fuels, but this would require a more comprehensive appraisal of which assets were adding to the problem of global warming and which were contributing to a low-carbon economy.
The government amendments also require schemes to undertake scenario planning on the impacts and risks of different outcomes as we move towards the Paris deadline. We see this as sending a clear signal to the regulators and the pension funds that the Government are not only paying lip service to this issue, but expecting clear change in governance and in investment strategies. Finally, on a similar theme to our amendment, the Government require clear transparency and accountability through reporting to scheme members and the public the actions taken. Again, we welcome this amendment.
Of course, all these requirements will need robust enforcement to ensure effective implementation. I hope that the Minister can clarify the plans of the Pensions Regulator to undertake these functions and can update the House on the progress made across the different types of pension schemes to create a level playing field in their obligations under these provisions.
These are the first steps in driving a UK investment strategy towards delivering on the Paris promise, but this is an important group of investors. I hope that this will send a wider signal throughout the financial markets that business as usual is not an option. There are huge calls for a green economic recovery plan as we grapple with the legacy of coronavirus. Let us hope that all these policies can come together to help deliver that green recovery. In the meantime, I am pleased to support our amendments and the government amendments to this clause.
Lord Balfe
In my last speech I omitted to declare my interests, not only those recorded in the register, but also as chair of the European Parliament’s Members’ pension fund—which has a number of beneficiaries in this House—and as manager of the House of Commons fund for former Members of the European Parliament. That is certainly not as big a fund as that of my noble friend Lord Naseby, but none the less is part of the pensions scenario in Westminster. I also advise a number of pension schemes, all fairly small. My amendment, Amendment 80, concerns how small schemes will deal with the duties that will be laid on them by this legislation, and asks the Minister to have their situation firmly in mind when making the regulations.
We often think of pension schemes as huge things, like the British Airways or Lloyds Bank schemes, but the great majority of schemes in this country are quite small. My amendment sets the quite arbitrary figure of £500 million in assets under management, a figure below which the onerous requirements of the amendments put forward in the Bill would not apply. That does not mean that I think small schemes should be exempted from any social concerns. Most of my advice is based on advising small schemes to go into asset tracking, because the evidence, of which there is now a lot, is that active management costs a lot and does not work. The sensible thing, particularly for a small scheme, is therefore to invest in index trackers.
However, being an index tracker does not mean that you cannot have social responsibility. There are index trackers that follow the UN principles of responsible investment, and there are others. We are concerned in this Bill particularly with the environment; I personally am concerned with schemes that follow the principles of the ILO. It is fine to have a scheme which invests in a company that has many trees in its garden that workers paid low wages for long hours can shelter under, but there are many things in this world to concentrate on other than just the environment—I do not want to detract from that, but we need a broader set of principles.
Norway, which has the biggest public scheme in the world, has an ethics committee that looks right across the investment market and advises the Norwegian Government and the scheme on what sort of investment should be avoided. Within the past few days, it has identified as not fit for investment companies that make what are called “autonomous weapons”—in other words, killer robots. So, there are many areas where we need to look carefully at what sort of investments we make.
In the case of small schemes, this is difficult. I advised one such scheme recently. I went to see them and asked, “How many pensioners have you got?” They said, “Oh, 22.” I said, “How do you look after them?” They said, “Oh, X”—naming the person—“in the wages section pays their pension each month when she does the monthly salary run.” I said, “What about the rest?” They said, “Oh, well, the general secretary looks after that. We have a man who comes in twice a year and we pay him, and he keeps us on the right side of the regulator.” This was a scheme with barely three figures’ worth of members in it, and many schemes are like it. We need to look for a way in which such small schemes can transfer their assets without there being any residual liabilities.
One problem is that you can get someone to run your scheme, but if the overall master trust gets into trouble, it can come back to those who have put their schemes in it and make quite unreasonable demands of them. If the number of small schemes is to be slimmed down, there has to be a way of transferring them so that the benefits are guaranteed but there is no comeback for more money. The amount of money required would be actuarily calculated, but it should not be possible to say, “Oh, well, the whole scheme has run into trouble. We know you transferred X years ago, but we now need more money from you”, because it is a direct disincentive.
I shall give another example, of a quite rich London club which, again, has a small scheme. It could quite easily transfer it in—it has huge assets: it could sell one or two of its pictures and cover its pension fund deficit—but it is reluctant to do so in case it received subsequent bills which detracted from the members’ assets. Again, this is something that the Minister and the department could look at in the future. It is outwith this Bill, but it is part of how we need to sort out the pensions legislation and administration for small funds.
My plea to the Government is that when they make the regulations, they remember the small schemes, which probably will not be able to afford the type of administration and advice that big schemes can. They should be encouraged into index trackers, because they are cheap and easy to run and, frankly, return the market, whereas active management charges a lot and does no better. I ask the Minister to look kindly on this amendment. I have never thought of pushing it to a vote; I tabled it to make these points, because I know that she is a sympathetic Minister who would be happy to ask her department in due course to look at the points raised.
Baroness Ritchie of Downpatrick (Non-Afl) [V]
My Lords, I first declare an interest as a recipient of the parliamentary pension fund. I support the amendment in the name of the noble Baroness, Lady Bennett of Manor Castle. I will also refer to Amendments 85 to 88 in the Minister’s name, which make particular reference to Northern Ireland.
Lord Naseby
My Lords, as a trustee of the Parliamentary Contributory Pension Fund, I see it as my duty to take into account anything that may have an impact on the long-term financial performance of the fund and on Members’ pensions. I expect to communicate that to the membership in our annual report, or alternatively when requested.
I do not wish to comment on any of these amendments in detail, but I particularly warm to Amendment 75 from the Government, which seems entirely appropriate.
Viscount Eccles (Con)
My Lords, the noble Baroness, Lady Bennett, opened the debate on this group with a request for more detailed information from collective money purchase schemes, particularly on the environment. That is entirely right and very appropriate when we move on to Clause 124, which is quite another matter. It builds on the 1995 and 2004 Acts, which refer to injunctions on trustees to produce statements of funding. That is a wide request; one can imagine all sorts of matters that trustees would wish to put into their statements.
It is not the same thing at all, however, as focusing on the risk of climate change, which is a much more accurately aimed request. The change risk, of course, is against the background that climate change, as in the use of the English language, is neutral, but I do not think that that is what we have come to mean by climate change. We should be careful not to use language inaccurately. I think that what we really mean is man’s contribution to, or effect on, the climate and what actions the world’s population have taken that affect the climate. That is considered in general to be something about which we should be very concerned. When it comes to considering the environment, who can avoid being incredibly concerned?
In the Government’s approach to how to deal with this matter, climate change is defined in the Bill as relating to Paris, its two-degrees limit on the rise in temperature from pre-industrial periods and other climate change goals. This is potentially a demanding and widely drawn comparison with things that have applied to trustees to date. We have to take care in our expectations of what it is reasonable for trustees to decide as they carry out their role in the interests of their members. They rely very heavily on advice. Their actuaries, who are often rather disregarded figures in the world of pension management and in our debates on pensions, have a wide knowledge of what is going on in pensions as a whole and why it is the way it is.
Trustees have to take very professional investment advice, of course. Like my noble friend Lord Balfe, they may decide that trackers are the best thing for them, but in many schemes, the investment decisions will be very detailed and always based on advice. Those advisers—the investment industry as a whole—can safely be assumed to know that there are huge issues relating to climate change and the environment, so their advice will be shot through with that understanding. Of course, there is also in the life of the trustees the employer, who can also be judged as knowing what is going on and understanding how he would like to see his trustees view these complicated matters.
Noble Lords should rest assured that these are complicated matters. It has been a long time since I was a pension trustee; nevertheless, there was always a huge debate about how to balance your portfolio, what to hold in it and what not to hold. The environment is not a thing for the future, of course; it is a thing for today. It is already part of our life; it affects our daily lives, to the extent that the world is already warmer. Those effects are connected to the temperature that we experience and the environment in which we live. When we come to consider the responsibilities of trustees to their scheme members, however, we need to be a bit cautious about how far down this complicated road we expect trustees to go when their members will be much more focused on their daily lives than on the way in which the powers that be are tackling these very difficult issues.
The Government’s stall is set out in Clause 124 and Amendments 75 to 78, which contain discretionary powers. They leave the opportunity to observe events and gauge responses to the problems we face before taking too much action, and they leave flexibility, as in their reference to other climate policies.
Lord Sharkey [V]
My Lords, I shall speak to Amendments 72 and 74 in this group. Neither amendment in any way alters any of the important climate change amendments in the group, except in one respect: they require the Government to make something happen.
What the amendments would do is very straightforward: they would simply impose a binding legal obligation on the trustees or managers of an occupational pension scheme of a prescribed description with a view to securing effective governance of the scheme with respect to the effects of climate change. They would also impose an obligation to include, in particular, the risks arising from steps taken because of climate change, whether by the Government or otherwise, and opportunities relating to climate change.
All those things are word for word in the Bill except that they are all governed by the word “may”. Our amendments would replace the two references to “may” with “must”. As the Bill stands, the Government are not actually obliged to do any of those things, or indeed anything at all, in this clause. The word “may” in subsections (1) and (2) is permissive, not directive—a point made by my noble friend Lady Bowles and me in Committee.
The Minister kindly wrote to us all in response on 5 March. She confirmed that the Government intend to take action and were wholly committed to legislating for effective governance of occupational pension schemes with respect to climate change. She concluded by saying:
“Changing the legislation to ‘must’ would therefore make no practical difference, because as a Government we are committed to making regulations under new sections 41A, 41B and 41C introduced by the Government’s amendment.”
This argument works both ways, of course. What can be the basis of the Government’s objection to “must” if they are committed to doing it anyway? What possible reservations, hesitations or changes of mind are being contemplated here? What can be wrong with having legal certainty that what has been promised will actually happen?
There is a parallel in this Bill to our discussions on the MaPS pensions dashboard. The Committee asked why the provision for MaPS to provide a public dashboard was only a “may”, not a “must”. In reply, the noble Earl, Lord Howe, confirmed that the Government were absolutely committed to MaPS providing a qualifying dashboard service. Several Members, including the noble Baronesses, Lady Drake and Lady Sherlock, noted that the Government being committed to MaPS producing a dashboard is not the same thing as saying that they will ensure that there is a MaPS dashboard. The noble Baroness, Lady Drake, made the point that a little amendment—“may” to “must”—would capture the Government’s assurances
“so that the next Secretary of State does not change their mind.”—[Official Report, 26/2/20; col. GC 186.]
This argument clearly convinced the Government. They have now introduced their own amendments to make a MaPS dashboard a “must” rather than a “may”. I know that we are all very pleased about that.
Can the Government accept the same logic here? If it was right to change “may” to “must” for a pensions dashboard, why is it not right to do the same thing for climate change? I look forward to the Minister’s eager acceptance of the precedent and these amendments.
Baroness Sherlock [V]
My Lords, I am grateful to all noble Lords who raised climate issues in relation to pension schemes during our proceedings, especially those involved in the cross-party talks led by the noble Baroness, Lady Hayman, and my noble friend Lady Jones of Whitchurch. I also thank the Minister for listening and moving on from the broad government amendments brought forward in Committee.
This Bill has been on a journey. When it was first published there was no reference to climate change at all. Indeed, from having been given advice from the Library, I understand that climate change has never been included in domestic pensions legislation before in this country, so we are making history here today.
The Labour Benches had two priorities on this: first, to provide clarity on climate risk by ensuring that the Paris Agreement is referenced; and secondly, to ensure that trustees and managers take international climate treaties into account when making decisions. The word “account” is clearly significant. It recalls the Court of Appeal judgment that found that the Government had failed to take into account the Paris Agreement when permitting the Heathrow expansion. That was a good example of the need to make sure that positive action on the international level to combat climate change is not forgotten when Ministers make domestic policy decisions.
Our priorities are reflected in Amendments 73 and 79, but because we have secured cross-party consensus with the Government, they are also reflected in the government amendments in this group, especially Amendments 75 and 76. I will be interested to hear the Minister’s reply to the questions from the noble Baroness, Lady Hayman, about whether these refer also to the physical impacts of climate change and the impact of steps taken to transition towards a low-carbon economy, and for clarification that Amendment 76 includes the UK’s net-zero target.
However, as my noble friend Lady Jones said, we are only at the beginning of a journey to net zero. Divesting pension funds away from fossil fuels is a big challenge. The Government and the industry need to go further and quicker, with aligning investment strategies with domestic and international targets being the ultimate goal. For this Bill, we have reached a good place with broad cross-party support. I look forward to the Minister’s reply.
Baroness Stedman-Scott
My Lords, government Amendments 75, 76, 77 and 78 seek to amend new Sections 41A and 41B of the Pensions Act 1995, which are to be inserted by Clause 124, introduced by the Government in Committee. The amendments would allow regulations to require that the trustees and managers of occupational pension schemes explicitly consider climate change goals, including the Paris Agreement temperature goal, for the purpose of ensuring the effective governance of their schemes with respect to the effects of climate change. The UK Government and others are committed to the Paris Agreement’s goal of holding the increase in the average global temperature to well below 2 degrees above pre-industrial levels. In fact, the UK is leading the way globally and has committed in law to the target of net-zero greenhouse gas emissions by 2050. We are completely committed to that.
The Covid-19 emergency has triggered the devaluation of many assets across the globe, affecting many investors. Climate change has the potential to bring about a greater, more permanent devaluation that pension schemes need to be prepared for. The Government intend to deliver a recovery from the current Covid-19 emergency that results in an economy that is more sustainable and resilient. Tackling climate change will be a win-win, as many of the actions we need to take to reach our UK climate targets, net zero included, will also support our economy as we emerge from the Covid-19 emergency. The ultimate achievement of the Paris Agreement goal and other climate goals, along with the steps taken by the Government and others to achieve them, are now of greater importance for pension schemes to consider in their overall governance of risk. These amendments would enable regulations to require that scheme trustees and managers take climate change goals and the steps taken to meet them into account.
Amendment 75 makes a minor change to subsection (4) of new Section 41A to make explicit provision for two types of assessments that may be required under subsection (3)(b). Amendment 76 inserts new subsections (4)(a) and (4)(b) into Section 41A. Subsection (4)(a) makes explicit that regulations may require scheme trustees and managers to take into account the different ways in which the climate might change and the steps that might be taken because of those changes. This allows for the assessment of physical and transitional risks respectively—the typical description of risk used by industry. Subsection (4)(b) provides that regulations made under subsection (4)(a) may require trustees and managers to adopt prescribed assumptions about achievement of the Paris Agreement goal and other climate change goals, or the steps that may be taken to achieve them.
The third amendment, Amendment 77, defines the meaning of “the Paris Agreement goal” by specific reference to Article 2.1a of the Paris Agreement. I would like to assure the noble Baroness, Lady Hayman, that Amendment 78 does not limit publication to the effects of climate but includes the effects of assets that contribute to climate change. Pension schemes already have a fiduciary duty to steward their assets, and all schemes have a duty to report on their stewardship policy, including engagement and voting, while from October of this year they will be required to report on how they have implemented their policies.
Finally, Amendment 78 to Section 41B would ensure that trustees and managers may be required to publish information relating to the assessments they make by reference to the Paris Agreement goal or other climate change goals under Section 41A. This includes publication of the contribution of schemes’ assets to climate change referred to in Section 41A(4)(b) as a way of measuring the extent of Paris alignment. Amendments 85 to 88 make corresponding changes to paragraph 12 of Schedule 11 for Northern Ireland.
I turn to Amendment 80. We believe that it is inappropriate to limit the scope of the legislation in this way. I should like to talk about the points made by my noble friend Lord Balfe about smaller schemes. I have been given assurances about such schemes and I can also reassure my noble friend that none of these measures would prevent pension scheme trustees investing in index trackers or seeking to drive schemes towards higher-cost active management. Innovation in the market has led to a blossoming of index-tracking products that take account of climate change risk in different ways. If the trustees of schemes of any size wish to take advantage of these, they can. Members of occupational schemes rarely have a choice of where they save, and they have a right to benefit from the effective governance and reporting of climate change risk, regardless of their employer’s chosen scheme. However, I can reassure my noble friend that these measures are intended to protect benefits through better consideration and management of climate risk.
The Deputy Speaker (Lord McNicol of West Kilbride) (Lab)
I have received no requests from any noble Lord to speak after the Minister, so I call the noble Baroness, Lady Bennett.
Baroness Bennett of Manor Castle [V]
I thank the Minister for her answer. Amendment 78 refers to this covering not just the effects of assets but of climate. I will leave it to others to assess the technical details of that, but I have a specific question for her. She referred to the need for larger funds to report on ESG matters. She does not have to give me an answer now, but I wonder whether there will be also a requirement to publish that, so that it is easily accessible by the public and can be publicised.
This has been a very productive and useful group of amendments. I am sure that the House will join me in paying tribute to the noble Baronesses, Lady Hayman and Lady Jones of Whitchurch. They have clearly done an enormous amount of work, some of which I have seen first hand, to get the Government to this point.
The noble Baroness, Lady Hayman, made a very important point when she said that your Lordships’ House would love not to have to challenge the Government, Bill by Bill, to see the climate emergency recognised in legislation and government action. In this aspect, it is crucial to look at the Committee on Climate Change progress report to Parliament from last week. The Minister made reference to the 43% cut in our territorial emissions of climate change gases. That report highlights the impact of consumption emissions, and the reduction is considerably lower when that is factored in.
The noble Baroness, Lady Jones of Whitchurch, said that we want to see best practice become standard practice. There is an acknowledgement that that has to be legislated for and cannot just be assumed. The noble Lord, Lord Sharkey, referred to elements of the Bill still being permissive and not directive. I am sure that that is an issue that the House will return to again and again when we come to the Agriculture Bill. We need to see direction to all to act, because the climate emergency and the biodiversity crisis, along with so many other factors, such as the state of our economy and society, impact on all.
The noble Baroness, Lady Sherlock, referred to Britain’s international role. Understandably, with the impact of Covid-19, attention has swung away from our crucial global role in COP 26. I therefore suggest to the House that everything we do should hold that in consideration. We are in a position where we need to be a global leader, and the world needs us to be a global leader.
In conclusion, it is not my intention to push Amendment 34 to a vote. I beg leave to withdraw the amendment.
Baroness Stedman-Scott
Member’s explanatory statement
This amendment and the Minister’s other amendments to Clause 47 are intended to make clear that regulations under the Clause may only be made in connection with collective money purchase schemes established by non-employers, or used by multiple employers not all of whom are connected with one another.
Member’s explanatory statement
See the explanatory statement for the Minister’s amendment at page 37, line 31.
Member’s explanatory statement
See the explanatory statement for the Minister’s amendment at page 37, line 31.
“(5) The provision that may be made under subsection (1) or (2) may be made by—(a) modifying or amending this Part;(b) making consequential modifications or amendments of any other enactment.”Member’s explanatory statement
See the explanatory statement for the Minister’s amendment at page 37, line 31.
Baroness Stedman-Scott
Member’s explanatory statement
This amendment and the Minister’s other amendments to Clause 98 are intended to make clear that regulations under the Clause may only be made in connection with collective money purchase schemes established by non-employers, or used by multiple employers not all of whom are connected with one another.
Member’s explanatory statement
See the explanatory statement for the Minister’s amendment at page 77, line 25.
Member’s explanatory statement
See the explanatory statement for the Minister’s amendment at page 77, line 25.
“(5) The provision that may be made under subsection (1) or (2) may be made by—(a) modifying or amending this Part;(b) making consequential modifications or amendments of any other statutory provision.”Member’s explanatory statement
See the explanatory statement for the Minister’s amendment at page 77, line 25.
Baroness Stedman-Scott
“3A_ In section 186 (Parliamentary control of orders and regulations), in subsection (3) (statutory instruments subject to affirmative resolution procedure), after paragraph (f) insert “, or(g) regulations under section 99(2)(c), or(h) regulations under section 99A(2)(b),”.”Member’s explanatory statement
This amendment makes regulations under sections 99(2)(c) and 99A(2)(b) of the Pension Schemes Act 1993 (inserted by Clause 25(4)(c) and (5) of the Bill) subject to the affirmative resolution procedure described in subsection (3) of section 186 of that Act, subject to the exceptions in subsection (4) of that section.
Baroness Stedman-Scott
“3A_ In section 181 (Assembly, etc. control of regulations and orders), in subsection (2) (regulations and orders subject to confirmatory procedure), after “20B(5)” insert “, 95(2)(c), 95A(2)(b)”.”Member’s explanatory statement
This amendment makes regulations under sections 95(2)(c) and 95A(2)(b) of the Pension Schemes (Northern Ireland) Act 1993 (inserted by Clause 76(4)(c) and (5) of the Bill) subject to the confirmatory procedure described in subsection (1) of section 181 of that Act, subject to the exceptions in subsection (3) of that section.
Baroness Noakes
(d) the person was—(i) an employer in relation to the scheme, or(ii) a person connected with or an associate of the employer.”Member’s explanatory statement
This amendment confines the criminal offences in Clause 107 to persons connected with the pension scheme employer.
Baroness Noakes (Con)
My Lords, in moving Amendment 46, I shall also speak to Amendments 47 to 49, which are in my name and those of my noble friends Lady Altmann and Lady Neville-Rolfe. There was a wide-ranging debate in Committee on the two new criminal offences and two new financial penalty powers in Clause 107. Unfortunately, I was unable to be present for that debate, but my amendments were moved by my noble friend Lady Neville-Rolfe, and I have read the record in Hansard.
The scope of the offences and penalties is very widely drawn and, while they do not apply if there is a “reasonable excuse”, there is no clarification of that term in the legislation. My noble friend Lord Howe spoke at length and helpfully in Committee, but it remains the case that there is considerable anxiety from pensions professionals and from companies about the impact of these provisions on ordinary commercial transactions. In Committee, the Government resisted attempts to define “reasonable excuse” and preferred to leave this to non-binding guidance from the Pensions Regulator—that may or may not be forthcoming as there is no obligation on the regulator to produce any guidance—and ultimately to the decision of the courts. We therefore have the classic formula for uncertainty for all those who might be affected by Clause 107, and that uncertainty could of course last many years, until enough cases establish the boundaries of the new offences and penalties.
My amendments today take a different approach from that in Committee and seek to limit the offences and penalties in the same way as the contribution notice regime in the Pensions Act 2004—namely, to the employer or to an associate or connected person of the employer. In Committee, my noble friend Lord Howe gave some examples of the people that the Government intended to be covered by Clause 107. On my reading of the scope of the contribution notice regime, all those mentioned by my noble friend would indeed have been covered by the amendment. If the Government think that the contribution notice’s scope is inadequate, I would have expected them to amend that scope in this Bill; after all, the contribution notices are there to make sure that defined benefit schemes are adequately funded. Criminal penalties and financial sanctions might make everyone feel better, but they do nothing directly to protect scheme funding.
I suspect that the Government intend these new provisions to apply to more people than are covered by contribution notices. In that case, it would seem to me essential that the Government set out clearly who they want to be covered by Clause 107. It cannot be right to create criminal offences without such clarity. However, even if the Government will not do that, I hope that the Minister can be clear about who they do not intend to be covered by Clause 107.
I shall concentrate my remarks on two groups—lenders and landlords—but the problem is wider and extends to all commercial counterparties. I should at this stage declare my interests as recorded in the register, including my directorship of the Royal Bank of Scotland.
I start with an employer who has a loan from a bank. That could fall due for repayment, because its term has ended or covenants have been breached. If the bank seeks repayment of a loan or decides not to renew it, that may cause financial difficulties for the employer. At one end of the spectrum, it could impair the employer’s ability to continue to trade as a going concern. In less extreme cases, it could impact, for example, the employer’s ability to meet payments under an agreed deficit repair plan. In either case, the result is material detriment within the terms of Clause 107. A bank should be well aware of this, because lenders have to know basic financial facts about their customers, including their pension commitments. That is clear within the language of Clause 107, but is it what the Government intend? If not, will the Minister say that clearly?
Similarly, a landlord may decline to renew a lease or decide to enforce early termination due to breaches of covenants. This can cause or amplify financial stress in an employer and have a knock-on impact on its ability to support its related defined benefit scheme. Is the landlord within these new offences and penalties or not? In the case of landlords and banks, there is no commercial or other nexus between them and the defined benefit scheme, yet they are drawn within the net of Clause 107 because their actions or conducts could indirectly impact the benefits payable by the scheme.
I remind my noble friend that we have not even begun to see the impacts of the coronavirus pandemic on businesses. The wonderful financial support provided by the Government in these early days of the pandemic will soon come to an end. Many businesses will be facing an uncertain future and are likely to have taken on additional debt. They may need more debt to survive. Many have chosen not to make quarterly rent payments this year. Their pension scheme deficits will almost certainly have worsened, due to extremely low interest rates and weak asset prices—a double whammy. The noble Lord, Lord Hain, referred to this in an earlier group of amendments. Banks and landlords will be making big decisions about enforcing existing loans or leases, as well as making new ones.
The impact could go beyond concerns about particular commercial transactions, with a chilling effect more widely. Defined benefit scheme employers may well become untouchables as counterparties, if there is major uncertainty about the implications for those who deal with them. My preference would have been for the Government to be clear about what counts as a reasonable excuse for the purposes of Clause 107. My Amendments 46 to 49 have instead concentrated on the persons who are intended to be covered by the new offences and penalties in order to invite the Government to provide certainty to third parties about whether they can expect to be covered by Clause 107. I beg to move.
Baroness Altmann [V]
My Lords, I have added my name to these amendments in the names of my noble friends Lady Noakes and Lady Neville-Rolfe. I congratulate my noble friend Lady Noakes on the way she introduced this amendment.
There are valid concerns around the wording of the good intentions of this Bill to introduce criminal offences or financial penalties for avoiding employer debt or risking member-accrued benefits. But it is right to express some concerns that this should apply only if the person is either an employer or associated with the employer, so that professional advisers cannot be held criminally liable, nor banks just making loans in the ordinary course of business, nor even insurers for mistakes made in underfunding the pension scheme.
I welcome the long-overdue extension of the Pensions Regulator’s powers contained in this Bill, which can punish wilful or reckless behaviour and non-compliance with contribution notices and so on. I also welcome the intention to deter bad practice by scheme employers, and indeed scheme trustees from undermining their pension scheme. It is right to have a criminal offence, but, as currently written, the provisions under Clause 107 could criminalise anyone who deals with a pension scheme. I do not believe that is the intention, and it could leave parties reluctant to deal with a business because of its pension scheme, which could in turn jeopardise the ongoing solvency of the company. Therefore, I would welcome some reassurance from the Minister that this will not be the outcome of this legislation.
Some might say that advisers should surely share the responsibility were there to be attempts to avoid pension debt. I have some sympathy with this. So, once again, will my noble friend reassure us that this Bill will not see those acting in good faith being caught out by the actions of an employer, or even perhaps of complicit trustees who might act in ways that are detrimental to the scheme? I hope that this reassurance can be forthcoming.
Baroness Neville-Rolfe (Con) [V]
My Lords, I support my noble friends Lady Noakes and Lady Altmann and the strong case they have made for these amendments. Noble Lords may recall that at Second Reading on 28 January I expressed some doubts about the scale and nature of the penalties in this Bill, which include a civil penalty of up to £1 million. I am still concerned that increasing them, especially the new criminal element, will deter the respectable people we need from becoming pension scheme trustees.
The world has been changed by the challenges of the coronavirus, as we have just heard. According to Patrick Hosking in the Times yesterday, using figures from pension experts Barnett Waddingham, FTSE pension deficits have soared by £45 billion to £210 billion since the start of the year, so that companies that have a deficit are now a good deal further away from closing it. This is an enormous strain on mostly well-run companies and schemes and reflects years of low interest rates caused by QE and turbulent equity markets. Who would want to get involved in pension administration? Yet its success is at the heart of the British savings system and vital to the future livelihoods of millions of hard-working people, often of modest means, up and down the country.
The Bill rightly reflects the need to plug a hole revealed by the Philip Green case and the furious debate in Parliament before Sir Philip was persuaded to pay up. However, as is often the case with legislation that responds to scandals, it is wide-ranging and takes enormous powers. It goes too far in my view towards burdening business at the expense of other stakeholders. The result will be less willingness to become a trustee and more administrative and other costs for pension schemes paid for, in the end, by the unfortunate pensioners, and the risk of more businesses being pushed into the Pension Protection Fund. This is the background to my unease with Clause 107 and why I moved an amendment in Committee with the help of my noble friend Lady Noakes, and why I now support her and my noble friend Lady Altmann with these amendments.
The criminal offences in Clause 107 are widely drawn. They try to catch bad behaviour by anyone who might be involved. But I maintain that this may have appalling perverse effects, injecting great uncertainty into what is permitted behaviour by those involved in pensions administration. My principal concern is with trustees, having been one and knowing what fine judgments one is called to make, but also with financial advisers, actuaries, accountants, insurers, property consultants and even secretarial support, all acting in good faith. It is one thing to provide for criminal sanctions against an employer, but wrong to extend this in such a vague and general way. A number of suggestions were made in Committee as to how one might tackle this, but disappointingly the Government have not listened—or not so far.
These new criminal offences will have a chilling effect on trustees and others involved, as my noble friend Lady Noakes explained, and I ask my noble friend the Minister to agree to think again and to narrow the very wide offences in this Bill to provide some comfort, either in this House or when it proceeds to the other place.
The Deputy Speaker (Baroness Garden of Frognal) (LD)
Lord Naseby has withdrawn, so I call Lord Blencathra. No? I gather that there have been some problems, so I call the noble Viscount, Lord Trenchard.
Viscount Trenchard (Con)
My Lords, while the Bill has generally been welcomed by the pensions industry and members of pension schemes, I worry that it may give the Pensions Regulator too much power. The new criminal offences contained in Clause 107 affect not only employers and senior associates of pension schemes. They could apply to anyone involved in such schemes: for example, trustees, banks and insurers. I therefore support Amendments 46 to 49, proposed by my noble friend Lady Noakes so eloquently and so well supported by my noble friends Lady Altmann and Lady Neville-Rolfe, which confine the new criminal offences to the employer and persons connected with the employer. It is absolutely right that the Government have acted to ensure that failures such as that of Carillion and BHS will no longer have a negative effect on members of pension schemes.
The offences created in Clause 107 are serious. They carry a potential seven years’ imprisonment and a civil penalty up to a maximum of £1 million. It is therefore right that these offences should apply as broadly as they do, but they should be limited in effect to the employer and the trustees of the pension scheme concerned. These penalties seem proportionate to the gravity of the crimes in certain cases, but both offences apply very broadly to “persons”, with no requirement for association with the pension scheme. The Government’s intention may be that the measures are there to catch wilful and reckless behaviour, but the problem is that their potential ambit is wider—much wider—than just the reckless.
As currently drafted, the criminal offences could impact ordinary pensions and business activity, and, in distressed situations, they might act as a disincentive to corporate or business rescue—for example, by encouraging directors to file for insolvency to avoid the risk of criminal liability that might arise through seeking a turnaround plan or a pension scheme compromise. So far, attempts at making the measures clearer and more targeted have not succeeded. Regulator guidance on how the new powers will be used has been promised, but this has no special status in law.
The Pensions Regulator is not the only possible prosecutor in Clause 107 offences, as the noble Lord, Lord Hutton, eloquently pointed out in Committee. My noble friend Lord Howe explained that the Secretary of State would prosecute only as a last resort, such as if the regulator ceased to exist or changed. I find it hard to envisage that in such circumstances the whole of the current pensions legislation would not be changed.
I think that it is necessary to confine those who might commit these two new offences to connected parties; otherwise, many other persons might unwittingly, or unintentionally, become exposed to prosecution. For example, the fund manager of a pension scheme, in handling investments entrusted to him by the trustees of the scheme, might make investments or realise sales that negatively affect the value of a pension fund’s assets.
I think that these amendments are very sensible and I look forward to hearing the Minister’s reply.
The Deputy Speaker
The noble Baroness, Lady Sherlock, has withdrawn. Have we had any success in finding the noble Lord, Lord Blencathra? Alas, no, in which case I call the Minister, the noble Earl, Lord Howe.
Earl Howe (Con)
My Lords, I am grateful to my noble friend Lady Noakes for tabling these amendments to Clause 107 and for the helpful conversations that we have had about them in recent days.
I start by saying that the Government understand the genuine concerns that have been raised during Committee and by my noble friend through these amendments. The first point that I would like to make —I think that it is necessary for me to make it—is that, in introducing the new criminal offences, the aim is to target individuals who intentionally or knowingly mishandle pension schemes or endanger workers’ pensions by behaviours such as chronic mismanagement of a business or avoiding pension liabilities. It is not the aim to frustrate legitimate business activities where they are conducted in good faith.
The key point is the one that I made in Committee: that it is an offence only if the person intended to harm the scheme or should have known that the conduct would have that effect and they have no reasonable excuse for their actions. The decision on whether a person does or does not have a reasonable excuse and ultimately did or did not commit an offence in a particular case is a matter for the courts. However, in coming to such a verdict, the courts will have paid due regard to all the circumstances in the individual case in question. That, of course, includes coming to a view on whether the person’s excuse for acting in that way was a reasonable one. The burden of proof on that question falls on the Pensions Regulator. In other words, the Pensions Regulator would need to prove that the actions of the individual were unreasonable.
The other dimension of the issue is that it is important that, where the elements of an offence are met, no matter who has committed it, the regulator should be able to respond appropriately. Any restriction of the persons potentially in scope would create a loophole for those people to act in such a way.
Having said all that, we are aware of the concerns raised by industry and by noble Lords. To address those concerns, I draw the House’s attention to the general prosecution policy which the regulator already publishes and which sets out the matters that it considers when using its prosecution powers.
My noble friend mentioned the regulator’s guidance. The regulator has stated that it will also issue further specific guidance explaining its approach to prosecuting the new offences under Part 3. Before it does so, the regulator will consult the industry on the contents of the guidance for the new offences, and it expects to publish this guidance prior to the commencement of these provisions.
Baroness Noakes
My Lords, I first thank all noble Lords who have taken part in this short debate. I was pleased to get support from my noble friends Lady Neville-Rolfe, Lady Altmann and Lord Trenchard.
I am grateful for what my noble friend the Minister has said, in particular that Clause 107 is not aimed at legitimate business activities conducted in good faith. He went on to say that there were other activities which might harm the defined benefit scheme but that they would be caught only to the extent that there was not a reasonable excuse. We will come back to that being the heart of the problem because there is no real comfort about what is included in “reasonable excuse”. We are invited to rely on future guidance on prosecution issued by the Pensions Regulator and guidance on how the regulator would approach the reasonable excuse.
I say to my noble friend that the pensions advisory industry has not always found guidance issued by the regulator helpful in guiding, as opposed to giving warnings about what the Pensions Regulator does not like. I do not think there is a lot of hope that that guidance will necessarily put an end to the uncertainty—and, at the end of the day, we are left with major uncertainty hanging over business until cases come before the courts and we see what the Pensions Regulator does in practice.
Having said that, as my noble friend knows, I never intended to divide the House and am grateful for what he has been able to say today. I will want to reflect on it further with those who have helpfully provided briefing on this. I know that some parts of the industry may want to stay in dialogue with the Government as the Bill goes forward. We will obviously have Third Reading in your Lordships’ House, but the Bill is a Lords starter and it will be taken in another place. So, while for today I will withdraw my amendment, and while I believe that we have made a lot of progress, we may not have made quite enough in making people comfortable that the range of transactions which could potentially be caught by this will not unintentionally fall within the ambit of Clause 107. With that, I beg leave to withdraw the amendment.
The Deputy Speaker
We now come to the group beginning with Amendment 50. I remind noble Lords that Members other than the mover and the Minister may speak only once and that short questions of elucidation are discouraged. Anyone wishing to press this or the other amendment in this group to a Division should make that clear in the debate.
Clause 109: Duty to give notices and statements to the Regulator in respect of certain events
Amendment 50
Lord Vaux of Harrowden
“( ) In particular, the declaration of a share buy-back by the employer is a notifiable event for the purposes of subsection (1) if the value of the assets of the scheme is less than the amount of the liabilities of the scheme.”Member’s explanatory statement
This amendment makes the declaration of a share buy-back by a company notifiable to the Pensions Regulator if the scheme is in deficit.
Lord Vaux of Harrowden [V]
My Lords, in moving Amendment 50 I will also speak to Amendment 51 in my name. I thank the noble Baronesses, Lady Bowles and Lady Altmann, for their support and the Minister and officials for the time they have given to discuss the issue on a number of occasions.
Both these amendments relate to a similar concern: shareholders of companies with pension deficits removing excessive value from companies and thereby increasing the risk relating to their pension schemes. We had a long discussion about this in Committee, so I shall try not to duplicate that too much, but I will briefly explain the issue for those coming to this for the first time. I suggest that events since Committee have conspired to make the matter more rather than less relevant.
The Bill introduces a requirement that the regulator should be notified in advance of notifiable events and that the notification should be accompanied by a description of how the notifiable event might impact the pension scheme and what is being done to mitigate that impact. The Bill does not say what those notifiable events will be; they are to be prescribed in future.
However, it is understood that the Government intend these to be, first, the sale of all or a material proportion of the assets or business and, secondly, the granting of security on a debt in priority to a debt of the scheme. An email I received from the regulator describes the purpose of the notifiable event regime as being to act as an early warning system so that it is alerted to corporate actions that may have a detrimental impact on the scheme and that it may otherwise not have been aware of.
The easiest way for shareholders to remove value from a company is through either a dividend or a share buyback. While the regulator will be able to find out about these after the event, it has no way of seeing them in advance. Once the money has gone, it is too late; it is very hard to recover, especially if it has gone abroad. We have seen high-profile examples of companies going under after large dividends have been paid, leaving pension schemes with deficits—BHS and Carillion being just the two most high-profile ones. It is not a theoretical risk and, sadly, recent events have made such situations only more likely.
The Government rightly argue that we should not restrict the payment of normal, reasonable dividends; I completely agree with them. Restricting the payment of normal, non-excessive dividends could have a negative effect on the company and therefore on the pension scheme. Anyway, many dividends end up in pension schemes. It is only excessively high dividends, compared with the deficit repair payments, that I am trying to catch here. Even then, I am asking only that they be notified in advance so that the regulator can consider whether they have a negative impact on the pension scheme. I am not trying to block them, despite some noble Lords wishing that were the case.
Secondly, the Government also rightly argue that we should not overburden the regulator with too many unnecessary notifications. Again, I agree with them, so I have changed the amendment we discussed in Committee so that Amendment 51 now allows the regulator to set the level of dividend at which it should be notified. Share buybacks are a less common action, so I suggest that they should always be a notifiable event.
Amendment 50 simply says that any company with a pension deficit should notify a share buyback to the regulator in advance. Amendment 51 says that a company with a deficit should notify the regulator in advance if the dividend is bigger than the deficit repair contribution and the deficit repair period is longer than a period to be specified by the regulator.
It is interesting to note that if a company borrows more than £50 million under the Coronavirus Large Business Interruption Loan Scheme, the Government forbid it to pay dividends, make a buyback or pay a bonus. They have taken that view presumably because they are worried that if it pays a dividend or a buyback it will increase the risk of non-payment of the loan.
By contrast, we are allowing companies that owe large sums to their pension schemes and deferred salaries to their employees to pay whatever they want without even a notification. That feels slightly like “one rule for us”. I do not think that the Minister will accept these amendments, and I would prefer not to push them to a Division. The Bill allows the Government to prescribe events as notifiable events in the future. The noble Baroness, Lady Stedman-Scott, has kindly confirmed to me that the Government will keep the issue of dividends and share buybacks under review, and take appropriate action if they or the regulator feel that they are becoming a potential problem. If the Minister could kindly confirm that understanding for the record, I will not seek to divide the House over these amendments. I beg to move.
Baroness Altmann [V]
My Lords, I am grateful to the noble Lord, Lord Vaux, for moving these two important amendments. I have added my name to Amendment 50, which requires share buybacks to be notified to the regulator if a company is responsible for a pension scheme in deficit.
The case for accepting this amendment seems quite overwhelming. The noble Lord has been extremely reasonable in only requiring notification of a buyback. Equity buybacks are sometimes used by companies to distribute to shareholders what is considered surplus cash where management believes that it has no better use for that money. That suggests that sometimes, management believes that the current share price is undervalued. Of course, the buyback improves reported earnings per share and flatters financial statements, but these measures are sometimes used as a yardstick to determine top executives’ pay or bonuses. Many receive a large element of their compensation in the form of stock options, and a buyback can offset the dilution of existing share values and any potential reduction in earnings per share that might otherwise come from their options. Therefore, buybacks could be considered a ploy to boost reported earnings per share or share price levels.
It should be remembered that although the buyback may increase earnings per share, it does not increase the fundamental value of the company. Even more worrying, sometimes, companies engage in buybacks funded by increased borrowing. One of the reasons given for taking on the increased debt to fund such a buyback is that it is more efficient, because the interest on the debt is tax-deductible, unlike with dividends. However, clearly, this will reduce the financial resilience of the company when the debt must be repaid or the gearing level rises, leaving less money available to fill a pension deficit.
A company’s financial difficulty results from lack of cash, not lack of profits, and for a company which sponsors a defined benefit pension scheme with a deficit, the buyback would allow shareholders to enjoy rewards at the expense of pensioners. Ultimately, if the cash has gone into buying shares, it is no longer available to fill the deficit. The buyback itself cannot be argued to generate future growth, because a company’s investing its cash in the business would be a reason to suggest that it will be better off as a result of that decision. However, where spare cash is simply given to shareholders to boost share prices and potentially boost management remuneration, this requires some oversight by the regulator.
Baroness Noakes
I shall be brief. I indicated that I want to speak on these amendments because I am concerned about the impact that they would have on companies’ ordinary transactions. Part of the problem would be that there is no distinction between ordinary dividends and something that might be regarded as an excessive dividend.
The noble Lord, Lord Vaux, has taken the approach of saying that share buybacks are always less common and always have to be referred to the regulator but other distributions of capital by way of dividend are not. Life is never that simple; if you are sitting in a boardroom deciding on dividend policy, there is clearly an approach to ordinary ongoing dividends. Then there is what you do with surplus capital, which can go by way of either a special dividend or a share buyback. I do not know how this amendment could possibly differentiate between those.
When one gets into the detail of Amendment 51, which tries to set a level at which so-called ordinary dividends would trigger the potential interest of the regulator, we could potentially get into problems. I do not think that it would be healthy to have major uncertainty hanging over companies undertaking their ordinary approach to the distribution of profits alongside what might well already be a well-defined deficit repair plan with contributions already agreed with the pension trustees, and then have something on top be required to go to the Pensions Regulator. The definition of what the regulator should be interested in will end up with a lot of things being notified to the regulator that, frankly, cause no concern at all. I do not think that that is an efficient way to approach life.
Baroness Neville-Rolfe [V]
The noble Lord, Lord Vaux, has adapted his amendments to meet some of the concerns that we all expressed in Committee, for which I thank him, but I am afraid that I am still not happy with the two amendments that he has tabled. For example, nearly all pension schemes are in deficit. Amendment 50 would allow the Pensions Regulator basically to stop all buybacks, which is a matter not for this Bill but for a governance Bill—following proper review and consultation—because buybacks can be justified in some circumstances and we have not had a chance to debate that.
The coronavirus measures, with which a parallel was drawn, are unique and different—that has been made clear in parliamentary agreement to them—so it is better to leave the arrangements to ministerial discretion, as the noble Lord, Lord Vaux, suggested. We have to remember that, however good the regulator is, he or she introduces delay and uncertainty, so we need to make sure that the powers are used with care.
Baroness Bowles of Berkhamsted [V]
My Lords, I declare my interests as in the register: I am a non-executive director of London Stock Exchange plc, which has a pension scheme of which I am not a member.
I have signed both amendments, which are about getting priorities right on the matter of how a company uses spare cash and the importance of paying down deficits, especially if it is over too long a time. If there is spare cash around, deficit reduction should rank ahead of share buybacks and be balanced with regards to dividends. Both those issues have already been well elaborated, especially by the noble Baroness, Lady Altmann, and the noble Lord, Lord Vaux.
The amendments would not prohibit either of those eventualities; they would make them notifiable events. The regulator could then exercise discretion about whether there were good reasons; for example, checking that, in the circumstances, the quantum of the dividend was acceptable. I am less certain about good reasons for buybacks, but if there were any, they could be discussed. I therefore support the amendment. To deem it excessively cautious would not be to take it as it is intended. Although we say that the matter would need to be investigated, we would expect the Pensions Regulator to be reasonable in all the circumstances. For example, if everybody had fallen into big deficits, obviously the situation would be different, because of what was going on in the markets, from where a company was being a laggard in making up its deficits. However, we must not forget that if those deficits are not repaid and the company is under stress, it will be the workers and the pensioners who lose out in the end. They cannot always be put at the end of the queue.
Baroness Sherlock [V]
My Lords, I am grateful to the noble Lord, Lord Vaux, for returning to this issue. We all know that there are some DB schemes with significant deficits and employers who could be doing more to clear them more quickly. Let us not forget the work done by LCP, which showed many firms paying out dividends 10 to 20 times their pension deficit payments, or the regulator’s annual DB funding statement last year, which raised concern about the disparity between dividend growth and stable deficit repair contributions.
The problem will not disappear. As more DB schemes have closed, they will soon be paying out more in pensioner payments, leaving them less to invest and with a need to de-risk their remaining investments.
The Covid pandemic is going to make things worse. The Pensions Regulator reports that, so far, only around 10% of schemes have agreed a temporary suspension or a reduction in DRCs post Covid, but more trustees and employers are in the process of discussing possible requests to suspend or reduce contributions. We all know that the full force of the economic storm has yet to hit us.
The noble Lord, Lord Vaux, mentioned the no-dividend rules for Covid business loans. The regulator’s Covid-19 guidance on defined benefit scheme funding and investment says that, if trustees face requests to suspend or reduce contributions, then they should seek mitigations. It gives an example, saying:
“All dividends and other forms of shareholder distribution to stop throughout the period of suspension and not to start again until the deferred or suspended contributions have been paid.”
TPR will still require trustees to report agreements to suspend or reduce contributions and provide information on the mitigations.
Ministers say that the regulator can chase employers if resources are taken out that should not be taken, but we know what the danger is if action is taken only after a dividend has been paid out. If the dividends are paid out by a UK employer to an overseas parent, it can be very difficult to get them back. It is entirely possible, in these difficult times, that if a company is in trouble and its parent company is based overseas, there may well be a move to repatriate assets to the home state. These amendments seek to tackle that problem not by stopping dividends or even buybacks where there is a deficit but by making them a notifiable event in certain circumstances.
The noble Lord, Lord Vaux, has softened his amendments, but he has still made a compelling case. Therefore, if the Minister does not want to accept these amendments, can he tell the House how he will ensure that the next BHS or Carillion scandal will not be a company with a foreign parent seeking to repatriate assets before abandoning its obligations to the pension scheme? I look forward to his reply.
Earl Howe
My Lords, I am grateful to the noble Lord, Lord Vaux, for tabling these amendments to Clause 109, which brings us back to an issue that we debated at some length in Grand Committee. It would be helpful to consider these amendments together, as they seek to make the declaration of a dividend or share buyback the subject of a notice and accompanying statement to the Pensions Regulator and trustees of the pension scheme. In the case of a share buyback, this notification would be required where the value of the assets of the scheme was less than the amount of the liabilities. In the case of a dividend, notification would be required if the amount of the dividend exceeded the annual deficit repair contribution and the amount of the annual deficit repair contribution was less than a percentage of the scheme’s deficit. That percentage would be specified by the Pensions Regulator.
I understand where the noble Lord is coming from, but I will address his concern with an explanation of Clause 109. The purpose of the clause is to make sure that the Pensions Regulator and trustees of a defined benefit pension scheme have prior knowledge about corporate transactions or events of which they would otherwise have been unaware and that pose a risk to the scheme and ultimately the Pension Protection Fund. The clause would also ensure that the trustees work with employers to mitigate the effect of such risks.
The Pensions Regulator and the trustees of the pension scheme are able to access information about dividends and share buybacks already. There are well-established processes whereby the regulator is able to get the information that it needs on dividends and similar payments as it assesses covenant strength and the ability of the employer to make contributions to deal with any deficit. Adding additional notifications of the kind that the noble Lord is suggesting is unlikely to be of any help. What it would certainly do is put an unnecessary burden on both employers and the regulator.
The regulator simply would not have the resources to deal with these additional notifications. That is not a trivial point: let us remember that it is a risk-based regulator and must focus its resources where it can do most good. We think that this focus is best directed at ensuring that recovery plans are robust. That is the best way to ensure that schemes are treated fairly. It is the strength of the recovery plan that is key here. Of course there will be occasions when dividends are paid without the regulator’s knowledge, but even if the regulator had been able to prevent that from happening, that would not help the scheme. That is because there is no requirement for the sponsoring employer to pay anything into any scheme deficit other than what is set out in the recovery plan.
Lord Vaux of Harrowden [V]
My Lords, I thank all those who have taken part in this short debate. While I do not entirely agree with the Minister on everything he said, I do agree that a strong recovery plan is the most critical element of making sure that deficits are dealt with. I part company with him on the idea that taking excessive dividends out does not impact on the ability of companies to strengthen the deficit repair plans. However, I thank him for the confirmation that he has given, which I asked for in my earlier speech. On that basis, I am content to beg leave to withdraw Amendment 50 and not to move Amendment 51.
The Deputy Speaker (Baroness Henig) (Lab)
My Lords, we now come to the group beginning with Amendment 52. I remind noble Lords that Members other than the mover and the Minister may speak only once, and that short questions of elucidation are discouraged. Anyone wishing to press this amendment, or any other amendment in the group, to a Division should make that clear in debate.
Clause 118: Qualifying pensions dashboard service
Amendment 52
Baroness Drake
“( ) Requirements prescribed under subsection (2) must include a requirement that a pensions dashboard service may not include a facility for engaging in financial transaction activities.”Member’s explanatory statement
This amendment ensures that a pensions dashboard service does not include a provision for financial transaction activities.
Baroness Drake [V]
My Lords, Amendment 52 is in my name and those of my noble friend Lady Sherlock and the noble Baroness, Lady Janke. The Bill enables the introduction of an ecosystem of public and commercial pensions dashboards. When built, the dashboard service will find and display, for view by all individuals, all the information about their occupation, personal and state pensions in one place. The Secretary of State can mandate all pension providers and schemes, including the state, to release their data on an individual. That mandate will cover the financial data of many millions of people.
The intention is that the dashboard will contribute to better decision-making by individuals about their long-term savings. Unfortunately, the evidence shows that that will not automatically translate into engagement and good decision-making by everyone. Structures will need to exist around the dashboard which support people making choices and protect them from detriment. That is why Amendment 52 is important. The amendment ensures that a dashboard service should not go beyond the finding and displaying for view information on a consumer’s savings into allowing financial transactions to take place through the dashboard before Parliament has had the opportunity to consider the matter and approve this through primary legislation.
The long-term savings market is particularly vulnerable to consumer detriment, because of the asymmetry of knowledge and understanding between the consumer and the provider, consumer behavioural biases, the complexity of products, and the irreversible nature of many pension decisions. There is a plethora of reports from different regulators confirming this. Allowing transactions on commercial dashboards, such as the transfer of assets, could provide new opportunities for detriment. The impact of scams, mis-selling, provider nudging and poor decision-making could increase if an individual’s total savings are displayed in one place, the dashboard allows financial transactions, and the wrap of consumer protection is not fit for purpose. For some vulnerable customers, poor decisions could be more costly if the impact is across all their savings, and if people are scammed, they could be scammed out of everything.
Before transactions are authorised, Parliament needs to understand how the dashboard is driving behaviours, of both consumer and provider, and how consumers will be protected. In this market, the consumer demand side is weak, and, increasingly, regulatory focus is on provider supply-side controls to protect consumers’ interests. Commercial dashboards could make it much easier for firms that have attractive front-end offerings to capture consumer assets through, for example, encouraging early consolidation and the transfer of pension pots. It is to be remembered that pension transaction decisions are mostly irreversible, and poor decisions can be financially life-changing in their impact.
Dashboards are not a silver bullet for removing consumer risk. Most individuals do not proactively engage with their pensions until they have to. When they do, they can be price insensitive and vulnerable to nudging, inertia and judgments detrimental to their retirement income. We now see that vulnerability in the drawdown market following the introduction of pension freedoms, as the FCA has confirmed.
Consumers reveal powerful behavioural biases which have more impact on financial capability than lack of knowledge and information. They take what the FCA describes as the “path of least resistance”, even in the face of information available to them. If someone is looking to consolidate all their savings, rather like Alice and the Drink Me bottle, if there is a button on the provider’s commercial dashboard that is marked “Transfer All Savings”, they are more likely to press it.
The FCA rules have not prevented mis-selling. Regulated advice failed the Port Talbot steel workers. The FCA report on the financial advice market’s support to pensions does not make good reading. In a dashboard service which allows financial transactions, protecting individuals’ data, and who can hold, access and use it, are questions of major importance. This amendment does not argue against allowing financial transactions longer term over the dashboard, but it recognises that the consumer protection issues are of such importance and magnitude that the decision to allow transactions must be preceded by the approval of Parliament. Neither Government nor Parliament can be agnostic on the matter. The state supports the long-term saving system with more than £40 billion of tax relief and mandates employers to enrol millions of workers into a pension scheme.
The Government must ensure that the dashboard service makes a positive contribution to retirement income outcomes for the consumer and the public good of the UK. I am arguing that people should have the freedom to make good decisions and be protected from poor decisions that they cannot reverse. This is something that the FCA often tries to do, and I am sure that if one put the issue to some of those Port Talbot steel workers, they would agree. Some of those steel workers learned a cruel lesson: poor pension savings decisions are irreversible. In Committee on 2 March, the noble Earl, Lord Howe, commented:
“I do not believe that I expressed a categorical Government intention to include transactions on the dashboard. I said that we would make that incremental step only after the most careful consideration and public consultation, and assessment of all the risks. I freely acknowledge that risks exist in that quarter.”—[Official Report, 2/3/20; col. 209GC.]
My case, and the sheer weight of the evidence, is that such are the potential risks that Parliament itself should have its say and that scrutiny by secondary legislation in the affirmative is not sufficient. Furthermore, the very nature and extent of the protections required may, because of their nature, require primary legislation. This is not an area of settled policy and it is a matter of significance for many millions of citizens. I hope that the Minister will accept the amendment. If he does not, I intend to push it to a vote. I beg to move.
Baroness Altmann [V]
My Lords, I have little to add to the wise words of the noble Baroness, Lady Drake, on Amendment 52. There are significant dangers should there be an easy transaction button on a pensions dashboard right from day one. However, perhaps I may speak briefly to my own amendments, which have been kindly supported by the noble Baroness, Lady Bowles: Amendments 56 and 59.
Amendment 56 is probing in nature and seeks to amend Section 119 of the Pensions Act 2004 to provide that regulations may be imposed that would require information from occupational pension schemes to dashboards to be accurate and up to date. Further, the amendment would ask the regulator to impose requirements for regular data audits, accuracy checks and error correction reports.
Baroness Bowles of Berkhamsted [V]
My Lords, I shall speak briefly to each amendment in this group. The noble Baroness, Lady Altmann, has a series of amendments on data accuracy—there was also one in the first group—which I have signed. It is important to have accuracy, especially when there are matters of significant value and security. Ensuring that records are accurate and are kept up to date should be in-built from the start of operations, and as the dashboard is starting out there is no reason not to take that precaution.
I have expended time and energy tracing and correcting inaccurate records on pensions and with banks. Key causes of corruption and inaccuracy have been that information was not transferred accurately, or sometimes was not entered accurately in the first place but particularly when legacy systems did not join up with a new system. It is immensely important that pensions information is not lost or inaccurate, as that can also open the door to potential scams or other sales pressures built around tracking pensions or correcting pension data.
With regard to the pensions dashboard, I agree with what has already been laid out by the noble Baroness, Lady Drake, so I will not repeat it. Transactions are the dangerous point. They are certainly not where the focus should be as dashboards are set up and their operations tested, but it is going to be very tempting for commercial dashboards. Commercial companies may find a way to get around that, but this information would give the FCA as the regulator a direct guide to what is to be expected so that it could take action against any circumvention of the intentions of the amendment. I therefore support all the amendments in this group.
Lord Vaux of Harrowden [V]
My Lords, I support all three amendments. The grouping is slightly odd, mixing the question of transactions with that of data accuracy; there is a relationship but it is only tangential. The noble Baronesses, Lady Drake, Lady Altmann and Lady Bowles, have already explained the reasoning for the amendments so I shall try to be brief.
Amendment 52 would prevent a dashboard service from engaging in financial transactions. The matter has been well explained by the noble Baroness, Lady Drake, so I will just say that the risks around pension-related transactions happening without proper advice are very well known. Dashboards are being created primarily for the purpose of allowing people to obtain better information about their situation. That information will be helpful when deciding whether to carry out some transactions but it does not in any way negate the need for proper advice, so allowing dashboards to become transaction platforms would make ensuring that proper advice had been taken much more difficult. At least until they have been fully established and the implications well understood, it really must make sense to prohibit dashboards from becoming transactional platforms.
The other two amendments along with Amendment 13, which was discussed in the first group, are about establishing appropriate processes to ensure the accuracy of the data on the dashboard. It almost goes without saying that a dashboard containing inaccurate information may actually be more damaging than no dashboard at all; I apologise for the echo of something else there. These dashboards are intended to help people and their advisers to make decisions about their future pensions. Inaccurate data will lead to wrong decisions being made. It is therefore critical that data must be fully and regularly checked and audited, so I urge the Minister to accept these amendments.
Baroness Neville-Rolfe [V]
My Lords, as noble Lords know, I am as concerned as anyone with consumer protection. I therefore welcome the amendment which we have agreed to during the passage of the Bill to ensure that the Money and Pensions Service provides a public-owned dashboard. That was a great step forward, and we will come on to that on the next amendment.
However, I fear that this amendment could stop commercial experimentation, which is desirable if properly regulated. As I understand it, any organisation providing a pension dashboard must achieve authorisation from the FCA. Innovation is important and can help consumers and pensioners. If the amendment were passed, it could have a chilling effect and prevent innovation until another Bill had cleared Parliament—not, I suspect, a welcome prospect for HMG after the extent of the amendments made to this Bill.
I have a question for the Minister. I am a little concerned about compliance with GDPR, which obviously is important in securing equivalence in the EU context, where portability is a key requirement. I wonder if the amendment could run us into any trouble on that aspect of regulation.
Baroness Janke [V]
My Lords, I support Amendment 52. I also support the other two amendments tabled by the noble Baroness, Lady Altmann, as a result of the matter being much debated in Committee, I am very grateful to the noble Baroness, Lady Drake, for her clear analysis of the issues involved.
Many would say that pensions dashboards are long overdue. They enable people to plan their future finances taking account of existing pensions, and to take a long-term view of future financial provision. However, the challenge of producing a dashboard that will adequately cover the complexity of the pensions landscape should not be underestimated. We are talking about millions of people, and the enormous number of lost pensions that we hear about shows both the need for and scope of the task. Given the level of complexity, the scope for scams and fraudulent actions increases and it is therefore essential that members of the public are sufficiently protected.
As many noble Lords have said, the vulnerability of many people means that they can be much more susceptible to scams and bogus claims and apparently attractive offers from the commercial sector. The additional factor that digital literacy and access can be problematic for some people also needs to be considered. That and the lack of sound advice can lead to bad decisions and life-changing, irreversible mistakes, as we heard from the noble Baronesses, Lady Drake and Lady Altmann, in Committee.
Pensions is a complicated subject; it is not easily accessible by everyone. Lack of engagement, which has already been talked about, is a result and, as the noble Baroness, Lady Drake, said, people often take the line of least resistance and take wrong decisions that they are unable to change. I hear the arguments made by the noble Baroness, Lady Neville-Rolfe, about innovation. Certainly, it is an important factor, but I feel that the protection of pension holders is more important. Measures to provide full protection should be the subject of further primary legislation rather than secondary legislation, as indicated in the Bill.
Baroness Sherlock [V]
My Lords, I will deal first with the data issues. There are known to be problems with data quality in many pension schemes that need to be addressed. The regulator has rightly been pushing trustees to improve the accuracy of their data and to evidence that they are doing so. But as we move to a world of pension dashboards, with a consumer’s savings all being displayed in one place and the expectation that behaviour will be influenced by it, data accuracy and standards are key, so I hope the Minister will take to heart the issues raised today.
On transactions, done well, a pensions dashboard can be a really useful service, helping savers to locate lost pots and see all their different pensions in one place—state and private—and work out if they are saving enough for retirement. But there are big risks, especially because the Bill leaves almost every aspect of the dashboard service wide open. In Committee, we tried to put some boundaries around this. We tabled an amendment to insist that there must be a public dashboard from the outset, and I am delighted to see the government amendment now requiring that. Another of our amendments required the FCA to regulate the provision of dashboard services; again, Ministers confirmed that that would happen. Another of our amendments proposed that using the dashboard to see your own data must be free, and Ministers confirmed that it would be. We have come a long way and I am really grateful to the Government for engaging with our concerns.
But two important issues are still outstanding, and they are addressed in this and the next group. As my noble friend Lady Drake explained so well, Amendment 52 would stop delegated powers in the Bill being used to authorise commercial dashboards to engage in transactions. We simply believe that the risks of this are such that Ministers should have to come back to Parliament and seek further authorisation before going down that road. Remember, we still do not know how many dashboards there will be, who will run them or what information can be put on them. We do not know where liability will lie for each link in the chain or how consumers will be compensated if they lose out. We do know that there will be a public dashboard and that the Government want commercial dashboards running alongside it from the start.
But let us think for a moment. If a company cannot charge to look at a dashboard, why would they create one, unless they can profit from it in some other way? How might that be? Could a company show a consumer their data and say, “Look, you’ve got all these different pots. Wouldn’t it be tidier if your brought it all over into this fund here, which my firm happens to run?” Could they fund it by taking advertising? Could a consumer log on to a commercial dashboard and see an advert popping up, inviting her to connect with an adviser, or saying, “Have you ever thought about equity release?” There are even risks just in presenting data in a way that could privilege some kinds of assets over others, depending on who is running the scheme.
This is a risky market—a point that my noble friend made very well. Those who sell complicated pension products generally know and understand a lot more about them than those who buy them. Let us remember the history of financial services mis-selling—from personal pensions through to endowment mortgages, to the PPI scandal, as a result of which, firms are likely to end up repaying up to £50 billion to consumers. The average pension pot is worth rather more than the average PPI policy. The dashboard project could extend to some 22 million people. It is a powerful tool.
Earl Howe
My Lords, I begin by turning to Amendment 52, tabled by the noble Baronesses, Lady Drake and Lady Sherlock. We have been clear that the initial aim for dashboards is simply to present people with information about their existing pension provision, whether that be the state pension, occupational pensions or personal pensions. Giving people the opportunity to see that information in a single place will represent a significant achievement. The pensions dashboard programme published papers in April that identify the scope of this initial offer, and it announced recently that the call for input on these proposals will start in early July.
The concern raised by the noble Baronesses relates to transactions. It is worth reminding ourselves that people can already undertake all kinds of financial transactions online, such as transferring existing pension pots between providers or consolidating small pensions into a single account. However, any organisation offering such services must meet existing regulatory requirements. In relation to pension transfers, these include requirements designed to ensure that people understand the potential consequences of undertaking these transactions.
These legislative requirements arise from the Pension Schemes Act 1993 and a member’s statutory right to transfer their cash equivalent to a pension scheme of their choice. Clause 125 seeks to amend that statutory right by creating safeguards to give trustees and scheme managers assurance that such transfers are to safe destinations. I do not think that the noble Baronesses, or indeed anyone who spoke today, gave sufficient credit to those provisions. Any such functionality would also have to navigate other existing legislative requirements, including those set out by Section 48 of the Pension Schemes Act, which require members with a cash equivalent value in a defined benefit scheme greater than £30,000 to seek financial advice. Members with guaranteed annuity rates must be sent personalised, tailored risk warnings before they are informed that they must take such advice.
In addition, I ask the noble Baroness to take into account the Government’s amendments to Clause 125, which will add a further series of safeguards. By taking a regulatory power to notify members to take guidance and information where a transfer meets prescribed circumstances, selected “at-risk” members will have to pause their transfer and demonstrate they have taken action to consider the risks of proceeding. Therefore, it is not fair to portray the Government as ignoring consumer protection.
Alongside this, we have been totally clear that any organisation wishing to provide a pensions dashboard must first complete an authorisation process, overseen by the Financial Conduct Authority. Once it has been authorised, it will be subject to the existing regulatory requirements for that activity and for any other activity it has the regulatory permissions to carry out. Where applicable, this may include the new protections offered by Clause 125 of this Bill.
The decision on whether transactions will be allowed on dashboards is not one we will take lightly. First, we need to understand how users respond to initial dashboards offering a simple “find and view” service and, subsequently, what additional needs users may have where dashboards could add value. Any decision to enhance the functionality of dashboards would have to be supported by extensive user testing as well as a review of the existing consumer protections to ensure that all necessary safeguards are in place to protect the consumer. We would also need to consider the legislative implications of such actions. Any application to transfer made using dashboards would be subject to the transfer requirements set out in primary and secondary legislation that are in force at the time of the application.
I strongly believe that Amendment 52 is the wrong way to go. It would deny people the right to take control of their financial situation. It actively seeks to frustrate. It would mean that consumers, even when properly advised and informed, would have to follow a parallel track to execute their wishes. It may even go so far that it could stop dashboard providers developing useful modelling tools that could, for example, inform people of the potential benefits of increasing their contributions or the impact of increased earnings. This amendment risks stifling future innovations that could demonstrably benefit consumers. My noble friend Lady Neville-Rolfe made that point very effectively.
As I have indicated, this amendment completely fails to take into account the existing regulatory regime under which many types of financial transaction are already regulated. The Government have been clear that we want to enable consumer-focused innovation; as I have said, we will always ensure that safeguards are progressed in line with this innovation.
My noble friend Lady Neville-Rolfe asked whether our proposals risk contravening any GDPR rules. I remind her that only the Money and Pensions Service and qualifying pensions dashboard providers that meet the requirements set out in regulations and operate to agreed standards will be able to connect to the dashboard infrastructure, so the request will effectively be a subject access request from an individual to the data controller to view their data. The individual’s identity will have been verified to the agreed standard level so that the pension scheme can be confident about who is making the request. Any request to search for consumers’ pensions information that is not received from the pension finder service will not be provided via pensions dashboards.
Turning to Amendments 56 and 59, tabled by my noble friend Lady Altmann and the noble Baroness, Lady Bowles, we agree that the accurate recording and management of pensions data is important. That is why the Pensions Regulator set out its expectations on record-keeping in 2010. It provided additional guidance in 2017 and 2018 to support trustees and scheme managers in measuring and improving their data.
The regulator already expects schemes to conduct annual reviews of their data that cover presence and accuracy, that trustees engage with administrators to identify and prioritise data for improvement, and that they report their data scores so that the regulator can monitor improvements and target its engagement with schemes. The Pensions Regulator has increased its scrutiny of scheme records and has targeted regulatory intervention based on reported data scores. Previous interventions have seen positive results.
The Financial Conduct Authority also has relevant requirements in place. Under its general compliance requirements in the FCA handbook concerning senior management arrangements, systems and controls, firms are required to
“establish, implement and maintain adequate policies and procedures sufficient to ensure compliance of the firm including its managers, employees and appointed representatives (or where applicable, tied agents) with its obligations under the regulatory system”.
As a result, when the FCA makes rules to compel schemes to provide data via dashboards, these will have to comply with this provision; we expect the rules themselves also to set out that the data must be accurate. In addition, the Financial Conduct Authority has the power to make further rules relating to data accuracy so long as it advances one or more of its operational objectives and is consistent with data protection legislation.
Alongside those requirements, the Minister for Pensions and Financial Inclusion recently wrote to some of the largest pension schemes, providers and third-party administrators to galvanise the industry’s approach to data accuracy and readiness for dashboards. The Minister requested a status report on the quality of their scheme data and, accordingly, their plans to improve it. The Government will feed the findings into the pensions dashboards programme to support their efforts. Schemes will be required to meet a clear set of data standards to connect to the dashboard system; these will be finalised in the autumn.
In addition, the programme will work with the regulators to develop a comprehensive onboarding strategy to support schemes in preparing their data ahead of their connection to the dashboard infrastructure. These activities seek to ensure that dashboards are a success by achieving the necessary coverage and that the data supplied is accurate and clearly understood by the user.
With those assurances and explanations, I hope that my noble friend will feel able not to move her Amendments 56 and 59 when they are reached.
Baroness Drake [V]
My Lords, I thank all noble Lords who have supported Amendment 52. I say to the noble Earl that nothing in my amendment would deny any of the things that he listed. That is simply untrue. It seeks to say that Parliament should have the authority to clear taking transactions on to a dashboard system. The noble Baroness, Lady Bowles, captured it quite succinctly: transactions are a key risk danger point and require attention in that sense.
The noble Earl does not deny that there are risks. The difference between us is that I believe that the scale and implications of those risks, and the unknown evidence that is yet to come forward from our experience of the dashboard, are such that this should not be dealt with by regulations or secondary legislation. It should be dealt with by Parliament clearing enabling legislation to allow people to transact on dashboards. That is the thrust of my amendment; it is not to deny people freedoms. This is not without precedent. It was Parliament that intruded to insist that charge caps should be applied to pension savings pots. In spite of the arguments articulated against that, the industry has survived perfectly well and everybody has gone on to thrive under charge caps on pension schemes.
In moving my amendment, I did not put forward a single argument saying that the Government were neglecting consumer protection. Ironically, a lot of the protections that the Government are introducing are to deal retrospectively with the consequences of introducing pension freedoms without a protective consumer wrap. It would be sensible not to make the same mistake twice.
The issue here is that the scale of the potential risks—the unknowns of what behaviour will be like on the dashboard—are such that, in my view, it is perfectly reasonable to say that that issue should come back to Parliament for clearance through primary legislation rather than through regulations or secondary legislation. I wish to press my amendment to a vote.
The Deputy Speaker (Baroness Henig) (Lab)
I shall now put the Question. We have heard a Member taking part remotely say that they wish to divide the House in support of this amendment; I will take that into account. The Question is that Amendment 52 be agreed to.
The Deputy Speaker (Lord McNicol of West Kilbride) (Lab)
We now come to the group beginning with Amendment 53. Anyone wishing to press this or any other amendment in this group to a Division should make that clear in the debate.
Amendment 53
Lord Young of Cookham
Member’s explanatory statement
This is a probing amendment, following the debate in Committee, to establish the Government’s proposals to use GOV.UK Verify for the purpose of authorising access to the Dashboard.
Lord Young of Cookham (Con) [V]
My Lords, Amendment 53 in my name presses the Government to clarify progress on identity verification. This is crucial because without a system for identity verification—proving you are who you say you are—no one can use a dashboard. The original proposal for verification was summarised on the ABI website:
“The process to confirm the identity of users is based on the gov.uk/verify system”.
Verify was a government-sponsored IT project that began in 2014 and has cost about £200 million. It should have provided the basis for accessing pensions dashboards. To put it mildly, however, it has not lived up to expectations, leaving a void in the dashboard programme.
Last year the NAO published a critical report on what in its words was
“intended to be a flagship digital programme”.
It said:
“Even in the context of GDS’s”—
the Government Digital Service’s—
“redefined objectives for the programme, it is difficult to conclude that successive decisions to continue with Verify have been sufficiently justified.”
A year earlier, the Infrastructure and Projects Authority recommended that Verify be closed as quickly as practicable. The Institute for Government’s Whitehall Monitor commented that the scheme continued to be “mired in issues”, had fallen “short of targets”, and had
“failed to build its intended user base and … is not delivering the efficiencies that the government sought.”
In March this year the Government stopped funding the scheme. Verify’s falling out of favour was heralded by my noble friend in his reply to my amendment in Committee. This is what he said:
“I understood what my noble friend said about Verify, and I assure him that the industry delivery group has this issue squarely on its radar.”
Putting on his black cap, he went on to say:
“The solution may not be Verify. … We hope to make announcements on that in due course.”—[Official Report, 2/3/20; col. GC 205.]
Responsibility for taking identification verification forward now rests with MaPS, the Money and Pensions Service. In its progress report in April on identity verification, there is no mention of Verify, which seems to have been airbrushed out.
Yesterday, I got an email from Mr McKenna of MaPS, for which I am grateful. I had asked him whether the current market engagement exercise on the dashboard included verification, and this is the reply:
“The current market engagement exercise does not include identity verification. This is a separate work strand within the programme that requires more work before we will be in a position to engage with the supplier market.”
So a prerequisite for the dashboard programme has been put to the back of the queue. Who is going to provide the identity verification service? Given the commitments that we have heard this evening that the service will be free, how on earth will it be funded? Will it be by MaPS, for example? Is my noble friend able to make the announcement that he trailed in his earlier reply to me, on the timing and funding of this crucial element in the programme?
Amendment 65, in my name, places an obligation on MaPS to provide a dashboard by replacing “may” with “must”. It is the identical twin of an amendment that I tabled in Committee, and I am grateful to my noble friend Lady Altmann and the noble Lord, Lord Sharkey, for their support. To the amateur, our one-word change seems a more economical way of achieving the desired objective than the five government amendments with thousands of words, but we bow before the expertise of professional drafters. I say straight away how grateful I am, as I am sure other noble Lords are, that the Government have listened to the strong case made on all sides in Committee, and recognised that we need the certainty of compulsion, rather than the uncertainty of discretion, when it comes to MaPS and the dashboard. That we have this concession is typical of the patient listening of Ministers and their officials in the last three months, on this and other issues, and I warmly welcome it.
But—and it is an important “but”—there is no date by which they have to do this. Without some idea of timescale, we could be left holding the menu without ever getting the dish—hence my Amendment 68, which obliges MaPS to complete this task by December 2022. I referred in Committee to the length of time it has already taken to get this project up and running. It was first promised by Government in 2002 as an online retirement planner, and we were told 12 years later by the then Financial Secretary to the Treasury that:
“A ‘RetirementSaverService’ (dashboard) will be essential to support pension freedoms.”
Five years after pension freedoms, there is still no dashboard, while eight national dashboards have been launched in Europe and we have been reassured by the ABI that there has been extensive testing of prototypes.
In response to my amendment in Committee, my noble friend Lord Howe said,
“but I can tell my noble friend that MaPS and the industry delivery group intend to set out their approach for the year ahead by Easter. By then, we should have at least the outline of a plan, with milestones I hope, so that we can be a little clearer on the answer to the question that he raised.”—[Official Report, 28/2/20; col. GC 184.]
Easter has come and gone, but no milestones. The latest from MaPS is:
“We plan to lay out a more detailed timeline by the end of the year.”
I looked at the ABI website over the weekend to see if it had updated it on the subject of the dashboard since Committee, and I found this under “FAQ”:
“If the prototype has worked, why do I have to wait until 2019 to use this myself?”
Perhaps that could be updated before Third Reading.
Since Committee, MaPS and the ABI have had to cope with the pandemic, and their top priority has to be the continued payment of pensions, the collection and investment of contributions, and the provision of advice. But the introduction of “must” instead of “may” risks being meaningless without some indication of a date by when the obligation must be discharged. I hope that my noble friend can provide some sort of road map and destination time by which we will do this.
Finally, Amendment 63, in the name of the noble Baroness, Lady Sherlock, would require the MaPS dashboard to be up and running for a year before other dashboards. My initial view was that we did not need to have more than one dashboard as the data displayed on each would be identical, so why duplicate? However, as a Conservative, I was persuaded to support competition and choice, but I have a lot of sympathy with this amendment; I believe it would be best if MaPS became the brand leader of dashboards and was well established as such in the minds of the public. It has a better chance of doing this if it is first out of the traps, rather like the BBC and commercial broadcasters. In practice, this should be the case as MaPS is in charge of the plumbing for all the dashboards.
Looking at the progress update report from MaPS in April, I see that Chris Curry of MaPS is in charge of the pension dashboards programme. His remit will be to develop the secure digital architecture to support and enable the development of pension dashboards. Therefore, MaPS is doing the specification, procurement and testing of the common systems that everyone will be using; with this inside track, it ought to be first in the field.
The Minister said in reply to the debate on this in Committee:
“It could be that the publicly funded dashboard will be launched first and be first in class, and that others will follow.”—[Official Report, 26/2/20; col. 185GC]
It would be helpful if the Minister could go a little further this evening and encourage MaPS to say publicly that it is indeed its intention to be up and running before anyone else. On this, as indeed with other amendments, I will listen very carefully to what my noble friend says in reply. I beg to move.
Baroness Drake [V]
My Lords, the introduction of a pension dashboard service raises major considerations of the public good and consumer interest, which is why I, my noble friend Lady Sherlock and many other noble Lords across the House have argued strongly for citizens to have the right to access their data through a public dashboard and not be restricted to commercial services.
I thank the Minister for his courteous consideration of our arguments and the decision of the Government to require the Money and Pensions Service—MaPS, a public body—to provide a pension dashboard service. Amendment 63 would ensure that the MaPS public dashboard must have been in operation for a year, and the Secretary of State must lay a report before Parliament on the operation of that service, before commercial dashboards are authorised by the FCA to enter the market. A MaPS dashboard would be part of their function to deliver guidance to the public that is free at the point of use—a safe space, unfettered by any commercial interests.
As the Government can mandate all pension providers and schemes to release personal financial data on the order of 22 or more million people, Parliament needs to be confident that the public good and consumer interest are well served. The points of the noble Lord, Lord Young of Cookham, are extremely valuable and important, and I thank him for making them. Financial technology should be harnessed for the public good and to improve financial markets, and the dashboard has that potential.
However, building a dashboard service has complexities and challenges. The architecture, the liability model, consumer redress on detriment, data standards and sharing risks, identity verification and security—that quite rightly preoccupied the noble Lord, Lord Young—delegated access and consumer behavioural responses, to name just a few, are all work in progress. As I observed in the previous debate:
“The long-term savings market is particularly vulnerable to consumer detriment”.—[Official Report, 26/2/20; col. 176GC]
There is a major governance challenge to be addressed: the consumer protection of millions in both the provision of the dashboard and the infrastructure that supports it.
The ABI, speaking for some commercial providers, has acknowledged the need for strong governance to make clear what obligations, liabilities and controls will be in place and are necessary. In requiring near-universal coverage, the dashboard service raises the bar on protecting customers from poor behaviour by regulated and unregulated providers, scammers and consumers’ own vulnerability, when all their savings can be viewed in one place.
Baroness Altmann [V]
My Lords, I want to speak briefly in support of Amendment 63. I have also added my name to Amendment 65. As the noble Baroness, Lady Drake, has just outlined, consumer protection has to be paramount. There has to be significant concern that, once a dashboard is up and running, we will need to learn lessons before further activity takes place. If we have a public service dashboard for a minimum of a year, we will have chances to learn lessons that otherwise might not be learned—particularly in light of such issues as data concerns, types of protected benefits and requirements for MaPS guidance. I am most grateful to the Minister for accepting the concept of requiring MaPS advice or guidance before any transfers. This is an important issue. I therefore hope that the Government will recognise the necessity of ensuring that private dashboards do not start before the public dashboard has been tried, tested and reported upon in Parliament.
The principle of Amendment 68, tabled by my noble friend Lord Young, is right. I would just advise caution on the issue of data accuracy and the lack of data standards, and the fact that it may simply not be possible for a dashboard and the data to be ready in the timescale he is suggesting, but the thrust of it and having an end date is absolutely the right way forward.
Lord Vaux of Harrowden [V]
My Lords, I have added my name to Amendment 63 in the name of the noble Baroness, Lady Sherlock. This amendment is very simple. It seeks to ensure a period of a year from the establishment of the publicly operated dashboard before competing commercial dashboards are allowed to operate. This may seem a small point, but it is quite important. Dashboards are a new concept and will include large amounts of sensitive and complex data from many sources. We do not yet know how they will used, whether the current design concepts are suitable in practice and whether changes will need to be made to ensure that they operate well and safely. Therefore, it must make sense for the system to be tried out in one place, with proper controls, and reviewed and reported upon, before we open it up to the commercial world. This period of a year will allow us to see how a dashboard is used and whether any unforeseen problems and consequences arise.
I am grateful to the ABI for its commentary on the amendments to this Bill, but I am afraid that I disagree with it on this matter. The ABI is right that making dashboards as accessible as possible is desirable, but that must be done in a way that ensures that unforeseen consequences are avoided. As I mentioned in an earlier debate today, a bad dashboard is worse than no dashboard. A year’s grace period to ensure that what the noble Lord, Lord Young, called the plumbing is working well, and to make any tweaks, seems a common-sense safeguard.
Lord Sharkey [V]
My Lords, I have put my name to Amendment 63 because it is vital to allow the MaPS dashboard the best possible chance of reaching a wide public and establishing MaPS as a trusted and independent operator. This amendment would provide the MaPS dashboard with a head start of about 12 months. Without that, I doubt that MaPS would be able to do any of those things very successfully. I doubt that it could establish a wide customer base. If it is competing from the start with rival commercial organisations and their dashboards, those rival dashboards, whose eventual presence I would welcome, would be provided by organisations that have more resources than MaPS does, more consumer-facing expertise and more experience and skill in communications with consumers. Many would also have a very large existing consumer contact base, firmly established brands and loyalty, whereas MaPS would find it very hard to establish itself as a distinct, recognised and trusted independent operator in the clamour of a vigorous competitive marketplace. You need market share, visibility and actual customer experience to do that. That is probably impossible for MaPS in a very busy, very fragmented and possibly very confusing marketplace.
To make the MaPS dashboard work, we need lots of people to know about it and lots of people to use it. If we are to generate trust, we must provide high levels of consumer satisfaction and embed the notion and value of independence in the MaPS brand. The only way to do this is to allow MaPS a head start, to properly fund its launch and its communication campaigns, and to give it time to use what it learns in its first year. That would enable it to offer a very high level of service by the time that the huge marketing expertise of its well-funded and contact-rich competitors arrives on the scene. That is why I support Amendment 63.
Baroness Neville-Rolfe [V]
I welcome my noble friend Lord Young’s probing amendments on verification and timing, and I look forward to hearing from the Minister. I was very struck by the summing-up on the previous amendment by my noble friend the Deputy Leader of the House, who showed just how strong the Bill is on consumer protection and to what lengths the Government have gone to meet the House’s concerns. But others have just tried to use the Bill to bring in yet more burdensome measures.
For me, Amendment 63 takes the biscuit, because the Government have agreed to bring in a Money and Pensions Service dashboard so that there is a government, public-funded version that includes people’s various pension pots and the old-age pension. The proponents of this amendment are then trying to exclude the trail-blazing commercial version, which was behind the Bill in the first place and is designed to help savers, building on the good practice that exists out there in the best pension funds and elsewhere. The amendment would lead to a delay of a year for those dashboards, yet they will all be properly regulated and monitored and MaPS would be in the lead. Competition from others will be an incentive to quality and speed, helping to identify the bugs that the noble Baroness, Lady Drake, who knows so much about pensions, referred to.
I cannot support this amendment. It is worrying that the Government are losing on a series of inappropriate amendments because noble Lords are not coming to the House to speak and listen, but can vote from their garden benches.
Baroness Janke [V]
I support Amendment 63 and am not voting from a garden bench. The case for this amendment has been very well stated and I will therefore not take up time by repeating it here. I support Amendment 63 and will vote for it if there is a Division.
Baroness Sherlock [V]
My Lords, this has been another interesting debate. Before I address the question of the dashboard, I pay tribute to the noble Lord, Lord Young, who has been deploying his considerable stores of intellect and wit as he has politely but determinedly pursued Ministers on the matter of verifying and identity verification. I look forward to hearing the Minister’s response to him yet again.
I am delighted that Ministers have now agreed to ensure that there will be a public dashboard and that it will be available from launch. I welcome the government amendments in this group, but Amendment 63, in my name and that my noble friend Lady Drake and others, aims to push the Government an extra step further: to put in place an essential safeguard that the MaPS public dashboard must have been in operation for a year, and the Secretary of State have laid a report before Parliament on the operation and effectiveness of the service, before commercial dashboards are authorised by the FCA to enter the market.
I am sorry to hear that the noble Baroness, Lady Neville-Rolfe, regards this amendment as inappropriate, and that she somehow seems to think that people were using the Bill as an opportunity to bring in other things. The only reason that we have had to table amendments to place safeguards is because the Government have brought forward proposals without adequate safeguards in the first place. I have certainly never voted while on a garden bench and I have more confidence that my fellow Members of the House of Lords are listening to the arguments and able to make an intelligent judgment. I hope that they will feel able to support us on this amendment, as they did on the last.
I am, however, grateful for the support of the noble Lords, Lord Vaux and Lord Sharkey, the noble Baronesses, Lady Altmann and Lady Janke, and the kind words of the noble Lord, Lord Young of Cookham. The case for this amendment has been made overwhelmingly by my noble friend Lady Drake and other speakers, so I will not rehearse it in detail, but I was struck by her summary of the many complexities and challenges still to be dealt with in the dashboard project. These are building the architecture, sorting out the liability model, deciding how to compensate consumers for a detriment, managing data standards and data-sharing risks, identity verification and security, and behavioural responses. Basically, there is a lot yet to be decided, designed, operationalised and tested. The Government’s plan is to do all this with a public dashboard and commercial dashboards running alongside each other from the launch. It is our contention that that simply unnecessarily increases the risk.
Earl Howe
My Lords, there was general agreement in Committee that pension scheme members should have access to a dashboard service that is publicly owned and free of potential commercial imperatives. As we set out in Committee, the Government wholeheartedly agree that such a dashboard should be available to all users from day one, alongside dashboards offered by other organisations. We explained that the single financial guidance body, now known as the Money and Pensions Service, can provide a dashboard under its existing statutory functions, but I accept that the Government could provide further reassurance in legislation.
The government amendments reflect this commitment by placing a duty on the Money and Pensions Service to provide a pensions dashboard. The dashboard must display information from private and occupational pension schemes. These amendments also enable the inclusion of state pension information.
In addition, these amendments repurpose the provisions that were in new Section 4A(1)(b), as inserted by this clause, as new Section 4A(1A). The original purpose of these provisions, however, is unchanged. They make it clear that the Money and Pensions Service can carry out functions relating to the provision of qualifying pensions dashboard services by others as part of its pensions guidance function, including providing state pension information. This could, for example, include publishing data standards with which providers must comply.
The amendments also make minor consequential changes to Clauses 119 and 121, as well as to Schedule 9, which relates to Northern Ireland. The duty to provide a pensions dashboard will apply only once the necessary supporting technical architecture is in place and pension schemes are required to provide information to their members via dashboards. I therefore very much hope that the government amendments will be accepted when they are moved.
I will now respond to the amendments tabled by the noble Baronesses, Lady Sherlock and Lady Drake, on the Money and Pensions Service dashboard being the sole dashboard for at least 12 months. The Government have been clear throughout that offering consumers a choice of dashboards is the best way to increase engagement. Our position on this has not changed. Allowing consumers to access their pensions information in the way that they want to is key to putting people in control of their savings.
Having a period of exclusivity for the Money and Pensions Service dashboard, as is being suggested, would seem to achieve relatively little, other than to restrict people’s access to their own information through a route of their choosing. However, what we will not allow to happen is for any commercial dashboard to be launched before that of the Money and Pensions Service. I would like to be clear that the Money and Pensions Service dashboard will be available from day one, alongside dashboards offered by other organisations.
I invite the noble Baroness to note that the Money and Pensions Service has an existing legislative requirement, in the Financial Guidance and Claims Act 2018, to report to the Secretary of State annually on the achievement of its objectives and functions. This report is also laid before Parliament and will provide detailed information about the development, delivery and operation of dashboards.
The noble Baroness, Lady Drake, asked me about the liability model and whether we can guarantee that it will be ready before commercial dashboards can be used. The pensions dashboard programme will develop a robust liability model to ensure that there are clear roles and responsibilities in the event of a breach. This will be in place before the public launch of dashboards.
I hope I have given reassurance that there will be a publicly owned dashboard and that there is a range of reporting requirements that allows sufficient oversight of progress, not least in making sure that the functionality which will underpin all dashboards can be relied upon. I have to say that some noble Lords rather over-egged the argument of functionality risk.
The long and the short of it is that we remain strongly of the belief that multiple dashboards are the best way to ensure that everyone can access their pensions information in the way that they desire. Therefore, I respectfully ask the noble Baroness, Lady Sherlock, not to move her amendment when we come to it.
My noble friend Lord Young has tabled three amendments, covering the Money and Pensions Service dashboard, a date for the introduction of that dashboard, and the verification of identity. I am glad he agrees that the government amendment fully meets his desire for the Money and Pensions Service to provide a dashboard. On providing a timetable for delivery, we are all keen to see dashboards available as soon as possible. However, it is essential to get the design of the service right, to ensure that it provides accurate information and is secure and consumer focused.
On that point, I can assure my noble friend that the pensions dashboard programme put in place by the Money and Pensions Service is taking the necessary steps to deliver the dashboard architecture. In April, it published two papers relating to data. Having deferred consultation on these papers because of the impact of Covid-19, the programme will now run a call for input throughout July and August. It is also bringing together a data working group to finalise a set of data standards and requirements by the end of the year.
The programme is also making progress on the supporting dashboard infrastructure. On 22 June, it started a six-week market engagement exercise with potential suppliers of the supporting dashboard architecture for the pensions finder service and the governance register. This will help the programme to determine the most appropriate route to market in preparation for a formal procurement process, anticipated to start in autumn this year.
Finalising the data standards and the procurement route is key to informing the timetable for delivery. However, it is essential that we do not force upon the Money and Pensions Service an arbitrary timetable set by legislation. I hope that, on reflection, my noble friend will come round to that view.
I understand that my noble friend wants to maintain momentum, and I agree with that. Alongside the annual report by the Money and Pensions Service, which I mentioned, the pensions dashboard programme has committed to publishing a progress update every six months, for the length of the programme. It will also set out a detailed timetable for delivery by the end of the year.
My noble friend also brought us back to the issue of digital identity and how a user of a dashboard is verified. In the March 2020 Budget, the Government reiterated their commitment to the creation of a ubiquitous digital identity market. To achieve this, they created the digital identity unit, which is a collaboration between the Department for Digital, Culture, Media and Sport and the Cabinet Office.
As my noble friend rightly said, an identity verification service is an essential component of the dashboards infrastructure. It will provide the verification required to assure pension schemes—the data providers—that they are returning data to the correct user and to nobody else. The verification service must also meet the needs of users, enabling them to verify their identity without undue difficulty.
On a point raised by my noble friend about funding, I say that the pensions dashboard service, including ID verification, will be free at the point of use for individuals. The identify verification service for dashboards will be managed centrally as part of the supporting infrastructure, as I indicated. Funding options will be carefully considered as part of any proposed solution on identity.
As outlined in the progress update report published in April, the pensions dashboard programme will need to source a functioning, workable identity verification service. It is working with the digital identity unit and the supplier market to explore potential solutions for dashboards. These solutions will be based on managing and mitigating the type of risks associated with dashboards. Developing their requirements will enable the pensions dashboard programme to assess the suitability of available products against robust success criteria.
I say to my noble friend that we understand the need for progress on the delivery of dashboards; we recognise the need for a safe and secure method for verifying someone’s identity, and we understand how important this will be for the success of the dashboard concept. While I can go no further than that, I hope that I have said enough to convince him that his concerns are squarely on the radar, and that he will accordingly feel able to withdraw his Amendment 53.
The Deputy Speaker
I have received no requests for noble Lords to speak, so I call the noble Lord, Lord Young.
Lord Young of Cookham [V]
My Lords, I thank noble Lords who have taken part in this debate, not least my noble friend Lord Howe for his response to the issues raised. I repeat the welcome given by all those who spoke to the government amendments, which in effect oblige MaPS to provide a dashboard. I make it clear that I do not propose to press any of the amendments in my name to a Division.
On identity, I note the new joint unit between DCMS and the Cabinet Office to come up with a digital verification process. It sounds a little like the exercise that was started in 2014 to initiate the Verify programme, which had the same objective. I only hope that this initiative is more successful.
On funding, there was a sentence in my noble friend’s response that I did not have time to write down in full, but it sounded as if it came from the Treasury: that funding options would be considered as part of a range of solutions. I would like to look a little further at that, but I welcome the reassurance that there will be no charge to the consumer. I am grateful that he recognised the importance of getting the identity verification process right as a precondition for a successful dashboard.
On the date, I say with respect that we heard a lot from my noble friend about “day one” but nothing about “day when”. We are no further forward in having any idea as to when the pensions dashboard will be up and running. I look forward to the six-monthly progress reports and I welcome what he said about recognising the urgency of getting the system up and running.
I think that we had a new commitment from my noble friend this evening which I welcome, which was that no one would be able to provide a pensions dashboard before MaPS. I am not sure that we have had that before. I wonder whether there will be some legislative underpinning of that commitment, which I would very much welcome.
The bulk of the debate was on Amendment 63. The majority of those who spoke, led by the noble Baronesses, Lady Drake, Lady Janke and Lady Sherlock, my noble friend Lady Altmann, and the noble Lords, Lord Vaux and Lord Sharkey, all wanted, in the interest of consumer protection, MaPS to have a head start so that it could be trialled and tested. My noble friend Lady Neville-Rolfe put the contrary view that there should be a more market-based approach to the dashboards without an inside track for the public sector. I do not propose to support the amendment in a vote, but my view is that it would be best if MaPS made it absolutely clear that it plans to be up there, using all its advantages, ahead of the field to set the pace. However, I understand the arguments and I suspect that when it comes to a Division the Government may be obliged to rethink whether this is something they really want to go to the stake on, or whether it is something that they can live with. In the meantime, I beg leave to withdraw Amendment 53.
Member’s explanatory statement
This amendment is consequential upon the Minister’s amendment at page 117, line 6.
Member’s explanatory statement
This amendment is consequential upon the Minister’s amendment at page 117, line 6.
Member’s explanatory statement
This amendment corresponds to the Minister’s amendment at page 108, line 32.
Member’s explanatory statement
This amendment corresponds to the Minister’s amendment at page 108, line 36.
Member’s explanatory statement
This amendment is consequential upon the Minister’s amendment at page 117, line 6.
Member’s explanatory statement
This amendment is consequential upon the Minister’s amendment at page 117, line 6.
“(A1) The single financial guidance body must provide a pensions dashboard service by means of which—(a) information that the trustees or managers of a relevant occupational pension scheme are required to provide by—(i) regulations under section 238D(1)(a)(ii) of the Pensions Act 2004, or(ii) regulations under Article 215D(1)(a)(ii) of the Pensions (Northern Ireland) Order 2005 (S.I. 2005/255 (N.I. 1)), and(b) information that specified authorised persons are required to provide by general rules under section 137FAA(1)(a)(ii) of the Financial Services and Markets Act 2000,may be requested by, and provided to, an individual or a person authorised by the individual.(A2) The single financial guidance body may, by means of its pensions dashboard service, provide information about—(a) state pensions,(b) basic and additional retirement pensions, and(c) state pension information relating to an individual.”Member’s explanatory statement
This amendment requires the single financial guidance body (the Money and Pensions Service) to provide a pensions dashboard service to deal with information from occupational and personal pensions schemes. It also enables the body to include state pension information in its pensions dashboard service.
Baroness Drake
“(A3) Before any other pension dashboard services can qualify under section 238A of the Pensions Act 2004 (qualifying pensions dashboard service)—(a) the pensions dashboard service under subsection (A1) must have been established for at least one year, and(b) the Secretary of State must lay before Parliament a report on the operation and effectiveness of the pensions dashboard service under subsection (A1) in its first year.”Member’s explanatory statement
This amendment ensures that the publicly owned pension dashboard service has been operating for one year and the Government has reported to parliament on its operation and effectiveness before commercial dashboard services can qualify.
The Deputy Speaker (Baroness Henig) (Lab)
I should inform the House that if Amendment 64 is agreed, I cannot call Amendment 65.
Amendment 64
Member’s explanatory statement
This amendment is consequential upon the Minister’s amendments at page 117, lines 6 and 25.
“(1A) The single financial guidance body may carry out other functions relating to pensions dashboard services, including functions for which provision is made by—(a) regulations under section 238A of the Pensions Act 2004 or Article 215A of the Pensions (Northern Ireland) Order 2005 (S.I. 2005/255 (N.I. 1)) (qualifying pensions dashboard services),(b) regulations under section 238D of the Pensions Act 2004 or Article 215D of the Pensions (Northern Ireland) Order 2005 (S.I. 2005/255 (N.I. 1)) (information from occupational pension schemes), or(c) general rules under section 137FAA of the Financial Services and Markets Act 2000 (information from personal or stakeholder pension schemes).” Member’s explanatory statement
This amendment enables the Money and Pensions Service to carry out functions relating to pension dashboard services, including functions for which provision is made by the regulations or general rules, whether relating to pension scheme information or state pension information.
“(1B) The functions of the single financial guidance body referred to in subsections (A1) to (1A) are part of its pensions guidance function.”Member’s explanatory statement
This amendment secures that the functions of the Money and Pensions Service referred to in the Minister’s amendment at page 117, line 6, and the Minister’s other amendment at page 117, line 25, are part of its pensions guidance function.
Member’s explanatory statement
This amendment is consequential upon the Minister’s amendments at page 117, lines 6 and 25.
““relevant occupational pension scheme” has the meaning given by—(a) section 238F of the Pensions Act 2004, in relation to England and Wales and Scotland, and(b) Article 215F of the Pensions (Northern Ireland) Order 2005 (S.I. 2005/255 (N.I. 1)), in relation to Northern Ireland;“specified authorised person” has the meaning given by section 137FAC of the Financial Services and Markets Act 2000;”Member’s explanatory statement
This amendment is consequential upon the Minister’s amendment at page 117, line 6.
The Deputy Speaker
My Lords, we now come to the group consisting of Amendment 71. I remind noble Lords that Members other than the mover and the Minister may speak only once and that short questions of elucidation are discouraged. Anyone wishing press this amendment to a Division should make that clear in debate.
Clause 123: Funding of defined benefit schemes
Amendment 71
“(2) In exercising any powers to make regulations, or otherwise to prescribe any matter or principle, under Part 3 of the Pensions Act 2004 (scheme funding) as amended by Schedule 10, the Secretary of State must ensure that—(a) schemes that are expected to remain open to new members, either indefinitely or for a significant period of time, are treated differently from schemes that are not;(b) scheme liquidity is balanced with scheme maturity;(c) there is a correlation between appropriate investment risk and scheme maturity; (d) affordability of contributions to employers is maintained;(e) affordability of contributions to members is maintained;(f) the closure of schemes that are expected to remain open to new members, either indefinitely or for a significant period of time, is not accelerated; and(g) trustees retain sufficient discretion to be able to comply with their duty to act in the best interests of their beneficiaries.”Member’s explanatory statement
The liquidity profile of an open and active scheme that is receiving regular, significant cash contributions is very different from a closed scheme. This amendment seeks to ensure that they are treated differently accordingly.
Baroness Bowles of Berkhamsted [V]
My Lords, this amendment revisits the issue of open direct benefit schemes on which discussions started in Committee; I thank the noble Lord, Lord Young, and the noble Baroness, Lady Altmann, for supporting it. Nowadays, those with defined benefit pensions are regarded as the lucky ones, yet there are still millions of people in thriving open DB schemes where, if you start work today, you can join.
However, these are under threat because the Pensions Regulator does not recognise the substantial difference between open and closed schemes. An open scheme is open at both ends. It has no end date and is open to new members, providing a continuing supply of new contributions, including from future members. Cash flow is steady state or positive, giving inherent liquidity and allowing assets to be used to generate returns. A closed scheme is closed at both ends. It does not permit new members. Contributions progressively dwindle to zero and it has a finite end date when everyone in the scheme has died. Closed schemes have a progressively ageing member profile, often or usually negative cash flow and to pay the pensions, the assets must provide liquidity and are progressively consumed.
Examples of open pension schemes include local authority pension funds, the Nuclear Decommissioning Authority and the Railways Pension Scheme. The different classes of open and closed schemes require different investment, risk and liquidity strategies. A low-risk liquid investment strategy is more appropriate for closed schemes where the loss in asset values would impair a model that relies on asset consumption as it moves to its end date. They cannot risk running out of assets too soon and recovery from losses on dwindling assets is difficult.
The same strategy does not need to be applied to open schemes. With a pipeline of new and younger members, assets do not need to be liquid, are not inherently dwindling, and a far longer investment horizon is possible. An investment risk profile of the type generally classed as balanced rather than risk-averse can safely be followed, including real assets such as infrastructure. As an example, the Railways Pension Scheme invested in the Carraig Gheal wind farm in West Argyll and the Sleaford biomass plant, providing both environmental and local community benefits. This type of investment brings higher returns and the contributions from the members and the employers remain affordable. If open schemes are needlessly pressed to have the liquidity and risk profiles defined for closed schemes, it is inevitable that they too will close due to unaffordability: start the run-down, jeopardise employer companies and employees will lose out, pay more, or both.
The reason for this amendment is that, although open schemes and run-on is given as an acceptable strategy in Annex F of the impact assessment, the Pensions Regulator is developing a strategy that requires both open and closed schemes to have a de-risking profile, without adequate recognition of the different natures of the schemes. The regulator’s DB code suggests treating accrued benefits the same in open and closed schemes of the same maturity, which fails to recognise the difference in the models that I have just explained. One open scheme may have a greater or lesser age maturity of its members than another open scheme, but it is not comparable in risk and liquidity terms to a closed scheme of identical member age profile because both ends are open. It is perpetual and new members and cash flows come in.
Amendment 71 would add new requirements on the exercise of regulatory powers by the Secretary of State to ensure that regulations on scheme funding, as provided for in Schedule 10, do not fail to recognise the characteristics of open schemes. Sub-paragraph (a) would require that open schemes are treated differently from schemes that are closed, which means that there should not be a one-size-fits-all policy that disregards the substantial differences that I explained and tries to compare an open scheme with a closed one. It must have its own regime. Sub-paragraphs (b) and (c) list the features of liquidity and investment risk that need balancing with maturity, but also in the light of the perpetual characteristics of open schemes. Sub-paragraphs (d) and (e) specify maintenance of affordability of contributions to both employers and members. Sub-paragraph (f) would require that regulations and principles do not accelerate closures of open schemes—essentially, a do-no-harm requirement. Sub-paragraph (g) states that trustees must
“be able to comply with their duty to act in the best interests of their beneficiaries.”
The effect of treating open schemes as if they are closed would require huge increases in contributions and, at an instant, put schemes in deficit. Dependent on the scheme details, that may not fall only on the employer. For example, the Railways Pension Scheme has a shared-cost approach to funding in which the contributions of the members would substantially increase as well as those of the employer. The Railways Pension Scheme provided me with figures on its strategy, but I understand that other open schemes are similar. For every £1 of pension income received by members, 75p comes from investment gains, with only 25p from contributions. Investments are maintained in a balanced portfolio with equity in the 40% range and only 15% in government bonds, defensive assets and cash. They have consistently met or exceeded investment return requirements.
If that portfolio were switched to gilts, income would crash because the days of 4.5% yields that underpinned conventional wisdom of investing in the long-dated gilts has gone in the wake of global quantitative easing. Where would the Railways Pension Scheme’s missing 75p per pound then come from—a near trebling of contributions? That would lead to closure and worse. The employees cannot afford it, the companies cannot afford it and the fair-paying public cannot afford it. It is not protecting the public’s purse. Why allow that to happen due to an over-simplistic approach? The Government really need to defend open schemes in this Bill. Given that importance, I am minded to press the amendment to a vote. I beg to move.
Lord Young of Cookham [V]
My Lords, I will add a brief footnote to the powerful case made by the noble Baroness, Lady Bowles. She referred to the Railways Pension Scheme. As Secretary of State for Transport from 1995 to 1997, I am familiar with the scheme, which has grown in the intervening years to be one of the UK’s largest funds and which I believe to be well run.
I shared with my noble friend Lady Stedman-Scott the concerns of the RPS; namely, as the noble Baroness, Lady Bowles, has said, that the draft DB funding code that will emerge as a result of this legislation would oblige the various schemes under the RPS to de-risk with lower returns. As the noble Baroness has explained, these would have to be made good by the industry, if it could afford it, or its employees, or the schemes would be closed to new members.
I was encouraged by my noble friend’s helpful reply, dated 17 June, which said:
“Those employers and schemes who are already following good practice and planning for the long term should not need to change and we would not expect such schemes to require significant additional funding.”
However, I shared the letter with the RPS and, despite this, it believes that the powers in the Bill are too loosely expressed and that more specificity would ensure that the subsequent regulations got off on the right track. If the Minister cannot accept the amendment, can he make a commitment that there will be a distinction between open and closed schemes, to be followed up in the subsequent regulations? Will he ask his officials to discuss these concerns further with interested parties in an endeavour to find an acceptable way through as the Bill completes its passage through both Houses?
Baroness Altmann [V]
My Lords, I support Amendment 71, to which I have added my name. I have little to add to the excellent words of the noble Baroness, Lady Bowles, and my noble friend Lord Young of Cookham.
I stress to my noble friend the Minister that this is a really important amendment. The Government’s recent White Paper called for pension scheme funding which enables the best deal for members, supports the economy and does not place extra burdens on business. If those are the objectives—and I think they are the right ones—they will be at odds with the draft DB funding code that may emerge from this legislation, which seems to want to drive DB schemes on a path to so-called de-risking, aiming for a particular date of maturity. This concept is simply inappropriate for an open scheme.
The regulatory approach for schemes such as USS or the Railways Pension Scheme would see their ability to invest for the long term, which must be in the members’ best interest, become much more difficult. There does not seem to be sufficient recognition of the difference in liquidity profile and investment horizon of an open, relatively immature scheme compared to a closed scheme. Indeed, this would pose an existential threat to the survival of all remaining 1,000 or so open schemes. In the face of quantitative easing, increasing exposure to gilts and fixed income assets makes little sense while central bank policy is designed to force bond yields lower. Forcing schemes to compete with central banks to buy ever more expensive bonds is the most expensive way to fund these pension commitments.
The Bank of England’s pension scheme is an ideal example. It follows a lowest-risk approach, investing solely in gilts and other such supposedly safe assets. It does not match its liabilities, but it is open and entails a contribution rate of between 40% and 50% of pensionable salary. Should such pension contributions be required without any upside potential for a diversified investment strategy that can take advantage of the wide range of investment options available from infrastructure assets, building housing for rental and other areas where pension schemes with a long-term horizon are ideally placed to take advantage—for example, our own infrastructure, in which other countries’ pension schemes have significantly invested—schemes such as RPMI would require such significant contribution increases that members could not afford it and would opt out, and employers could probably not afford it either.
Therefore, I urge my noble friend to look carefully at this really important issue and to recognise explicitly that there are different needs for open DB schemes relative to those that are otherwise closed.
Baroness Drake [V]
My Lords, I speak in support of Amendment 71. Given the hour, the noble Baroness, Lady Bowles of Berkhamsted, with her usual skill, has captured the issues clearly and succinctly. It is clear that there is genuine concern among those running DB schemes which are materially open to new members with strong employers, such as the sections of the Railways Pension Scheme and the Universities Superannuation Scheme. They fear that they will be forced to de-risk unnecessarily, with all the implications that that carries and all the potential detriment for both employers and employees in the scheme.
The amendment seeks to address two issues: first, that it should not be government policy to require trustees of pension schemes materially open to new entrants with strong employer covenants to adopt a strategy that will result in them de-risking their investments unnecessarily and prematurely, for all the reasons that other noble Lords have clearly articulated; and, secondly, that the Secretary of State, in exercising powers under Schedule 10 to make provisions through regulation on the funding of defined benefit schemes, should make provisions that are consistent with the policy in the White Paper statement that running on with employer support could be an acceptable long-term strategy for a materially open scheme. The amendment is consistent with any reading of the government policy in the White Paper, but it seeks to ensure that it happens.
Lord Vaux of Harrowden [V]
My Lords, I had intended to add my name to this amendment, and I apologise that I failed to do so. The noble Baroness, Lady Bowles, has raised an extremely important issue in the amendment and has eloquently set out the reasons.
We are often guilty of looking at defined benefit schemes as a concept that is on the way out—that we are only really talking about the run-out of closed schemes —but that ignores the fact that many DB schemes remain active and open to new joiners. I am very grateful to the Railways Pension Scheme for explaining the potential implications for such schemes of the regulator’s consultation on the defined benefit funding code of practice.
For schemes that are mature or closed and in the run-down phase, it makes complete sense to minimise the risk of the investment strategy so that there is a high degree of certainty that the fund will be able to meet its obligations. The flipside of that, of course, is that a low-risk investment strategy means a low return. That is fine for mature schemes, but schemes that are not mature and still live would suffer from being restricted to a low-risk, low-return investment strategy. As the noble Baroness, Lady Bowles, said, the largest part of benefits paid from a fund typically come from the investment returns earned over its life. If forced to take such a low-risk, low-return approach in order to meet a certain level of benefit, they would have to massively increase contributions from either the employer or the employee or a combination of both. Indeed, I confess that I had not understood that there are DB schemes that specifically share such risk between employers and employees.
A higher-risk investment strategy with the ability to earn better returns is entirely appropriate for schemes that are not mature. I think that it was the noble Lord, Lord McKenzie of Luton, who, in Committee, raised a concern about hastening the demise of defined benefit schemes. If the regulator, in taking an overly risk-averse approach, insists on too low a risk and a low-return approach for open or immature schemes, they will inevitably become less attractive to employers and possibly to employees. All we will achieve is the hastening of the end of defined benefit schemes, which are the gold standard for pension saving, especially for those on lower earnings.
The amendment is therefore critical to ensure that the regulator takes into account the state of maturity of a fund when looking at scheme funding and to ensure that trustees have sufficient discretion to be able to act in the best interests of their beneficiaries.
Lord Berkeley (Lab) [V]
My Lords, I too congratulate the noble Baroness, Lady Bowles, on bringing forward this amendment. It is vitally important that the many contributors to these open schemes have comfort that these schemes will continue and will provide them with a reasonable level of benefit when they retire. I am grateful to the Railways Pension Scheme for a very useful briefing, which other noble Lords have seen. I myself am not a member of that pension scheme, but I have a large number of friends who are among its 350,000 members. I think it is relevant that 100,000 of them are still active, and that number will probably continue. That will happen, as the noble Baroness said, in the schemes for local authorities, nuclear decommissioning and many other sectors.
The real point is that many of the people contributing to these funds are comparatively low paid. Perhaps the Minister when she comes to respond can explain why the Government think it is a good idea to allow the schemes to require a greater contribution from the members and from the employers for no particular benefit. It seems absolutely clear that open and closed schemes must be treated separately. In ending, I ask the Minister to explain to me and other noble Lords why Ministers are not going along with this amendment. It seems so simple and well thought through, and I will certainly support it if the noble Baroness decides to divide the House.
Lord Snape (Lab) [V]
My Lords, I will confine my remarks to the impact of this amendment on the Railways Pension Scheme, and I join other noble Lords who expressed support for the amendment. As a former railwayman I was a member of the RPS in my younger days, although I was sensible enough—if that is the right term—to transfer to the parliamentary pension scheme when I was elected to the other place many years ago. However, I remain in contact with many of my former colleagues within the railway industry, and certainly they and the trustees of the Railways Pension Scheme have expressed their concern about the impact of this legislation on their future policy.
I remind the Minister that the RPS is a final salary defined benefit scheme that replaced the British Rail Pension Scheme after privatisation in 1993. Successive Ministers since then—among them those as distinguished as the noble Lord, Lord Young of Cookham—have assured the Railways Pension Scheme that matters will continue pretty much as before, and phrases such as “mirror image” and “the continuation of the present scheme” have been used. To find ourselves in the position that we will be in if this amendment is rejected is, to say the least, something of a surprise.
I have to tell noble Lords that the future of the Railways Pension Scheme is of massive concern among the railway unions, one of which, the National Union of Rail, Maritime and Transport Workers—I used to be a member of its predecessor, the National Union of Railwaymen—has already balloted or threatened to ballot its members about the future of the scheme. The acceptance of this amendment would go some way to ease the fears that many members of the scheme feel about the future.
However, the trustees of the RPS themselves have expressed concern about the future. Without this amendment being written into the Bill, they feel that the regulations which will follow will force trustees to take short-term investment decisions rather than the long-term and ethical decisions that the RPS takes at the present time. Indeed, one of them passed a comment to me that “We will be forced in the end to buy nothing else but government gilts”—which is probably not an investment path that most advisers would recommend in the current circumstances.
To ensure that the RPS is traditionally able to make long-term and ethical investments, I make this plea to the Minister to write this amendment into the Bill. It may well be that the noble Earl, Lord Howe, says to us, “We hear what you say. We are conscious that there is concern; we will look at this. Of course, many of your fears are groundless, and Ministers will bear all these fears in mind”. However, over the years that I have been a Member of the other place and your Lordships’ House, Ministers have come and gone. The other day I counted that 27 Ministers for Transport have been around in my time in one House or the other. Ministerial pledges are all very well, but times change—not quite as often as Ministers.
Baroness Neville-Rolfe [V]
My Lords, I have little to add, but I very much agree with ensuring that
“the closure of schemes that are expected to remain open to new members, either indefinitely or for a significant period of time, is not accelerated”,
to quote from the amendment. I look forward to hearing from the Minister on how he can meet the House’s concerns.
Lord Bradshaw (LD) [V]
My Lords, I too welcome this amendment in the name of my noble friend Lady Bowles to help keep open defined benefit schemes. This is to be applauded, as I believe that they are in the best interests not just of their members but of wider society. Open defined benefit schemes assist UK plc over the long term and reduce the potential burden on the state from inadequate pension provision.
As we have heard, the genesis of this Bill dates back to corporate failures such as Carillion and BHS. It is right that the Government look to address the shortcomings that led to these failures and the losses that members of those schemes unfortunately suffered—but it is important to learn the right lessons. BHS and Carillion were fundamental examples of pension schemes brought down by a failure of corporate governance to manage those companies properly, not of companies brought down by a failure to manage their pension schemes.
Like other noble Lords, I understand the Pensions Regulator seeking to protect members’ benefits, but it should look at defined benefit schemes, because they look to the future. They do not just look in the rear- view mirror but have a much wider responsibility to act in the best interests of all members—past, present and future.
Any moves to significantly reduce those returns by forcing schemes that remain open to new members to start investing in line with the risk profile of closed schemes will have unintended consequences. I shall certainly support the noble Baroness, Lady Bowles, if she decides to call a Division.
Lord Sharkey [V]
My Lords, I strongly support my noble friend’s analysis of the one-size-fits-all regulatory threat to open schemes. I also strongly support the proposed remedy, which would ensure proper consideration of the essential differences between open and closed schemes, is proportionate and is not unduly prescriptive. I hope the Minister will respond positively.
Baroness Sherlock [V]
My Lords, we all believe that trustees of DB schemes should have a clearly defined funding and investment strategy for insuring pensions in the long term. However, if that is pursued in a way driven by the need to protect members in closed maturing DB schemes, then schemes with strong covenants open to new entrants risk being swept up in an approach that is wrong for them. As closed DB schemes increasingly mature, the regulator will expect them to de-risk and reduce their deficits. However, if that approach is applied in a blanket form it will force some open schemes to de-risk prematurely, putting pressure on employers and, in the railway scheme with its shared-cost basis, on employees too. Given all the concerns expressed, will the Minister accept this amendment?
Earl Howe
My Lords, I am grateful to the noble Baroness, Lady Bowles, for her amendment, which touches on a number of important factors to be considered in the development of secondary legislation, including the factors that it lists. I say immediately that I agree that these are all important factors to take into account when developing secondary legislation for defined benefit scheme funding. However, we do not need an amendment to do that. The amendment includes factors that are all taken into consideration during the whole process of framing policy, legislation and guidance.
One of the greatest strengths of our scheme-funding regime is that it operates on a scheme-by-scheme basis because every scheme is different, and it would be unhelpful and inflexible to treat them all the same. The measures in the Bill build on that approach, as will the secondary legislation. The existing scheme-funding legislation has been drafted to ensure that it is flexible enough to apply to all types of defined benefit scheme—for example, whether open or closed. Equally, the scheme-funding measures in the Bill are flexible enough to apply to all types of defined benefit scheme.
In the protecting defined benefits White Paper we were clear that there are a number of examples for suitable long-term objectives and that running on with employer support would be a reasonable course of action for an open scheme. Whether or not the strategy for ensuring that benefits can be provided in the long term is suitable will depend on the specific context of a particular scheme. Additionally, we entirely accept that schemes with different liquidity profiles and maturity will be able to take different trajectories. This is, and will remain, fundamental to the scheme-specific approach. So I assure the noble Baroness and the House that any regulations will also be formulated with considerations such as those outlined in the amendment in mind, where appropriate.
The big danger with an amendment of this kind is that it creates inflexibility. It remains our aim that the scheme-funding measures in the Bill do not change existing flexibilities but, rather, seek to make best practice universal and ensure that all schemes are planning for the long term. It is good practice for all schemes, including open schemes, to set a funding and investment strategy.
My noble friend Lord Young asked whether I could commit to a meeting along with officials to discuss these issues. Yes, I am happy to do that, and if schemes have concerns with what TPR is proposing they can engage with the current consultation. The Pension Regulator’s current consultation on the defined benefits funding code includes a twin-track compliance process that takes account of scheme and employer circumstances. Indeed, the current consultation has a full chapter on open schemes, and I encourage anyone interested to contribute their views.
Regulation-making powers exist precisely to allow the system to be calibrated effectively to ensure that this balance is struck. While the noble Baroness’s amendment reflects a number of factors that are considered while developing policy, we do not need to specify those in primary legislation and indeed, as I hope I have indicated, it would be unhelpful to do so. We need to leave room for the flexibility that I have emphasised; we must leave enough flexibility in the system to allow it to react effectively to future changes. Indeed, in the light of the current social and economic climate, it is very clear that the economic shape of the future is unknowable.
I hope that the noble Baroness will recognise from what I have said that the Government’s approach is fair and proportionate and that she will accept my assurance that appropriate flexibilities are, and will continue to be put, in place. On that basis I respectfully urge her, and urge her with some emphasis, to withdraw the amendment.
Baroness Bowles of Berkhamsted [V]
My Lords, I thank all those who have spoken in this debate. I particularly thank the noble Lord, Lord Young, and the noble Baroness, Lady Altmann, for signing the amendment, for making their contributions and for speaking to the Government. It is clear to see that there is support for the amendment from across the House, and I hope that it is also clearer to everyone why preservation of open DB schemes is in the public interest. We are, in fact, in a rather strange situation where the Minister is in agreement with the policy; it is in government policy, but yet there is a significant danger from what the Pensions Regulator has actually said. That is the sole reason why there needs to be something on the face of the Bill that confirms what is government policy.
The Government have a further opportunity to amend this Bill in a way that they consider is better than my amendment and give guidance in a different way. I would be happy to help, but we have run out of time and I have not heard a suggestion that something will actually be presented at Third Reading. This House does not have any more opportunities with this Bill, and I cannot see anything coming down the track to give us another opportunity that would be in time to make a difference with regard to the Pensions Regulator’s obvious position.
This is not a new argument: I have spent 10 years in Brussels arguing the toss on these things, on the difference between IORPs and Solvency II, and I know where the pressure comes from the former FSA—now the FCA. Part of this Bill, on CMP schemes, is fixing a problem for one newly privatised employer. Why dump others who have found good ways to make their DB schemes flourish and last? If the Government do not make it clear, that is what will happen: they may well end up being dumped.
In the first group of amendments, the noble Baroness, Lady Sherlock, said that she did not want CMP schemes to undermine DB schemes. Without this amendment or something like it, they may well have nowhere else to go. This is not a nice-to-have amendment; it is vital. The issue should not be swept into the corner for these pension schemes to die quietly, and I wish to test the view of the House.
Baroness Stedman-Scott
(a) that assets are assessed by reference to their exposure to risks of a prescribed description, and(b) that an assessment includes determining the contribution of the assets of the scheme to climate change.”Member’s explanatory statement
This amendment makes separate provision about assessing pension scheme assets’ exposure to risk and their contribution to climate change.
“(4A) The regulations may require the trustees or managers of the scheme to take into account— (a) different ways in which the climate might change, and(b) different steps that might be taken because of climate change.(4B) Regulations under subsection (4A) may require the trustees or managers of the scheme to adopt prescribed assumptions as to future events, including assumptions about—(a) the steps that might be taken for the purpose of achieving the Paris Agreement goal or other climate change goal, or(b) the achievement of the Paris Agreement goal or other climate change goal.”Member’s explanatory statement
This amendment enables regulations under inserted section 41A of the Pensions Act 1995 to require trustees and managers of pension schemes to consider different future scenarios, including scenarios involving the achievement of particular climate change goals.
“( ) In this section “the Paris Agreement goal” means the goal of holding the increase in the average global temperature to well below 2°C above pre-industrial levels referred to in Article 2(1)(a) of the agreement done at Paris on 12 December 2015.”Member’s explanatory statement
This amendment defines the Paris Agreement goal which is mentioned in the Minister’s amendment at page 118, line 36.
Member’s explanatory statement
This amendment ensures that information relating to the effects of climate change includes information about the matters to which regulations under inserted section 41A of the Pensions Act 1995 may relate.
Baroness Stedman-Scott
“(c) the member obtaining information or guidance about exercising the option conferred by subsection (1) from a prescribed person in a prescribed case;(d) providing the trustees or managers with evidence that—(i) the member has complied with a prescribed condition about obtaining such information or guidance from a prescribed person, or(ii) the member is not subject to such a prescribed condition.”Member’s explanatory statement
This amendment enables regulations under inserted section 95(6ZA) of the Pension Schemes Act 1993 to prescribe conditions about obtaining information or guidance from persons such as the Money and Pensions Service, before the trustees or managers may act on a member’s application under section 95.
“(6ZC) Regulations may make provision requiring the trustees or managers of a pension scheme to notify a member who makes an application under subsection (1) of conditions prescribed under subsection (6ZA).” Member’s explanatory statement
This amendment allows regulations to make provision about requiring trustees or managers to notify members of conditions prescribed under section 95(6ZA) of the Pension Schemes Act 1993.
“(c) the member obtaining information or guidance about exercising the right under subsection (1) from a prescribed person in a prescribed case;(d) providing the trustees or managers with evidence that—(i) the member has complied with a prescribed condition about obtaining such information or guidance from a prescribed person, or(ii) the member is not subject to such a prescribed condition.”Member’s explanatory statement
This amendment enables regulations under inserted section 101F(5A) of the Pension Schemes Act 1993 to prescribe conditions about obtaining information or guidance from persons such as the Money and Pensions Service, before the trustees or managers may act on a member’s transfer notice under section 101F.
“(5C) Regulations may make provision requiring the trustees or managers of a qualifying scheme to notify an eligible member who gives a transfer notice of conditions prescribed under subsection (5A).”Member’s explanatory statement
This amendment allows regulations to make provision about requiring trustees or managers to notify members of conditions prescribed under section 101F(5A) of the Pension Schemes Act 1993.
Baroness Stedman-Scott
(a) that assets are assessed by reference to their exposure to risks of a prescribed description, and(b) that an assessment includes determining the contribution of the assets of the scheme to climate change.”Member’s explanatory statement
This amendment makes provision for Northern Ireland corresponding to the Minister’s amendment at page 118, line 33.
“(4A) The regulations may require the trustees or managers of the scheme to take into account—(a) different ways in which the climate might change, and(b) different steps that might be taken because of climate change.(4B) Regulations under paragraph (4A) may require the trustees or managers of the scheme to adopt prescribed assumptions as to future events, including assumptions about—(a) the steps that might be taken for the purpose of achieving the Paris Agreement goal or other climate change goal, or(b) the achievement of the Paris Agreement goal or other climate change goal.” Member’s explanatory statement
This amendment makes provision for Northern Ireland corresponding to the Minister’s amendment at page 118, line 36.
“( ) In this Article “the Paris Agreement goal” means the goal of holding the increase in the average global temperature to well below 2°C above pre- industrial levels referred to in Article 2(1)(a) of the agreement done at Paris on 12 December 2015.”Member’s explanatory statement
This amendment makes provision for Northern Ireland corresponding to the Minister’s amendment at page 118, line 39.
Member’s explanatory statement
This amendment makes provision for Northern Ireland corresponding to the Minister’s amendment at page 118, line 44.
“(c) the member obtaining information or guidance about exercising the option conferred by subsection (1) from a prescribed person in a prescribed case;(d) providing the trustees or managers with evidence that—(i) the member has complied with a prescribed condition about obtaining such information or guidance from a prescribed person, or(ii) the member is not subject to such a prescribed condition.”Member’s explanatory statement
This amendment enables regulations under inserted section 91(6ZA) of the Pension Schemes (Northern Ireland) Act 1993 to prescribe conditions about obtaining information or guidance from persons such as the Money and Pensions Service, before the trustees or managers may act on a member’s application under section 91.
“(6ZC) Regulations may make provision requiring the trustees or managers of a pension scheme to notify a member who makes an application under subsection (1) of conditions prescribed under subsection (6ZA).”Member’s explanatory statement
This amendment allows regulations to make provision about requiring trustees or managers to notify members of conditions prescribed under section 91(6ZA) of the Pension Schemes (Northern Ireland) Act 1993.
“(c) the member obtaining information or guidance about exercising the right under subsection (1) from a prescribed person in a prescribed case;(d) providing the trustees or managers with evidence that—(i) the member has complied with a prescribed condition about obtaining such information or guidance from a prescribed person, or(ii) the member is not subject to such a prescribed condition.”Member’s explanatory statement
This amendment enables regulations under inserted section 97F(5A) of the Pension Schemes (Northern Ireland) Act 1993 to prescribe conditions about obtaining information or guidance from persons such as the Money and Pensions Service, before the trustees or managers may act on a member’s transfer notice under section 97F.
“(5C) Regulations may make provision requiring the trustees or managers of a qualifying scheme to notify an eligible member who gives a transfer notice of conditions prescribed under subsection (5A).”Member’s explanatory statement
This amendment allows regulations to make provision about requiring trustees or managers to notify members of conditions prescribed under section 97F(5A) of the Pension Schemes (Northern Ireland) Act 1993.
Pension Schemes Bill [HL]
Wednesday 15th July 2020
(4 years, 4 months ago)
Lords ChamberRead Full debate Pension Schemes Act 2021 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 104-I Marshalled list for Report - (25 Jun 2020)
Lord Ashton of Hyde (Con)
My Lords, I have it in command from Her Majesty the Queen to acquaint the House that Her Majesty, having been informed of the purport of the Pension Schemes Bill, has consented to place her interest, so far as it is affected by the Bill, at the disposal of Parliament for the purposes of the Bill.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Stedman-Scott) (Con)
My Lords, before we move to the technicalities of closing our debates on the Bill in this House and it moves for consideration in the other place, I want to take a moment to reflect on the Bill and its passage through your Lordships’ House.
This is important legislation that will benefit members of the public and will help people plan for their future. As I said at Second Reading, the Bill will have a far-reaching impact for people saving into pensions for their retirement. It ensures that reckless bosses cannot gamble with people’s savings; it transforms the way people get information about their retirement savings; and it introduces a whole new type of pension to the market.
It is clear from the excellent contributions and speeches made as the Bill progressed through this House that many of your Lordships agreed with its principles. Contributions and questions from all sides have been thorough and searching. I would not have expected anything different.
The Government listened to your Lordships’ arguments and concerns as the Bill progressed and made a number of amendments both in Committee and on Report— 73 in total, which I think you will agree have strengthened the Bill. We recognised the concerns of the DPRRC and this House in respect of delegated powers; we listened to your thoughts about a public dashboard; we introduced measures in respect of climate reporting and the Paris Agreement; and we have responded to the threat of scams by tightening the rules on transfers.
Your Lordships made further amendments to the Bill on Report concerning intergenerational fairness, consumer protection and scheme funding. We will look at these carefully along with the strong arguments made in support of them as the Bill progresses in the other place.
I thank all those who have engaged on the Floor of the House and in the many meetings that we have had outside, which I hope you found helpful. I thank my noble friends Lord Howe and Lady Scott for all the help and support they have given me throughout this process. This was my first Bill, and they have helped enormously to keep me on the straight and narrow. I thank the Whips office, the House staff, my private office, led by Vanessa Drury, and all those involved in helping us through the hybrid proceedings. These have been very testing times for everyone, and the fact that we are here at all bears testimony to the work they have put in.
Finally, I want to thank the Bill team and all the officials across DWP. I thank them for the extensive engagement programme that they helped me with. I thank Jo Gibson, Jane Woolley, Mike Jewell and Debbie Bullen—to name but four—but there are many support people behind them, and I would not want to miss anybody out in trying to name them all. They have put in incredibly long hours to support my noble friends and me during debates, to facilitate briefing meetings, and to provide the updates, letters and briefings that noble Lords have received. They have done this at a time of great uncertainty, with many teams reduced to help support front-line services. I hope that they will manage to get some well-deserved time away over the summer.
On that note, I thank you all again for your patience and support. I beg to move that the Bill do now pass.
Baroness Sherlock (Lab) [V]
My Lords, I thank the Minister for those remarks and concur with them. We have agreed on so much about this Bill: we support the new CDC pension schemes; we all want to see financial technology harnessed to benefit consumers and to make the financial markets work more efficiently; and we are keen to work constructively with the Government to bring innovations such as the dashboard to fruition.
Where we have differed is on the extent of the protections needed to mitigate the risk of consumer detriment and poor outcomes. We still believe that the weight of evidence is with our arguments, as are reports from various regulators. I hope that by the time the Bill is debated in another place, the reasoning behind our Report amendments on the head start for the public dashboard, on the risks of dashboard transactions and on questions of fairness will find favour.
The pandemic has pushed many consumers into digital engagement far faster than they may naturally have adapted to it. While that has kept our economy and society functioning, it has also exposed some consumers to greater risk of detriment. We might not see any consequential increase in the number scams until later in the year, but that means that the provisions in this Bill will be timely and welcome. More risks will emerge, including new ones as a result of Covid, so I urge Ministers to keep the House informed as regulators scan the landscape and the Financial Ombudsman monitors new kinds of complaint. Although they are not covered in this Bill, we wait with interest to see how the Government will regulate the newly emerging superfunds, given the economic impact of Covid.
Pensions are very long term, and it will take decades for the full effects of public policy decisions by any Government to be seen. That is why it is so desirable that pensions policy be built on the foundations of political consensus, and it is why I am grateful for the significant concessions that have been given during the passage of this Bill.
I pay tribute to my noble friend Lady Drake, whose expertise and determination underpinned our campaign for the Government to commit to a public dashboard and have it operating from the start. I am grateful for support from across the House for that and for all the shared support for moves to secure commitments on governance, including ensuring that dashboard services will be regulated by the FCA. It was great to see cross-party working on climate issues, led by my noble friend Lady Jones of Whitchurch and the noble Baroness, Lady Hayman, result in an agreed position with government and the first ever reference to climate change in domestic pensions legislation. I am grateful to the Minister for yielding to pressure from many quarters for amendments on transfers and on delegated legislation.
This is a better Bill than the one which entered the House, and I give thanks to all who made that possible. I thank my noble friend Lord McKenzie of Luton, but I am sad that it will be my last time sharing the Front Bench with him. He has given so much to this House and to our country in his decades of public service. I look forward to his continued contributions from the Back Benches.
I am a grateful to Dan Harris of our staff team, who has done sterling work on this Bill and is a joy to work with, as are all my colleagues who joined in during our proceedings. I am grateful to House officials and the broadcast teams. I am very grateful to the Bill team and all the officials who have met us repeatedly and patiently answered our many questions. I am grateful, too, to colleagues across the House for intelligent and thoughtful debates. I am grateful also to the Ministers: to the noble Earl, Lord Howe, for his gentle engagement and to the noble Baroness, Lady Stedman-Scott, for her co-operative spirit and her willingness to engage and to concede. This may have been her first Bill; I am sure that it will not be the last. I look forward to joining in and occasionally doing battle yet again.
We did the Committee stage of this Bill before Covid, crammed into the Moses Room with not a hint of social distancing. We did the Report stage in hybrid mode. To be honest, I will never get to love voting on my phone or get used to making passionate speeches to my iPad, but it has shown that this process can work. We have thoroughly scrutinised a vital and highly technical Bill, and we have made it better than it was. That is the job of the House of Lords in a nutshell. I am so glad we can still do it.
Lord Sharkey (LD) [V]
My Lords, I thank the Minister for introducing the very important new amendments concerning transfer rights. In Committee, the noble Baroness, Lady Altmann, and I attempted to do, perhaps rather clumsily, what they do rather elegantly. We live in a time when scams are increasing, people are desperate for any return, online propositions are everywhere and can seem very tempting, and your money—occasionally all your money—is easy and quick to lose. These amendments will not solve those problems, but they will prove a valuable addition to the guidance armoury and to the better protection of consumers, and I welcome them.
My noble friend Lady Janke led the debate from these Benches with real insight and conviction. It is a pity that she cannot be with us today as the Bill concludes its passage through the House. She has asked me to thank, on her behalf, all the Members who have taken part in what has been a constructive and congenial process. She has particularly asked me to congratulate the Minister and her officials on their apparently unlimited patience, their evident willingness to listen and their responsiveness. I join my noble friend Lady Janke in her remarks, especially as concerns the Minister’s patience and forbearance. The Minister’s character determined the character of our discussions. I also thank all Members who joined in those discussions, especially my noble friend Lady Bowles and the noble Baronesses, Lady Drake, Lady Sherlock and Lady Altmann. Their expertise was evident throughout and greatly added to the value of the debate. I believe that, collectively, we have made a good Bill better.
Lord Naseby (Con)
My Lords, I declare an interest as a trustee of the Parliamentary Contributory Pension Fund. I place on record that I have spoken on this Bill, I have tracked all stages of it and I pay a major tribute to my noble friend on the Front Bench, in particular for her care and attention regarding the less obvious aspects of a major Bill like this. If this is her first Bill as Minister, she has made an extraordinarily good start.
Lord Flight (Con)
My Lords, I add my congratulations to my noble friend, who has managed a complex and important territory most constructively. I also thank the Opposition for collaborating in a constructive way. I could not help thinking, as we come to the end of this bit of legislation, that if we look forward 30 years, we will then be in a very different age where people will live much longer and will retire later. There will have to be an adaption of their pension saving between now and then but, for the present, this Bill has done a very good job of addressing a difficult territory.
Baroness Stedman-Scott
I thank everybody for their comments and supportive remarks. What has really come out of this is that we collaborated, we talked, we listened and we made the Bill better. For that, I thank everybody.
Pension Schemes Bill [Lords]
Wednesday 7th October 2020
(4 years, 1 month ago)
Commons ChamberRead Full debate Pension Schemes Act 2021 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 104-I Marshalled list for Report - (25 Jun 2020)
The Secretary of State for Work and Pensions (Dr Thérèse Coffey)
I beg to move, that the Bill be now read a Second time.
Pensions are a fundamental part of everyone’s future. They offer security later in life and can provide much-needed investment to help to build the sustainable future we need. This Bill delivers on our manifesto commitments to legislate for a new style of pension scheme, establish pensions dashboards and tackle those who try to plunder the pension pots of hard-working employees. It creates a new style of pension scheme that has the potential to increase future returns for millions of working people while being more sustainable for employees and employers alike. The Bill has consumer interests at its heart. It strengthens protections for savers by extending the Pensions Regulator’s sanctions regime—prison for pension pot pinchers will, I hope, deter reckless bosses from running schemes into the ground.
The Bill transforms the way people get information about their retirement savings, bringing pensions into the digital age by allowing people to see all their pension information in one place, at the touch of a button. Importantly, it will ensure that individual savers can be told exactly how their pensions will be affected by the increases in the global temperature and what their scheme contributes to carbon emissions.
Through the Bill, the UK will be among the very first countries in the world to put climate change reporting for pension funds into law. That is a crucial step in meeting the Government’s net zero ambition. It will ensure that pension funds play a leading role in the decarbonisation agenda.
Duncan Baker (North Norfolk) (Con)
My constituents in Norfolk are passionate about climate change. They want to have safe and sustainable investments for the future. Can the Secretary of State explain how they will be able to invest sustainably and safely, and how the Bill will help them with that?
Dr Coffey
My hon. Friend has one of the constituencies with the highest number of pensioners in the country, but for his future pensioners this is an important Bill. It will bring transparency for the first time about what is happening with individual investments. This Government are not in favour of trying to force divestment of different elements of fossil fuels and similar—I am conscious that he has Bacton in his constituency. But the Bill is about making sure that the trustees—effectively, the way in which pension funds will be used—are clear about how they can contribute to ensuring that we tackle climate change and how their investments can play a part in making that happen.
This unprecedented period that we have been experiencing has shown more than ever the need for financial resilience but also the need to focus on future resilience. Helping workers to achieve greater financial resilience for themselves for the long term is a crucial part of our economic recovery. Improving the financial resilience of the public is a personal priority for me and I am proud that the Bill is designed to help pension savers across the country. The Government have already taken action to ensure that there is support for pension contributions under automatic enrolment in the coronavirus job retention scheme. How important that policy is to us is demonstrated by the fact that we will be paying for pension contributions for kickstarters.
There are five parts to the Bill. Parts 1 and 2 set out the regulatory framework for new collective money purchase schemes, also known as collective defined contributions or CDCs. Interest in the CDC schemes is growing, as both members and employers look for options beyond the more traditional choices currently available to them to build long-term resilience. The schemes will provide employers with a new way of providing a pension where employers and employees can work together to deliver mutually beneficial outcomes.
The schemes will enable contributions to be pooled and invested, to give members a target benefit level. Investment risk is borne across the membership, rather than by individual members, delivering a good income in retirement without the cost of guarantees and without placing future liabilities on the employer. The Bill will ensure that the schemes are well run and we will require good member communications, so that members understand how their scheme works, including the risk-sharing features of CDC schemes, and that benefit levels may fluctuate.
Part 3 strengthens the powers of the Pensions Regulator. That fulfils our manifesto commitment to tackle those who think they can plunder the savings of hard-working employees. No more. The Bill introduces criminal sentences, so that the worst offenders could end up in jail for seven years, ensuring that those who play fast and loose with hard-working people’s pensions face justice. These important measures introduce the power to issue civil penalties of up to £1 million, as well as creating three new criminal offences for individuals found to be acting wilfully or recklessly.
Some concern has been expressed in the other place that the scope of the powers is too wide and might deter people from becoming trustees. Let me reassure hon. and right hon. Members in this House and the other place that our objective is not to stop or interfere with routine business activity, or to deter people from becoming trustees. We have been clear that businesses must be allowed to make the right decisions to allow them to develop and grow. These new laws underline the importance of being trusted with the stewardship of members’ retirement savings and ensure that people’s hard-earned financial resilience is protected.
Our objective is to provide a sufficient deterrent to make individuals think twice before acting in a way that puts members’ savings at risk. The key point is that the Bill makes it crystal clear that an offence is committed only if the person did not have a reasonable excuse for their behaviour or for engaging in that particular course of conduct. It will be for the regulator to prove that the act was not reasonable. The Pensions Regulator will publish specific guidance on these powers after consulting with the industry.
Part 4 of the Bill delivers on our manifesto commitment to legislate for pensions dashboards. The world of work is changing, and people now have an average of 11 jobs in their lifetime. Pension savings built up during this time are often with different providers, and many people struggle to keep track of their pensions and find it difficult to make informed decisions about their retirement. The provisions in the Bill will bring pensions into the digital age and help individuals to make informed decisions about their financial futures. Pensions dashboards will provide an online service, helping people to reconnect with their pension pots, enabling them to find lost pensions and allowing them to view all their pension information, including the state pension, in a single place.
Steve Brine (Winchester) (Con)
I welcome the Bill, and part 4 in particular, including the bit that my right hon. Friend has just outlined about pension dashboards. It is such a minefield for our constituents to find all this information in one place, although people can do so very easily, for instance, via the HMRC dashboard in respect of tax. The Bill talks about compelling schemes to participate and to provide good quality data in a timely manner. Could she just expand on that compulsion? What exactly does that mean in legal terms?
Dr Coffey
The Bill will require the pension schemes to provide all the data that they have available, so that it can be brought together to provide that information. I am conscious that this is further data, which may take a little time to come together, but this has been worked on for some time and we have made careful progress with the industry to get to this point. If my hon. Friend has any more detailed questions, my excellent Pensions Minister, the Under-Secretary of State for Work and Pensions, my hon. Friend the Member for Hexham (Guy Opperman), will be able to pursue this either in later interventions or in Committee.
Neil Gray (Airdrie and Shotts) (SNP)
We welcome this part of the Bill in particular. We support informing savers about their savings landscape, but one concern we have is that the amendment in the Lords that allows for the public dashboard to be bedded in for a year before commercial dashboards come in could be removed in Committee. Can the Secretary of State confirm now that she has no intention of watering that down? If that were to happen, it would be met with the vigorous opposition from the Opposition.
Dr Coffey
Our aim is to empower consumers through dashboards and the Government believe that they are best served through multiple dashboards. Of course we have listened carefully to the concerns expressed in the other House as well as in this place. We are still on Second Reading, and I think it is fair to say that we will be considering the contributions carefully and that any matters that may need to be looked into further can be considered in Committee.
Mr Shailesh Vara (North West Cambridgeshire) (Con)
I welcome the Bill, particularly the part that my right hon. Friend is referring to at present. Sometimes, when people have multiple pensions with various pension schemes, they wish to put them into one pot, or two or three pots, rather than having to deal with so many. When that happens, some pension schemes seek to charge administrative costs when passing the funds on. Is there any mechanism to ensure that those administrative costs can be kept to a reasonable level, rather than being extortionate, which would ultimately impact on the pension pot for the individual?
Dr Coffey
My hon. Friend is right to say that dashboards could encourage more people to consider consolidating their pension pots. There is guidance out there, and the Pensions Minister assures me that we are continuing to review the costs and charges that can happen in that regard. There is an element of administration cost that comes with such transfers, but I can assure my hon. Friend that we are on the side of the consumers who are saving to ensure that their money goes as far as possible for their future.
The Bill sets out the legislative framework for dashboards and makes provision to compel pension schemes to participate and provide good-quality data in a timely manner. The Pensions Regulator and the Financial Conduct Authority will be responsible for ensuring compliance by schemes. In the other place—this is perhaps covering a little of what has already been said—we introduced Government amendments to make it crystal clear that there will be a public dashboard, which will be overseen by the Money and Pensions Service. As I have already shared with the House, we want to ensure that we increase people’s engagement with their pensions, so it is important that the dashboards are accessible to as many people as possible. Some 52 million UK adults have pensions savings, involving over 40,000 schemes. That is why I believe that having multiple dashboards is the best option, ensuring people can easily access information to manage their financial affairs for today and tomorrow.
Part 5 covers a range of policies. Clause 123 and schedule 10 introduce new provisions with regard to scheme funding. Most sponsors and trustees work well together and use the flexibilities of the current scheme funding regime reasonably, but good practice is not universal. The scheme funding provisions seek to help trustees of defined benefit schemes to improve the way they manage scheme funding and investment. They will also enable the pensions regulator to take action more efficiently to safeguard members’ pensions and to mitigate risks to the Pension Protection Fund.
Climate risk is a key worry and concern for many people in this country. The Government are resolute in how we want to help to tackle emissions to achieve our commitment to net zero by 2050. The Bill will make the pensions system greener and support the commitment to get to net zero by 2050. Clause 124 contains regulation-making powers to require scheme trustees and managers, for the purpose of managing climate-related risks, to take climate change goals, including the Government’s net-zero target and the Paris agreement temperature goal, into account. The clause enables regulations to be made mandating pension schemes to adopt and report against the recommendations of the taskforce on climate-related financial disclosures. This will ensure that occupational pension schemes take into account climate change and the response to climate change in the Government’s risk management and investment strategy, and report on how they have done so. Such measures will ensure that occupational pension schemes take climate change into account and require that trustees disclose progress to their scheme members and the public.
Climate change is one of the defining challenges facing the planet for this and future generations, and the trillions invested in pension funds worldwide offers an enormous opportunity to build back better, greener and sustainably. I am extremely proud that we are at the forefront of efforts to effect real and lasting change. These pension measures are among the first of their kind on the international stage.
Nigel Mills (Amber Valley) (Con)
Does the Minister agree that the responsibility for pension scheme trustees goes further than just reporting having a strategy? Once they have invested, they need to engage and to monitor their investments to ensure they actually comply with their obligations to try to drive through that performance change.
Dr Coffey
I understand exactly the point my hon. Friend makes. My understanding is that the Financial Conduct Authority is changing its guidance or approach to make sure that asset managers are also getting on board. We are trying to ensure that asset managers, as well as trustees, are aware, so we have that collaborative arrangement to make sure we can make progress on this important use of pension funds.
One big concern people have relates to scams. Clause 125 further protects savers from falling victim to unscrupulous scammers when considering transferring their pension pots. The measures allow us to place conditions on a scheme member’s right to transfer their pension savings to another pension scheme. This will protect members from pension scams by giving trustees of occupational pension schemes a level of confidence that transfers of pension savings are made to safe, not fraudulent, schemes. Regulations will proscribe the circumstances where there is a high risk of a transfer to a fraudulent scheme and could require scheme members to obtain information or guidance before transferring.
Stephen Timms (East Ham) (Lab)
I welcome this measure in the Bill, reflecting changes in the other place. As the Secretary of State said, the intention is to require, in certain circumstances, savers to take advice before they move their pension savings into what might be a scam. I wonder whether she agrees with me that we should go further and allow trustees to prevent a transfer where it looks as though the savings are going into a scam.
Dr Coffey
I know that the right hon. Gentleman and his Select Committee are looking at this matter carefully, and I appreciate that he has been in discussions with my hon. Friend the Under-Secretary of State for Work and Pensions, who I believe wrote to the right hon. Gentleman yesterday. It is certainly an issue on which we want to continue to work to identify circumstances that could raise red flags, and legislate to enable trustees to act when they appear. The powers in the clause are broad enough to cover some of the scenarios about which the right hon. Gentleman is concerned.
Neil Gray
I welcome the intervention from the Chair of the Select Committee. During the passage of the Financial Guidance and Claims Act 2018, the SNP tabled a number of relevant amendments that may well have covered some of these problems, which are a hangover from pension freedoms. Would the Secretary of State and the Minister be willing to look at some of those amendments again in Committee to make sure that some of those issues, particularly in respect of advice and guidance, are tied up?
Dr Coffey
My hon. Friend the Under-Secretary of State for Work and Pensions has just told me he will share with the hon. Gentleman the letter that he sent to the Chair of the Select Committee. Generally, pensions legislation has broad support across the House, in recognition of the fact that these are long-term decisions, so of course the Government will look carefully at any amendments in Committee and any points made by the hon. Gentleman. We want to make sure that, going forward, we have conference in the long-term objectives of the changes that the Bill will bring in.
In conclusion, I pay tribute to my hon. Friend the Under-Secretary who is passionate about pensions, exceptionally assiduous and, in my humble opinion, the best Pensions Minister we have had in a very considerable period of time. I hope the House will agree that having safer, greener and better pension schemes is good for our constituents, as we encourage people to invest in themselves today to prepare for a comfortable retirement, and help to make them better informed about how their money is growing and being used for them and the planet. I commend the Bill to the House.
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
I am grateful to be called to speak in this Second Reading debate. Since I became the shadow Secretary of State earlier in the year, I have been carefully following the progress of the Bill in the other place and am pleased that it has finally reached this House.
First, I record my sincere admiration for and thanks to my colleagues in the other place—noticeably Baroness Sherlock, Baroness Drake and Baron MacKenzie—for their laudable work in carefully and thoughtfully amending the Bill.
In opening the debate for the Opposition, I shall outline our perspective on the Bill as it stands, as well as addressing the three areas—protecting people, protecting pension schemes and protecting the planet—in which Labour would like to see further amendments made as the Bill progresses. However, let me say clearly at the outset that my colleagues and I broadly welcome the Bill. We have been in dialogue with the Government for some time about its contents and the issues that it covers, and I am grateful to the Pensions Minister for his time this week on a number of matters. We will therefore not oppose the Bill today.
My message to the UK’s pensions industry is that it should have confidence in the strong commitment that exists across the House of Commons to a pension system that is sustainable, sufficient and able to meet the challenges of an ageing population. Although we broadly support the measures in the Bill, we believe there is more to be done to create the robust system that we want. As the Bill progresses, we will seek to make those arguments in the usual way.
A new piece of pensions legislation is always an important step. Personally, I am fascinated by pensions, but I appreciate that not all people feel the same way. For many people, retirement feels like a distant concept. The understandable financial pressures that many families experience—especially at the moment—make longer-term considerations harder to contemplate. Even in better times, talk of defined contributions or lifetime allowances can cause some eyes to mist over. I feel strongly, though, that we will not be able to address the major public policy questions we face without getting people of all ages to make a genuine connection between their future prosperity and happiness and the pension plans that they are making today.
The connection I mention is essential because the outlook for today’s young people is drastically different from that in years gone by, and that has become even more critical in the light of this year’s events. We already know that the combination of student debt, higher house prices and—most of all—the impact of the 2008 global financial crisis and the austerity that came after it has meant that for the first time there is a generation of British people who might not be better off than their parents. That is why in last week’s debate on the Social Security (Up-rating of Benefits) Bill I made the point that the triple lock is not just about the level of the state pension for existing pensioners but about how we index the state pension so that it keeps its value for future generations who are not yet retired. We also have to make sure that we have a complementary system of occupational provision in which people have knowledge and control of their savings, with strong regulations to protect consumers’ interests, and in which people can easily comprehend how the decisions they make will affect their retirement plans.
All that brings me to the contents of the Bill. First, I want people to know that their pension savings—their assets—will directly contribute to the future they want for themselves and their family. I am immensely proud of the work that my Labour colleagues did in the other place—much of it behind the scenes—to put climate commitments for pension funds into UK legislation for the first time ever. This is not just lip service, but genuine commitments, formalising the requirements of the Task Force on Climate-related Financial Disclosures and enshrining a commitment towards the Paris agreement for trustees and managers of occupational pension schemes. That is fundamental to tackling the climate emergency and it is a vital contributor to the health of pension funds. The long-term prospects of fossil fuel companies have implicit risks and it is only right that those risks are taken into consideration as part of the financial responsibility that schemes have towards their members.
The UK should be leading the way on green finance, but we have been slipping behind internationally in recent years. I want to explore ways that we can go even further to achieve that goal. The connection between people, really thinking about where their money is invested, is a key component of helping them to become more involved and more informed about their financial future overall.
The Bill also contains the blueprint for the pensions dashboard, one of the most long-awaited policy initiatives in history. We want to future-proof that dashboard, so that one day people can see in black and white an easily understandable measure that tells them how exposed to climate risk their retirement portfolio is. I know that the industry wants to make sure that we learn to walk before we start to run, and that the creation of the dashboard in itself is no small proposal, but I want us to be as ambitious as we can. Frankly, there is no time to waste when it comes to the climate emergency.
That takes me to my second point, on protecting people. For too long, there have been cases of unscrupulous people using the complexity of the pensions industry to exploit those using it. The dashboard, in particular, has a vital role in making information transparent and easily accessible. That includes making sure that it has the capacity to clearly spell out to people what their fees are and who they are really paying, and for what. One of the very good amendments in the other place was to protect the dashboard from private transactions for a fixed period, and I am disappointed that the Government seem not inclined to keep that.
When consumers are presented with the new information that the dashboard will provide, we would prefer to have a moratorium on how products and new services are sold and marketed until people get used to having ready access to this information. In the wake of, for instance, volatile markets brought about by the coronavirus pandemic, it would be very easy for people to panic and make decisions that might not be in their long-term interests. We want to look at how we use the Money and Pensions Service to best mitigate this, especially when it comes to transfers.
Small pension pots, as has been mentioned, continue to be a major problem. How we can use the dashboard to easily consolidate those pots with minimum hassle and cost has to be on our minds. The dashboard will bring a sense of immediacy and transparency to that, but we need to make sure that people make their decisions when they are fully informed.
The other element of this, sadly, is pension scams. Regrettably, George Osborne’s pension freedoms, exactly as was warned of, have been a watershed moment for fraudsters, who have taken advantage of such a significant change in the rules. As the shadow City Minister and now as the shadow Secretary of State for Work and Pensions, I have been made aware of some truly dreadful stories. I remember one especially bad case where the victim not only lost their pension to the scam, but was then pursued by Her Majesty’s Revenue and Customs for many years for the tax payable on that money, because they had accessed it under the age of 55, even though they had been under the impression that they were moving it to a legitimate investment for nowt. That is the kind of scam that absolutely ruins lives, and the penalties and action taken against fraudsters should be severe.
We should also take pride in the fact that there have been several substantial successes in pensions policy in the last few years. Auto-enrolment is a prime example of that—a hugely successful policy begun by the last Labour Government. Thanks to auto-enrolment, by March 2019 more than 10 million people had been auto-enrolled in a pension scheme, according to figures from the Pensions Regulator. Of course we want people to be more engaged in their pensions, but default options that are easy to set up and straightforward to contribute to are essential.
That brings me to my final point, on protecting pension schemes. What that means is ensuring a strong infrastructure so that we have a well-protected and well-functioning system. First, we will urge the Government to retain the cross-party Bowles amendment inserted in the other place. We do not want the regulation to work in a way that unnecessarily closes defined-benefit schemes that would otherwise be open for new members, and that is what we are worried will happen if open and closed schemes have to meet the same investment and maturity profiles. That is why we believe it is wrong to treat open and closed schemes in the same way, but that is another issue we intend to explore further in Committee.
Big challenges demand big answers, and that is why Labour supports the introduction of collective defined-contribution schemes as a potential way to get a better deal for workers than traditional DC schemes might offer. In doing so, we are mindful of the arguments from other countries about the need to ensure intergenerational fairness in those schemes, but we believe that those safeguards can be built in.
However, one area where we feel the Bill is silent is the creation of pension superfunds. These are very large funds of capital intended to consolidate several smaller DB schemes and run them as one large fund on a for-profit basis. Many are advertising substantial returns to potential investors. That is potentially an extremely significant development, and we do not believe it is appropriate for the Government to leave it in the hands of the Pensions Regulator to rule on this matter. The Government know the concerns that we have raised, and concerns have also been expressed by the Governor of the Bank of England and many people in the industry. I do not understand why these measures are not in the Bill, and the Opposition plan to push the Government again for more answers on this in Committee.
We believe that the measures in this Bill are important and worth while. We want well-managed, sufficient and sustainable pension provision that addresses long-term needs and is intergenerationally fair, and we want to begin the process of allowing savers to be much more engaged and in control of their assets. While the Bill does not give us everything we want, it makes solid steps towards that goal, and it is our belief that it deserves to have its Second Reading today.
Andrea Leadsom (South Northamptonshire) (Con)
First, I congratulate my right hon. Friend the Secretary of State and, in particular, the Under-Secretary of State for Work and Pensions, my hon. Friend the Member for Hexham (Guy Opperman), on their long-standing commitment to improving security for all our people in older age. My hon. Friend the Member for Hexham has shown over a lengthy period his commitment to securing older age for all in our country.
I would like to make four brief points, which I hope my hon. Friend will take into account as this excellent Bill continues its passage through both Houses. First, I would like to talk about the safety of pensions. There is no doubt that auto-enrolment has been a huge success for many, but Ministers will be aware that some people—particularly those on low pay—have been auto-enrolled into a pension scheme and found, when they tried to get information on their investment, that the company handling their pension is, in fact, a bogus firm.
I vividly recall a constituent coming to see me at my surgery. He was a delivery worker on fairly low pay. He was concerned about his auto-enrolled pension and wanted to know what was happening to his assets. He was trying to get an answer from the administrator for that firm and was simply told that the assets had decreased in value. When he tried to find out more, the firm would not engage with him. It was incredibly difficult for me, as someone who is quite familiar with the asset management sector, to get on to the ombudsman on his behalf. It was very difficult to get answers out of anyone. I urge my hon. Friend to ensure that we have the ability to clamp down hard on scams of all sorts, including by those who provide auto-enrolment schemes, and to enable people who may not be at all familiar with managing assets and their own investments to seek redress where necessary.
My second point is about the structure of pensions. I completely agree that the dashboard concept is a great idea. There is no doubt that it will transform people’s ability to hang on to all their small pension pots from the various jobs they have had. Most people these days have several jobs during their career, not just one or two, and it can be a case of people looking in the back of a drawer and trying desperately to remember the name of the company where they worked for six months. That is why we end up in a situation where lots of people have lots of little pots that they never manage to lay their hands on. I ask my hon. Friend, as he considers the next steps for pensions, to consider properly the potential for creating a lifetime pot that follows the worker. Obviously, that would be a radically different approach to the pensions dashboard that enables people to keep track of all those pots, but, actually, when individuals try to consolidate a pension, quite often the transfer value of that pension is considerably less than the pay-out value if they hang on to it. That is often why one pension pot will try to hang on to a person as one of its members and stop them going somewhere else. In my view, it would be worth while looking at a pot that follows the individual that they then keep paying into wherever they work throughout their career.
In 2014, which seems like light years ago now, I was City Minister and I was very proud to be working with George Osborne, who was Chancellor at the time, to introduce the pensions freedoms. I heard what the hon. Member for Stalybridge and Hyde (Jonathan Reynolds) said about that being an opportunity for scammers. I completely agree that some of the measures that have been put in place have really helped with that, and that, indeed, there have been some major problems. However, I do not agree that we should not have brought in those measures, because the ability of many people to then get a decent amount of money on retirement was quite life-changing for them. It enabled some to have a great holiday. It enabled others to help their children buy their first home, or to pay off their own mortgage to give them greater security as they went into a lower income in a later stage of their life.
At that time, back in 2014, we also upgraded the Pensions Advisory Service, so that people could get good advice on how best to manage their own pension assets. In my view, this has been a positive change, but there is still a very low level of understanding of pensions among members of the public, so for many, making decisions about what to do with their pension freedom or with any kind of investing is a really worrying time. That leaves them open to crooks and scammers. I ask my hon. Friend the Minister what conversations he has had with the Secretary of State for Education about adding an applied practical element to the maths GCSE that would educate young people on issues such as pensions, mortgages, car finance schemes, and, yes, student loans. What more can be done to enable people to familiarise themselves better at a younger age, so that it is not such a mystery to them as they reach the shockingly old age of people like me—
Andrea Leadsom
Exactly, Mr Speaker—at least. I was referring to people who are starting to have to think seriously about these issues.
My fourth and final point is about investing in decarbonisation. It was fantastic yesterday to hear the Prime Minister talking about our ambition to be world-leading in clean growth. That was, in fact, the No. 1 priority that I set out for the Department for Business, Energy and Industrial Strategy when the Prime Minister first took office last year. I know that my right hon. Friend the Secretary of State and my hon. Friend the Minister are determined to help our pensions system contribute to the excellent action on decarbonisation that the Government are already taking. I totally agree with them that this multibillion-pound sector can be a real force for good, and investing in the green economy can play a part in helping us to level up across the UK.
Matt Western (Warwick and Leamington) (Lab)
I just want to pick up on those points. The right hon. Lady is making some powerful arguments, and I commend her for that. She will probably have picked up, as I did the other day, that Exxon Mobil has been surpassed in terms of the value of its business by a Florida-based renewables company. When we consider that that was the origin of the Rockefeller Foundation wealth, it just goes to show that had we invested in some of those organisations earlier and provided encouragement, through tax or other fiscal incentives, for pensions to get into that sector, we would have done extremely well.
Andrea Leadsom
The hon. Gentleman makes a good point. We should highlight the excellent work of some of the traditional high-carbon emitting companies of the past, which are really transforming themselves to become the renewables companies of the future. Some of the announcements made by BP, for example, have been incredibly welcome, especially those that show its determination to reduce its carbon footprint and to become one of the best and greenest companies of the future.
So I agree that by encouraging pension funds to invest in greener industries, we can help to improve our green economy and thereby level up across the UK and create hundreds of thousands of jobs. May I therefore ask my right hon. Friend the Secretary of State and my hon. Friend the Minister what conversations they have had with our right hon. Friend the Secretary of State for Business, Energy and Industrial Strategy about the Government’s proposed reforms to corporate governance and audit? There is no doubt that audit reform could provide a much greater focus on what businesses are actually doing to improve their carbon footprint, and corporate governance changes could improve the incentives on company directors to prioritise carbon reduction and protecting the environment. With improved transparency and information about company performance, it will be considerably easier for pension fund managers to make investment decisions that will build security for us all in older age as well as protecting our planet, which is a top priority for so many people right across our economy.
Once again, I welcome this very important Bill, which I think is going to be quite transformative. I hope that my right hon. Friend and my hon. Friend will take my comments and suggestions in the light in which they are given, which is to try to improve and build on the excellent work that they have already done.
Neil Gray (Airdrie and Shotts) (SNP)
It is a pleasure to follow the right hon. Member for South Northamptonshire (Andrea Leadsom), who made some very interesting points that we would want to listen to, and that highlight why, on such an important issue, it is so important for Government to listen to Members across this House and work constructively on this very important piece of legislation.
The SNP broadly supports the Bill. There are key elements that we wish to see advanced, but also areas we hope to work on with other parties to help to improve. I am grateful to the Pensions Minister for his time over the past number of weeks, and in the previous Parliament, in keeping me up to date with the Bill. Similarly, I am pleased that the two main Opposition parties have been able to work together so constructively on these matters. I am grateful to the hon. Member for Birmingham, Erdington (Jack Dromey), in particular, for his approach, and look forward to maintaining that collaboration into Committee stage. I also echo the message to the pensions industry from the shadow Secretary of State. We engage regularly with it, as I am sure he does, on UK pension policy areas—and also, obviously, on looking towards pensions post Scottish independence. We are happy to see the Bill as it has arrived from the Lords advance into Committee, and we will not oppose its Second Reading, but I wish to lay down a few markers for the UK Government.
First, I want to set out our view on the key measures in the Bill. Parts 1 and 2 provide for the framework to operate and regulate collective defined-contribution schemes. There is great support for this from the Royal Mail and the Communication Workers Union. Like the shadow Secretary of State, I would be keen to have an assurance that while CDC schemes are worthwhile projects worth pursuing, they should not be a replacement for good DB schemes. We also support part 3, which provides greater powers for the Pensions Regulator that we hope would be a deterrent to any future BHS-type moment happening again.
We also support part 4, as it provides the legislative framework for the pensions dashboard—the digital platform that will enable people to see all their pension savings in one place so that they can make better decisions and informed decisions about their retirement plans. Part 5 pulls together a number of other provisions that we support—specifically clauses 123 and 124—and other areas such as climate change reporting. It is incumbent on all of us to do what we can to address the climate emergency, so we welcome these measures.
We support these measures because we see them as helping to take important steps to encourage lifetime savings and provide greater clarity and protection for people dealing with their pensions. However, we do not want the UK Government to attempt to row back on improvements to the Bill that were made in the Lords, and particularly on providing the public dashboard, with a bedding-in period, before commercial dashboards arrive. Baroness Drake’s amendment, at least, should stand. I hope the Minister will confirm, as the Secretary of State was unable to do so, that he has no intention of removing it or watering it down in Committee. We do not oppose commercial dashboards. We understand that they will be coming and they have an important part to play. We just want the UK Government to invest properly in marketing and embedding the public dashboard as the first port of call for people to seek impartial information on their pensions. If commercial dashboards are allowed to take off at the same time as the MaPS dashboard, I fully expect the usage of the MaPS dashboard to be lower than it should be. It will be a huge missed opportunity to engage and inform people about their pensions in an impartial way. If the Government are serious about empowering and informing people about their pensions—I hope that they are—they will accept the Bill as it stands in this area.
We feel that compromise can be found to resolve any concern the Government may have about the wording of amendment 71, which was tabled by Baroness Bowles, to ensure that open schemes can be treated differently. I am willing to work with the Minister on clause 123, but urge him not to remove it altogether. That would have major implications for open schemes—a point on which my hon. Friend the Member for Gordon (Richard Thomson) will elaborate in more detail later.
It is true that the Government enjoy a majority in this House, but they should not abuse that. I think that the Minister will today find unity on the Opposition Benches for protecting the amendments made in the Lords, some of which were supported by Conservative peers and former Pensions Ministers. I hope that he will be willing to work constructively, as he has been doing up to now, and as he went out of his way to do when we were first looking at the Bill in the previous Parliament, when the Government did not have the support of such a majority behind them. Matters such as those contained in the Bill should see consensual working. I hope that he will agree and listen to what he is hearing, not just from Opposition Members but from stakeholders across the industry, about protecting these amendments.
What the Bill sadly does not do is address a series of pensions injustices. The 1950s-born women are still waiting for justice, but we may have someone who is able to help. He said this:
“I have made several representations already on behalf of my own constituents who fall into this category. And I must say the answer I’ve got back from the Treasury is not yet satisfactory. But I will undertake—if I’m lucky enough to succeed in this campaign—to return to this issue with fresh vigour and new eyes and see what I can do to sort it out… But you know obviously the Treasury raise some stupefying sum that they say will be necessary to deal with it. I’m not convinced that’s necessarily true. Let’s see what we can do.”
The Member of Parliament who made that commitment last year is now the Prime Minister. Surely, the Pensions Minister will be keen to work with his leader to lobby the Treasury to honour that promise. The least it could do would be to organise an impact assessment to better understand the detriment suffered by 1950s-born women and work on recompense from there.
Another area of injustice I would expect to be discussed in Committee is plumbers’ pensions schemes. My hon. Friends the Members for Perth and North Perthshire (Pete Wishart), for Kilmarnock and Loudoun (Alan Brown) and for Gordon have been working hard on this, to their credit, and I look forward to further discussions in Committee.
Another long-standing area of campaigning for the SNP has been on the creation of an independent pensions commission. I believe that there is sympathy for such an idea in the official Opposition, and the Minister may have considered this matter in the previous Parliament. We want to see a standing pensions commission that would ensure that injustices such as those suffered by the WASPI women are not allowed to happen again. We also feel that it would take the political sting out of difficult issues needing wrestled with. We accept that such a broad standing commission may be outwith the scope of the Bill—unless the Government were willing to propose it, of course—but we hope that it could be considered in the longer term.
We also want to see much greater speed applied to the roll-out of auto-enrolment to people on lower incomes and younger people. Although we wholeheartedly support automatic enrolment, far too many have been left behind and still cannot benefit from this important measure. Now, more than ever, we need the UK Government to be more ambitious. We have called for them to lower the age threshold for auto-enrolment to 18 so that young people can benefit from saving early for retirement, remove the lower limit for the qualifying earnings band so that contributions are payable from the first £1 earned and expand contribution rates beyond the 8% statutory minimum. This would recognise the importance of starting a savings habit early, given the powerful impact that early career contributions can have on the size of retirement savings. Saving from the first £1 earned would be simpler and help low-income workers to save more.
The Association of British Insurers notes that by reducing the lower age limit to 18 and removing the lower earnings limit, a further £2.5 billion could be saved. The UK Government’s failure to act on this at speed is disproportionately affecting women. Again, the ABI reports that the average pension pot for a woman at 65 is one fifth of a 65 year-old man’s and that women receive £29,000 less state pension than men over 20 years. That deficit is set to continue, all else being equal, closing by only 3% by 2060. Extending the coverage of auto-enrolment further by reducing the earnings threshold to the national insurance primary threshold would bring 480,000 people—mostly women—into pension saving, so further delays would be unacceptable. The UK Government should set a clear timetable for their plans on the expansion of auto-enrolment.
For people to get the most out of their savings, we need strengthened consumer protections and measures to boost confidence in the pension system. Pension freedom reforms were introduced in April 2015 by the Government to allow people to draw on their pension pots early, potentially resulting in future financial hardship for them. The introduction of pension freedoms muddied the waters further for individuals trying to understand their pensions. We voiced our opposition to the reforms at the time, highlighting that they could result in people transferring out of their pension to their detriment, and we have been shown to be correct.
It is clear that the UK Government have not put in place adequate safeguards for older people who are opting to free up funds to ensure that they will not end up in a desperate financial situation later. A pension pot should be looked at as deferred income, not a cash machine, and those with less money are more vulnerable to economic shocks in their personal finances, as well as potentially being more vulnerable to scammers who give misleading or false advice for a fee. Many people have since been given unsuitable financial advice to transfer their valuable DB pension pots into less suitable and less secure DC schemes, leading to growing compensation payments from the Financial Ombudsman Service and the Financial Services Compensation Scheme. The issue may represent a large mis-selling scandal, the full scale of which may only come to light in time, but as we fast approach an economic impact from coronavirus, I suspect that time might not be too far away.
Age UK notes that the introduction of the freedom and choice reforms in 2015 led to new opportunities for scammers, perhaps most notably people transferring out of their DB scheme, but also by people charging very high fees and selling unregulated investment opportunities to DC savers. We support measures in the Bill that will provide greater protection and reduce scams, but we hope to be able to tie up some more loose ends from pension freedoms when the Bill moves into Committee.
Given the challenges faced in so many areas, it is also disappointing that the Bill does not address pension taxation or having a more equitable spread of the benefits of the UK Government’s investment in pensions tax relief. It also does not address the issues regarding superfunds, and we hope to be able to return to those areas later as well.
In conclusion, we support this Bill’s Second Reading. As I have said, we will work with all parties to protect the Opposition amendments secured in the Lords, and we hope to be able to advance our own amendments, working with others, to make a decent Bill with necessary measures even better. Let us work together to make the most of this opportunity for current and future savers.
Nigel Mills (Amber Valley) (Con)
It is a pleasure to speak in the debate on this excellent Bill, and I think that I echo most of the remarks we have heard so far by saying that there is nothing in the Bill really to oppose. It leaves most of us looking for things we would like to add to the Bill, rather than being upset with anything that is already in it.
Much as the Opposition spokesman said, there are some key challenges for pensions, and I will address how the Bill tackles those challenges. The three challenges I generally look at are how we can increase people’s engagement with what their pension means, how much they need and what they are likely to have in their retirement; how we can increase the number of people who get a decent pension in retirement, rather than just some small amount of money; and how we can protect what people have actually saved. The Bill makes progress on all three, but the key thing is engagement.
If we can get engagement right, people will understand how important the issue is, what it means and what some of the risks, consequences and benefits are. Through that, we can probably get people saving more, and we can help stop them being a victim of a scam or making a bad choice when they get to retirement.
It is tempting to think, because we have 10 million more people saving for pensions through the great success of auto-enrolment, that we have fixed the engagement problem, but the opposite is true. Auto-enrolment has not been such a success because people have engaged; they just have not chosen to opt out, and that was the whole basis for the inertia that was the reason for the adoption of auto-enrolment. We need to do more to engage people to make them understand exactly what all this means and what their retirement will look like if they carry on saving as they are.
The pensions dashboard is a key component. If we can get that right and people can go on to something and find out how much they have saved, find out what pension they would get from that, find out perhaps what ideally they would have saved by now and what their shortfall is, and then get some ideas for what action they should take over the rest of their working life and how to close that, then we can genuinely improve the outcome people will have from their saving.
The challenge we have with the pensions dashboard is that we will get those improvements in behaviour and the outcomes we want only if people actually go on the dashboard on a regular basis and find the information they need. I would be more sceptical about how advantageous a stand-alone MaPS dashboard would be, because I have a horrible feeling that if we write to people and say, “Here’s your logon and here’s your password,” some people might log on the first day and think, “This is great—it’s really useful,” but would they remember it existed next year, the year after, when they get to their mid-life MOT time and when they get to their retirement? For a whole load of people, that envelope will never get opened, or would go in a drawer and basically just be gathering virtual dust.
We need to get that information to where people are managing their finances—whether their banking app or whatever else people are using. I am not too precious about whether there is a one-year gap before we open up that data, but I think for this to work and to get the advantages we seek, we need to get it further than just one dashboard that people might look at if they remember it exists and they can find their password and their username. That is not how this will really work.
I would not support having two-way functionality. The dashboard has be about sucking out data, not a transactional dashboard. I would hate the idea that someone could go on the dashboard, click a button and do something to their pension after a few beers on Friday night. That would be a crazy thing to get into. The model we have of a dashboard that sucks out data when it is asked for it is the right one. However, we need to get people using it, not just have it gathering real or virtual dust.
The challenge we do really need to address on pensions is how we get people from saving a pretty small amount of money, which will not get them the quality of retirement that they think it will, to saving the amount that they need. That is where collective defined contribution schemes can play a really important part, if they are used as an improvement to DC, not as a weakening of final salary schemes. I think that we would all encourage employers who do want to give their staff the best possible pension to think about whether they can move from a DC to a CDC to give their staff a far better outcome.
The Secretary of State called my hon. Friend the best Pensions Minister in living memory, and I think here that is indeed true. Steve Webb may claim that prize, as perhaps the longest-serving Pensions Minister in living history, but this Minister will not just bring on to the statute book a dream of defined ambition or a third way, but actually see schemes in this space, and it will be a real achievement if we can get these schemes operating.
My only caution is that it when we are selling the advantages, we should be clear that there is no magic. There is no employer guarantee here. The reason why someone gets a much higher pension from this is that the people who, sadly, die earlier in their retirement will in effect be paying for those who have a longer life to have a higher pension. That has always been a feature of defined benefit schemes and it is a feature of annuities, but we should not let people think that somehow this extra pension comes from nowhere. People should understand that they will not have their own pots to pass on to their family if they are one of the ones who, sadly, dies young. At times, the marketing of these has been a little bit over-optimistic about what the benefits of the improved investing strategy or the reduced costs are, when most of the increased pension actually comes from the collective risk sharing.
It is a pity that the Bill has not looked at how we can expand the scope and rates of auto-enrolment. I understand why that has been done, and I know that we have set a mid-2020s timetable for further increases to the rate and changes to the age or the scope of earnings. However, the fact that we have seen opt-outs be far lower than we thought does create the scope to bring forward some of those changes in trying to get people much higher than the 8% savings ratio and nearer to the 12% that we think they really need, or to at least the 12% that we think they really need.
My final area of remarks is on how we protect people and protect what they have saved in relation to scams. There are clearly welcome measures in the Bill, but we possibly could look at how we can go further to make sure that we are putting every tool out there that can possibly be there. We heard evidence at the Work and Pensions Committee this morning from pension scheme administrators, and there is the awful situation where they suspect that the transfer being asked for might be a scam, but they cannot be absolutely sure. They have a duty to make such a transfer, but can we find a way to allow them to delay the transfer a little while so the member can have some more information and a bit of time to reflect and make absolutely sure that that is what they want to do before they go ahead? That sort of change in emphasis in relation to the powers would be really helpful in this situation.
We also need to go further in ensuring that, if people cannot afford advice, they at least take guidance from Pension Wise before they take fundamental decisions. Last time a pensions Bill came before the House—there is one every few years—amendments were tabled to try to make accessing pension guidance if not compulsory, as close to compulsory as we could get. It was suggested that before money was moved, there should be a release code from Pension Wise, to say that the person had taken guidance. The compromise at that point was to get the regulator to go away, do some work, and put measures in place to try to include that nearly mandatory use of guidance. Regrettably, however, the regulator has been incredibly slow, and three years have gone by without us seeing a great deal of action. I hope that this Bill will be clear that that is what we expect the industry to do, and the regulator should put that in place and monitor it.
We want everyone who has saved for decades not to make a horrible mistake at the last minute, and to take that free guidance. Such guidance has huge support and receives overwhelmingly positive feedback, and there is no reason for someone not to take high quality free guidance before risking thousands of pounds that they have saved. I accept that we cannot make that compulsory, but it should be as close to that as possible.
On pension consolidators, the idea of consolidation for weaker, smaller defined benefit schemes is attractive, and I welcome the market moving in that direction and the regulator’s approach so far. However, given that pensions Bills do not come before the House that often, I wonder whether we have missed an opportunity to put some of those rules on a statutory footing. Normally, I would not want the Government to include a clause that allows them to make secondary legislation, as that is not great for parliamentary scrutiny, but I wonder whether the power to introduce such rules could have been included in the Bill, should the regulator start to believe that regulation alone does not have the force or impact that we need. We would not want one of those consolidators to get any kind of market share if we are not sure that it is improving the situation for members, rather than making it worse.
Finally—I asked the Secretary of State about this—the pensions industry can be a huge force for good, and thanks to auto-enrolment it is investing billions of pounds every year. However, it should not invest passively, or just put money in, leave it there, and see what happens. When we have scandals, or corporate failures or disasters, we frequently see that large investors in some companies have not been playing an active role in ensuring the high standards that they should have expected. We must send out a loud and clear message that, where pension schemes and their asset managers are sizeable investors in some of the largest and most significant businesses in our country, we expect them to play an active role in the stewardship of those companies, and not just leave it to others. That is essential if the climate change measures in the Bill are to work. We should not just expect a report every couple of years.
The Parliamentary Under-Secretary of State for Work and Pensions (Guy Opperman)
I hesitate to interrupt my hon. Friend’s flow, but there is an ongoing consultation on illiquids and consolidation. I endorse what he says about stewardship. He will no doubt be aware of the consultation that closes this week, which specifically encourages active stewardship regarding the management of large funds as he describes.
Nigel Mills
I am grateful to the Minister—perhaps he will submit my views to those consultations. This is about a behaviour change. It is not enough for us to just put rules in place; we need such behaviours to become the norm for large pension schemes that are investing huge amounts. That needs to be part of the behaviour; otherwise, we will have yet another report that gathers dust and that nobody really reads. Members and savers expect such measures. They want their money to be invested well—ethically, and in businesses that will improve the climate outcome. That would be good for pension schemes and their members, and companies need to take such measures seriously.
Stephen Timms (East Ham) (Lab)
As has already been widely said, there is much to welcome in this Bill. Some important changes were made in the other place, and I pay tribute to the work that it did. I also appreciate the efforts that the Minister has made to work with my hon. Friends on the Front Bench, with me and the Work and Pensions Committee, and with others across the House to secure broad support for the measures in the Bill.
Pensions dashboards should be an important step forward in enabling savers to understand their pension position, allowing them more readily to make good decisions in planning for retirement. The Select Committee, under its former Chair, Frank Field, to whom I pay tribute, said in 2018:
“The case for a publicly-hosted pensions dashboard is clear cut”
because
“consumers want simple, impartial, and trustworthy information.”
In 2019, the Committee observed:
“A non-commercial pensions dashboard will be a welcome, if overdue, additional tool to provide transparency to individuals and help them plan how they use their pension funds.”
We have heard that it was agreed in the other place that the dashboard provided by the Money and Pensions Service should be up and running for a year, and the Secretary of State should report to Parliament on its operation, before other commercial dashboards are set up, and that commercial dashboards should not have facilities for engaging in financial transactions. Like others, I hope that those changes stay in place.
The former Committee reported in 2016 on defined-benefit pension schemes in between reports that it published on the BHS and Carillion scandals, and its recommendations at that time are reflected in the new powers provided to the Pensions Regulator in this Bill. The Committee recommended, for example, that the Government should consult on proposals to give trustees powers to demand timely information from sponsors, and I welcome the new offence created by the Bill of “knowingly or recklessly” providing false information to trustees.
The Committee also highlighted, in 2018, the attractions of collective defined-contribution pensions. I echo the observation of the hon. Member for Amber Valley (Nigel Mills), whose contribution to the Select Committee I am grateful for, that the pooling of risk offers better pensions than standard defined-contribution saving and avoids the large potential liabilities that have made defined-benefit schemes less popular than they were. I welcome the legislative framework provided in the Bill, and I hope that this new model will be widely taken up.
However, I want to focus my remarks on the issue of pension scams, echoing a number of points that have already been made. As we have heard, the Select Committee has started an inquiry on pension scams, which the Secretary of State referred to. That is the first strand of three in an assessment of the pension freedoms five years on from their introduction by George Osborne.
Losing one’s pension savings to a scam is devastating. The Select Committee has heard of lives that have been ruined by scams—of people who have worked hard all their lives and were looking forward, as they were entitled to, to a comfortable retirement, finding suddenly that their savings have all been stolen; husbands not daring to tell their wives what has happened, or of the shame or dread of the future that they are suffering.
We do not know the scale of this issue. Many scams are never reported, partly because people are ashamed of what they have done and partly because they know that the chance of ever retrieving any of the money is slim. There are grave concerns about the effectiveness of Action Fraud in investigating and ensuring the pursuit of scams, given the low rate of success in retrieving scammed pensions.
The pension scams industry group, to which I pay tribute, estimates that scams could account for anything between 0.5% and 12% of all transfers out of employer pension schemes in the last five years. If we take the middle figure—say 5%—that would mean that over the last five years £10 billion of pension savings have been stolen. There are certainly well-informed reports of named individuals living in the lap of luxury in homes in exotic locations around the world on the proceeds of pensions out of which they have defrauded hard-working savers.
I am bound to say that these awful problems should have been foreseen when pension freedoms were introduced five years ago. Indeed, as I remember well, they were foreseen, but the coalition Government did not adequately prepare for them. I do not know why—they should have done, but they did not. Charles Randell, chair of the Financial Conduct Authority, said at the 2020 annual public meeting of the FCA that
“the manner in which the pension freedoms were introduced leaves a number of lessons to be learnt, including about the importance of coordinating changes in government policy with regulatory and industry preparedness and the speed with which major changes are introduced.”
He was absolutely right—those things were not done, and thousands of hard-working people have had their lives ruined as a result.
The pension scams industry group has thought long and hard about this, and the pensions industry has every incentive to worry about the reputational damage that it suffers as a result of the impact of scams. If people cannot trust what will happen with their money they will not save. The industry group has identified red flags to assist in establishing whether the destination for a proposed transfer is likely to be a scam. It has suggested three main flags, any one of which, most people would agree, should mean that the transfer should not go ahead: first, if the receiving scheme is on the FCA warning list or some other internal list of schemes, entities or individuals of concern; secondly, if advice on the proposed transfer has been provided by firms or people who do not have appropriate regulatory permissions; and, thirdly, if the provider or self-invested personal pension operator is not registered with the FCA. The industry group has identified a number of other flags that may not in themselves show that the transfer ought not to go ahead, but do suggest that further checks need to be made before it does.
As I mentioned in my exchange with the Secretary of State, an amendment to the Bill was tabled in the other place to ensure that if a proposed transfer raised red flags it should not go ahead until the saver had taken financial advice. The problem graphically reported by the pension scams industry group is that only about a quarter of would-be scam victims would be deterred from proceeding after receiving advice telling them not to do so. The scammers win people’s confidence—they become their friends, as we heard in the Select Committee this morning. The scammers tell people, “Yes, they will say that, but that is because they do not want you to move your money.” People trust scammers until the moment they find their pension has gone.
I want to table a proposal enabling trustees to refuse to make the transfer altogether if one of the major red flags is raised. In my view—and I know that other Members support such an amendment—the statutory right to transfer conveyed in pension freedoms legislation should not apply in such cases. We heard this morning from scheme trustees not only that they had an obligation to transfer even if they knew perfectly well that the destination was a scam but that if they did not do it quickly enough they would be fined for not getting a move on under the arrangements that are in place. It is hard to argue that the statutory right of transfer should apply, for example, if the destination is a firm that is listed on the FCA warning list. If the trustees of a scheme know that a particular transfer is going to a firm that is on the warning list, they should surely not have a legal obligation, as they do at the moment, and will still have under the Bill, to hand the money over to crooks if the saver has taken advice but still, despite that advice, wants to go ahead. If the receiving firm is a above board, it must show that to the FCA and get itself off the warning list.
Guy Opperman
I am grateful to the Chair of the Work and Pensions Select Committee with whom I have had, I think, three separate meetings over the summer specifically to address this point. Clearly we are all keen to ensure that clause 125 and the powers within it address the issues that he rightly raises and that are of concern to fellow members of the Select Committee.
The right hon. Gentleman will be aware that I wrote to him yesterday and have given evidence in a more detailed document to the Work and Pensions Select Committee. With his permission, I will put both those documents in the Library of the House, so that all colleagues, including the hon. Member for Airdrie and Shotts (Neil Gray), have an opportunity to be aware of them. I am very happy to continue working with the right hon. Gentleman, and he will be well aware that the view of my Department is that the matters he raised can be addressed fundamentally by clause 125. The FCA has particular views of the red-flag list warning list point, but I am sure we can continue the dialogue.
Stephen Timms
I am extremely grateful to the Minister for those points and for the work that he has done, the responsive way that he has looked at the issue over the past couple of months and for the information that he has now provided. I will be very keen to hear from the Pensions Scam Industry Group whether it feels that the proposal that the Minister has now tabled will meet the points that it has been raising. However, I am grateful for the progress that we have been making on this issue and that will no doubt be further explored in Committee in the weeks ahead.
The determination by the pensions ombudsman in 2015 allowed trustees to decline a transfer request when there were concerns about a scam but the Hughes v. Royal London court case in 2016 overturned that determination and established that the trustees do have an obligation to go ahead even when they know the receiving scheme is a scam. That must be changed, and I am very encouraged by the Minister’s point that he believes that it will be possible to bring forward regulations under the Bill as it stands to have that effect. It is important that that change is made.
Mr R complained to the pensions ombudsman about the decision of the London Pensions Fund Authority and Newham Council, which is my local authority, to allow him to transfer his pension to the Gresham pension scheme. That transfer went ahead and he has lost his entire pension valued at £64,000. He has been awarded £1,000 in compensation since then. His view now is that the trustees should have refused to make that transfer but, under the 2016 Hughes v. Royal London decision, the trustees are legally obliged to go ahead with the transfer in a case of that kind. I think Mr R is right that the transfer that he requested should have been blocked by the trustees, and I very much hope that in future that will be possible. Very few people would today argue that the pension freedoms should be repealed but pension savers are entitled to expect protection. The change that I have described is designed to provide it.
My final point has been touched on by the shadow Secretary of State. Clause 123 was amended in the other place. As the Minister knows, there is very strong support for the amended clause on the part of current defined-benefit schemes, such as the railways pension scheme and the BT scheme, that remain open. If that amendment were to be removed, those schemes fear that they would be treated unfairly by the regulator and in the same way as schemes in very different circumstances. Their future would be threatened as a result. It could be the final blow for private sector defined-benefit schemes. There is great nervousness about the Minister’s intentions on that clause, as he well knows, and about the fact that if he removes the amendment, he may make those schemes unsustainable. I wonder if, in closing the debate, he might comment on his intentions on clause 123.
Gareth Davies (Grantham and Stamford) (Con)
It is a great pleasure to follow the Chair of the Work and Pensions Committee. This is an incredibly important debate because we know that our population is growing in age. By 2024, it is projected that 24% of our population will be over the age of 65, and in my constituency, 31% of our population is already over the age of 65. One of the key challenges that we face in this place is determining the best way to ensure that older people have safety, dignity and comfort in their retirement. They have paid their taxes, contributed to our economy and raised the next generation. But let us be clear: ultimately, the surest way of ensuring that people have safety and security in their retirement is through economic growth. No pension fund reform will be as effective if we do not have economic growth, because through economic growth, people earn more money and save more money
It is clear that our pension system simply has not progressed to meet the needs of a modern economy. That is why I warmly welcome the Bill for its clarity for pensioners and the protections that it brings. I would like to focus my speech on the dashboard provision, which is one of the most interesting aspects of the Bill, and I have three points to make: first, on why I believe the dashboards are needed; secondly, on concerns from the industry about the commercial provision; and thirdly, on concerns about the cost to pension plans.
In terms of why the dashboards are required, pension provider LV= estimates that a typical worker in Britain changes job every five years. As the Secretary of State said, a British person today can have as many as 11 jobs throughout their career, going from job to job and collecting pension plans along the way. It is hard to keep track of those pension pots, and people forget or lose them. The Pensions Policy Institute has outlined that around 1.6 million pension pots, worth a staggering £19.4 billion, are lost today. That works out at around £13,000 per lost pension plan. By 2050, it is estimated that there may be as many as 50 million lost pension pots.
These dashboards are incredibly important because, as the hon. Member for Stalybridge and Hyde (Jonathan Reynolds) rightly pointed out, an additional 10 million people have been put into workplace pension plans in the last eight years alone. To ensure that all pension pots are included in the dashboards and to harness the very best of British FinTech, we need a commercial provision, and that brings me to my second point.
While some in the industry have suggested that commercial dashboards open pensioners up to mis-selling, I put it to the House that this mistrust is unfounded. I looked at Denmark and Israel, which both have pension dashboards alongside commercial transactions, and not once has there been a case of mis-selling. We have one of the greatest financial regulators in the world in the Financial Conduct Authority, and I have tremendous faith in its ability to ensure that mis-selling does not occur.
Thirdly, I want to address the comments made about cost to pension plans by others in the industry. A dashboard is only as good as the data put into it. I would expect pension plans to already have their house in order and to have been practising data hygiene for many years. Anybody who has worked in a senior position in the investment industry, as I have, will know that data science is one of the fastest growing parts of any business today, and not least pension or investment businesses. Those businesses should have been practising strong data hygiene for many years. I think we can all agree that the many benefits that are brought to millions of pensioners up and down our country, across these lands, will far outweigh any cost to pension plan providers.
I also want to highlight—it was mentioned by my hon. Friend the Member for Winchester (Steve Brine) who is no longer in his place—the provision to compel pension providers. I want to emphasise it, because I think it is under-appreciated just how important that is. If we look at what happened in Denmark and Sweden, which had a voluntary provision to provide data, it took between 10 and 13 years for those dashboards to be fully operational and fully comprehensive; if we look at Australia, which had similar provisions to this Bill, it took a fraction of the time. That is an under-appreciated point that deserves recognition.
Guy Opperman
To address that point, the Government were clearly waiting for the industry to volunteer the provision of the data to create a pension dashboard, but upon that not being done on a voluntary basis, it was inevitably the conclusion of both industry and advisory bodies that we should proceed to compulsion. Hence, the Bill, following consultation, requires such data to be provided. I accept the international examples as totally correct, and that is why we are proceeding as we are.
Gareth Davies
I am grateful to the Minister for clarifying that and, again, I welcome the provision to compel pension providers. It allows the dashboards to be as effective as possible as quickly as possible.
Finally, let me address clause 124, requiring pension fund managers to include climate change risk. Again, I would expect pension fund managers already to be incorporating climate considerations in their investment process—climate change is clearly a risk for all pension pots. I am disappointed that we have to include it in the Bill, but I welcome it none the less and highlight how it emphasises, once again, this Government’s commitment to green finance.
It would be remiss of me, however, to stand up in this Chamber without mentioning my long-standing call to the Government to issue a Government green gilt, which would help to raise literally billions of pounds to fund some of the announcements that have been made this week. That would follow Germany, Netherlands, France and many countries around the world in tackling UK pension fund assets, some of which—many of which—have already been funding other countries’ bond issuances around the world. I would welcome any comments that the Minister has on that point.
In conclusion, this is an excellent Bill. I welcome the clarity that it brings to pensioners, as well as the powers for the regulator that will give a lot of comfort to many. It will clearly help bring our pension system into the modern world.
Nick Smith (Blaenau Gwent) (Lab)
Pensions are often the biggest pot of money that anyone will have. They hold the promise of future financial security and are hugely important to millions, but they are also complex and more needs to be done to support people in understanding this crucial topic. Increasing choice through pension freedoms has had a big downside, in particular for those moving out of defined-benefit pension schemes.
In 2017, the British Steel pension scheme was being reconfigured. Steelworkers were being circled by pension sharks to encourage pension transfers. One steelworker family from Blaenau Gwent was approached by a rogue financial adviser while they were away at their caravan on a family holiday, and he sweet-talked them into a bad deal. Such rogue advisers are often propped up by completely unregulated introducers, who are still not being properly investigated by the Financial Ombudsman.
Our Parliament’s Work and Pensions Committee, in its report on this long and sorry tale, concluded that steelworkers were “shamelessly bamboozled” and that the industry’s response has often been “too little, too late”. It is a scandal that continues to have a devastating impact on steelworker families in my constituency and on thousands more across the country. The case study shows a slowness to respond by regulators. Predatory behaviour is all too common, and more action is needed to tackle it. Rates of genuine criminal enforcement against rogue advisers is low, and advice to steelworkers remains confusing, so it is vital that the Bill brings forward the protections that should have been in place for steelworkers three years ago.
I welcome the Bill’s commitment to strengthening the powers of the Pensions Regulator when it comes to enforcement and penalties; that is overdue. However, I think the Bill still leaves consumers vulnerable to being ripped off through a new market that could be created by the dashboards that have been mentioned. If the Government reject Labour’s amendments in the other place, I urge them to provide some answers to the following key questions.
Has the Minister had conversations with the FCA and other agencies about putting in place proper measures for the regulation of any new dashboard market? The FCA, in particular, seems more concerned about what happens in the City of London than what happens in the kitchens of consumers across our country. What accountability measures will be put in place to ensure that regulators protect and prioritise consumers first? People who have issues with their pensions too often face an alphabet soup of different agencies and regulators. What steps will be taken to ensure that regulators’ responsibilities are clearer for the consumer?
The Government say that this Bill will ensure that pension schemes are fit for the future. To make sure that that is the case, they must also reflect on the mistakes that have been made in the past. Protecting consumers must always be our top priority. The British Steel pension scandal may have been unique to the south Wales valleys and other steel towns across our country, but the issues that it represents can equally be found in our country’s suburbs and cities. I hope that the Government will learn the lessons of the recent past and ensure that consumers and pensioners are protected for the future.
Dr Ben Spencer (Runnymede and Weybridge) (Con)
The measures in the Bill could transform how we view and engage with pensions, and I welcome the huge progress that that represents. Pensions are technical and complicated, and decisions about saving for our future, and about what to do with all our savings, are incredibly important. Naturally, the Pensions Schemes Bill is incredibly detailed and technical, but its overarching aim is clear: it is about protecting and empowering consumers.
Today I will talk about the tension that arises between giving savers the power to make the best choices, while protecting them from those who seek to scam or exploit them. Across quite a lot of what we do in politics, and in many of the decisions that we make as a nation, there is a tension between supporting free choice in decision making and ensuring that there is a safety net and some degree of protection.
Changes to workplace pensions and the introduction of pension freedoms has meant that individuals now take more decisions about, and responsibility for, their pensions. Free choice and autonomy are dependent on several things, however, including access to the correct information and the ability to understand it; freedom from coercion, either implicit or explicit; and not being duped by scammers. The Bill rightly focuses on those areas.
On access to information, the introduction of a pensions dashboard will lead to real improvements in accessibility and consumer confidence in planning for retirement. For too long, finding out about and understanding one’s pension and savings has been excessively complicated, and information has been inaccessible. The measures in the Bill to require pension funds to provide data represent a huge step in addressing the issue. To achieve the maximum benefit, however, we must work to ensure that full state pension data is included, as well as a means of tracking all small pension pots that an individual may have accrued.
As many hon. Members have said, gone are the days when people had a job for life. Most of us will do many jobs throughout our careers, and I suspect that those in the House are very mindful of that. That leads to people having many small pension pots, adding further complexity and confusion to planning for retirement. The ability to track pension pots and bring all that data together will give individuals the information and the power to make the best decisions for themselves.
It is not sufficient for the information simply to be there; people have to want to access it, know that it is there and be able to use and understand it. Not everyone will have the confidence or ability to review their pensions data. Arguably, those who are most engaged with their pensions are those who need the least support. We must therefore ensure that, alongside the pensions dashboard, communication to individuals is clear and that support around it is available to help everyone to build confidence in their ability to manage their financial affairs. Probably for most people at the moment, thinking about their pensions in 20 or 30 years’ time and delving into planning for the future is the last thing on their minds, but it is a crucial thing that all of us must do and do early on. It is how we get that message across and ensure that when people think, “You know, I’m going to see where I am at and have a think about how much I’m saving,” there is an easy route to getting that information, processing it and starting to make sound financial decisions.
Of course, when people go on that journey, out come the crooks. Sadly, when it comes to scamming, there are many crooks in the world. The Work and Pensions Committee heard harrowing evidence of the scale and impact pension scams can have on people’s lives; in some cases people lost their life savings just as they were planning to retire, with no ability to get back into employment to recoup them—the worst possible situation. We know that in times of economic stress, such as the current pandemic, the rate of scams increases. I therefore especially welcome the additional powers for the regulator, the greater sanctions on employers or trustees who do not fulfil their obligations, and the measures in clause 125 to protect individuals from scams. The ability to introduce conditions on a member’s right to transfer their pension means safeguards can be added to prevent money being sent to scam accounts, but the scammers will not go away and we must strive to do more.
There is clearly a difficult balance to be struck between enabling an individual’s freedom of choice and protecting those who may be vulnerable to exploitation. The Bill introduces many positive changes and safeguards. It will improve access to data and improve confidence. It also lays the foundation for a vast improvement in how we can engage with pensions and savings, but I remain concerned about those who are vulnerable to exploitation. I therefore urge Ministers to continue to explore ways to identify those who are most vulnerable to exploitation, to crack down on fake webpages, to pursue international crime gangs who are responsible for a lot of such offences, and to work closely with industries, charities and the social care sector to ensure that we can protect and support those who are most at need. People should be able to choose to do what they want with their pension and plan for their future free of the threat of being a victim to a pension scam.
Ben Lake (Ceredigion) (PC)
Diolch, Mr Deputy Speaker, for calling me to contribute to this very important debate, which I think has revealed quite a refreshing amount of consensus on both sides of the House. It is a pleasure to follow the hon. Member for Runnymede and Weybridge (Dr Spencer). I agree with many of the points he made in relation to the measures in clause 125.
The Bill represents a welcome step to ensuring the security and responsible use of UK pension schemes. I particularly welcome clause 124, which addresses the vital issue of climate change: the risk it represents to our long-term socioeconomic security and the role pension funds can play as key levers in the decarbonisation effort of our economy. Wales has a proud record on sustainability and climate change mitigation. A commitment to sustainable development is written into our de facto constitution and we were a world leader with our Well-Being of Future Generations (Wales) Act 2015. I know the Minister is aware of the groundbreaking work undertaken at the Centre for Alternative Technology, which is located in the constituency of the hon. Member for Montgomeryshire (Craig Williams). There is also groundbreaking work undertaken on my side of the Dyfi estuary. In particular, Aberystwyth University boasts the world-leading Centre for Glaciology, while IBERS—the Institute of Biological, Environmental and Rural Sciences—and Aberinnovation campus conduct crucial work into climate change mitigation.
Guy Opperman
I am grateful to the hon. Gentleman for putting on the record my knowledge of mid-Wales and support for so much of what is taking place there. I would be delighted to join him and visit the two institutions in his constituency and in that of his neighbour, my hon. Friend the Member for Montgomeryshire (Craig Williams), when we are allowed to do visits in future.
Ben Lake
That is a very kind offer from the Minister and I will take him up on it.
Achieving net zero emissions will undoubtedly be a difficult and expensive challenge, yet, as the past few months have shown, the state, with its unrivalled ability to borrow and invest, can effect unprecedented change to our society and economy quite rapidly when there is a desire or need to do so. With around £3 trillion invested in UK pension schemes, pensions represent an equally transformative source of investment and could support our decarbonisation efforts.
I welcome the requirements in the Bill for pension schemes to assess their exposure to climate change risk. Those requirements are necessary and well overdue. The Economist Intelligence Unit’s estimate that climate change could eliminate up to 30% of the world’s total manageable assets, along with the fact that the vast majority of UK pension schemes currently do not take climate change risk into account, offer sufficient justification for the introduction of the requirements.
Closer to home, in 2019 Welsh local authority pension funds still had more than £1 billion invested in fossil fuels. That means not only that the pension holders are exposed to future climate change risk, but that the funds are—indirectly at least—undermining collective efforts to decarbonise the economy. I therefore urge the UK Government to consider how they can better work with the Welsh Government to encourage the use of pension wealth to realise decarbonisation and productivity improvements across the four nations of the United Kingdom.
The opportunities are there. In recent years, vital projects such as the Swansea Bay tidal lagoon have gone unrealised, while the UK Government have proven themselves unwilling to finance key aspects of our carbon transition in Wales, including improvements to the Welsh railways. Simply put, we have an opportunity to make pensions work better for Wales, to achieve our climate targets and to meet our international commitments.
I welcome the Bill’s increased powers for the pension regulator and the greater urgency for funds to consider climate change risk, but the Bill could go one step further. The finance sector has already taken welcome steps not only towards divestment but in advancing the environmental, social, and corporate governance agenda. The UK Government could bolster those efforts by amending the Bill so that all default funds are required to reach net zero by 2050, at the latest. That would stimulate green investment, as well as industry development, including better reporting standards and stewardship, as mentioned by the hon. Member for Amber Valley (Nigel Mills) earlier.
Pension funds have a pivotal role to play in decarbonisation—from influencing companies’ boardrooms to invest in a green transition, to protecting pension holders from the risk of climate change. For too long, their transformative potential as investors in that regard has been underutilised, so I welcome the Bill, and particularly clause 124, and hope that the Government can consider strengthening it further so that pension schemes play an even greater part in achieving our vital climate change targets.
Shaun Bailey (West Bromwich West) (Con)
It is a pleasure to follow the hon. Member for Ceredigion (Ben Lake) and to hear about all the fantastic work that my former university is doing in the green sector.
This is an important debate. We are talking about something that is often overlooked and under-discussed: the bedrock of people’s futures. The hon. Member for Blaenau Gwent (Nick Smith) summed it up well when he said that this is not about financiers in the City of London; it is about people in their kitchens. It is about people in Tredegar or Tipton—their futures and their livelihoods. It is about making sure that they have a sustainable future for their retirement, and the Bill is vital to ensuring that that can continue.
For people of my generation, in their ’20s, pensions are not something we really think about, to be honest. As my hon. Friend the Member for Runnymede and Weybridge (Dr Spencer) summed up well, quite often the issue is information. As the data shows, many people now have numerous jobs. As my hon. Friend the Member for Grantham and Stamford (Gareth Davies) pointed out, some people have up to 11 jobs in their lifetime. It is about the slip in the drawer—the final notice that people get when they leave but then forget about it, and it goes to the back of their mind.
My first point, then, is about my support for pension dashboards. It is vital that we can ensure that people make informed decisions about their futures. I support the pension dashboard provisions in the Bill, because it is absolutely right that we ensure that, as people come to make decisions about their livelihoods and their future and how they are going to ensure it is sustainable, they have the information available. It has been interesting to hear, as a member of the Work and Pensions Committee, how that work has progressed. There is still more to do in this space, though, and that is recognised across the board. Nevertheless, I think we can all agree that it is vital that savers have the freedom to make choices in an informed way.
I want to turn to scams, which has been an overarching point today, particularly in relation to protecting the most vulnerable. I have some sympathy with the right hon. Member for East Ham (Stephen Timms), the Chair of the Work and Pensions Committee—perhaps I can call him my right honourable friend—when he talks about the red flag approach. We have heard evidence, summed up by my hon. Friend the Member for Runnymede and Weybridge, of the disastrous effect that these scams have on ordinary working people and how people can lose their livelihoods as a result of someone who comes across as their friend and says to them, “Ignore the warning signs. Of course they are going to say that to you. Of course they are going to tell you not to do it, but it is a risk. Go on—do it.” I absolutely support, and we cannot stop, the freedom of savers to make that choice because I am fundamentally of the view that the person who knows best how to run their own life is the individual themselves, but ensuring that the safeguards are there is vital. I am heartened that the Minister is in a listening mood on this point and I hope that, as the Bill progresses, that listening mood continues. I am sure, from his comments today, that it absolutely will.
We have heard today some interesting evidence about what happens when the scams are finished. The right hon. Member for East Ham made a really good point about Mr R, who lost all that money and now has £1,000 compensation. When it comes to recovery funds and compensating people who have lost out, it is difficult. Ultimately, a lot of the time we are hearing that people are still left in absolutely dreadful positions, so I am heartened by the Minister’s approach. I look forward to hearing, as the Bill progresses and work continues, about the work that the Government will do more widely on this point, because that does not stop here with this Bill. We have all acknowledged that work to protect consumers from these scams and discussions with regulators will carry on as we continue.
I am supportive of and really heartened by the regulatory enforcement and the increased penalties, increased sentences and custodial sentences that are in place. That is absolutely right, because it is important that people cannot be seen to be allowed to get away with this, and they should not be. We need to support consumers who, at the end of the day, are relying on us getting this right.
I briefly want to touch on the point about climate change. My right hon. Friend the Member for South Northamptonshire (Andrea Leadsom), who is not in her place, made the point about ensuring that we encourage funds to invest in new green technology. Green technology is going to be a vital part of what I call the “industrial flourishment”, particularly in an area such as mine in the Black Country. I am really fortunate to have in my area groups such as the midland housing group that has been pioneering fuel cell—battery cell—technology some 23 years before it has actually been used, and it is investment in technologies such as that that will power through the economic revival as we come out of this pandemic and crisis.
I want to keep my comments relatively brief today, because we have had some fantastic, very well-thought-out contributions. Broadly, I am really happy with the cross-party support for the Bill. I definitely think that there are some probing discussions to be had as a result of the debate today, not least on scams and how we protect some of the most vulnerable consumers. In communities such as mine, particularly in areas such as Wednesbury, Tipton and Oldbury, we have some of the most vulnerable individuals who rely on some of these schemes. They are not wealthy people. They are not people who can ignore their pension pots. They are people ultimately who rely on their savings to get them through their later life, so we need to make sure that we protect my constituents in those areas, and I look forward to working with the Government particularly on that point.
Steve McCabe (Birmingham, Selly Oak) (Lab)
This is the first time that I have seen the Pensions Minister since his sad loss. I just want to say that it is very good to see him back in the Chamber.
I start with clause 123. Like others, I think that schemes that remain open to new members should be treated differently from those that are closed. It is important that this is reflected in the legislation and in the Pensions Regulator’s codes of practice. Schemes that are open to new members have different needs and I hope the Minister will consider supporting the amendment that was put forward in the other place.
If these defined benefit schemes are treated the same as closed schemes, they will simply become unaffordable. They do not have the same de-risk needs that the regulator is seeking to tackle for closed schemes. In fact, the White Paper itself acknowledged this, as it acknowledged that they would have reasonably longer-term objectives. One very good example—in fact, an almost perfect example—is the railway pension scheme, which is a shared cost arrangement, with a 60:40 split between employer and member. Huge hikes in contributions would simply make this scheme unaffordable for both employers and members and it is worth remembering that, however much we think that defined benefit schemes may be on the way out, they still account for over 20% of the UK pension sector, so it is important that we try to look after them.
There is another unintended consequence. There is a danger that, if we go down this route, we could end up with the Pensions Regulator virtually setting pension policy, rather than simply regulating it, because it would be their actions that would determine how pension policy unfolds in the year ahead. I am not against the regulator, but everyone here will know that it is a body that has in the past come in for criticism. There is a danger here that, if it were to adopt too cautious an approach, partly through a desire to protect its own interests, it may well end up acting against the interests of people who are investing in pension schemes. I do not think that the regulator is seeking to do that or that the Government are seeking to do that: it may be an unintended consequence of giving this power to the regulator to treat these schemes as if they are the same thing. It will end up directly influencing policy in relation to defined benefits schemes in a way that I do not think anybody here really wants. My point is simple: we should do everything that we can to ensure that one of the consequences of the Bill is not to dismantle and effectively force the closure of perfectly viable existing open defined benefit schemes. I hope the Minister will reflect on that.
I welcome part 4 of the Bill relating to the dashboard. I agree that the first dashboard should be a single non-commercial product, hopefully hosted by MaPS, but I also welcome a choice of platforms with the establishment of commercial dashboards, which need to be properly regulated. I am not so sure about the timescale—about whether there should be an absolute timescale before one is established and others can come along. It seems to me that that might be an issue about personal choice and demand to some extent. There does seem to be some evidence that particular age factors will influence who will use what type of dashboard. There may be other characteristics that would influence that. There is a possibility that a relatively small number of people might use a MaPS dashboard, which is a persuasive argument for at least encouraging some sort of choice and variety in the field. It is also important that the state pension is included in the dashboard. That, for me, is a given.
In terms of the green agenda, I welcome what the Bill offers, but there is a persuasive argument for saying that default pension funds should support Government net zero targets. There is about £3 trillion invested in UK pensions, and that could make a real difference in achieving low-carbon investment. The Economist Intelligence Unit estimates that climate change could wipe $43 trillion off the global economy—about 30% of the world’s manageable assets. So trustees pursuing net zero targets would inevitably be respecting their fiduciary duty to protect members’ interests if they were to go down that road. It is not about a choice between being green and their members’ interests: it is about recognising what the green challenge is and how we could use those assets to get much closer to what the Government are seeking.
Gareth Davies
The hon. Gentleman is making some very good points that I would like to add to as someone who has dealt with many of our country’s pension funds. There is a disconnect between what the pensioners and the trustees believe: they would like to see much more investment in climate change initiatives and funds, but most of our pension funds are advised by a handful of consultants who are often a blockage to investment in, for example, ESG—environmental, social and governance—funds. Does he have any thoughts as to how we unblock the consultants aspect of this?
Steve McCabe
That is a good point. I think surveys have been undertaken that show that younger people from the 25-plus age group—there is an age divide in this—are much more concerned about where their pension investments go. As with most other things, if you are putting the money in, you should have a voice in where it is directed. That seems perfectly reasonable.
Guy Opperman
Let me try to clarify the legitimate point raised by the hon. Gentleman and also the flipside in terms of the argument by my hon. Friend the Member for Grantham and Stamford (Gareth Davies). The Department for Work and Pensions has driven pension trustees forward to embrace ESG and the path of net zero, and asset managers have been lagging behind. I want to put on record the good work done by the FCA, which I accept has been criticised legitimately in the past. Only last week, Chris Woolard and his team specifically issued guidance that accelerates the asset managers to put them on a parallel path to the pension trustees so that we basically ensure that the original investor, and then the actual manager of the money, are working off the same hymn sheet.
Steve McCabe
I am grateful to the Minister and acknowledge the points that he has made. I just think that there may be permission to go a bit further in this regard, and that is the point that I want to emphasise.
I support directed advice, particularly where there is any question of a scam. I welcome a power for trustees to intervene. I am happy to support the proposal from my right hon. Friend the Member for East Ham (Stephen Timms). In my view, it might be better to give the Money and Pensions Service a role in offering limited advice rather than just the guidance so that we try to bridge the gap between guidance and advice. The fundamental difficulty seems to be that, unless people have a particularly big pot and can afford advice, they are denied it, and guidance is not sufficient to protect them or steer them in the right direction. There is an argument for something to bridge that gap, and it might be worth looking at a role for the Money and Pensions Service in doing that.
Finally, I want to go back to where I started and share my concerns that the Bill might be giving too much power to the Pensions Regulator. I was not entirely convinced by the Secretary of State’s comments at the outset. There is a legitimate fear that clause 107 has the potential to criminalise a much wider group of people than can possibly be necessary or sensible. I ask the Minister to look at that again and see if we can be absolutely certain that the net has not been cast too wide.
Harriett Baldwin (West Worcestershire) (Con)
I welcome the Bill, which is a milestone in the country’s journey to a safer, better and greener financial future, in which more people are saving for their old age. I echo the warm words spoken by the Secretary of State about the work of the Under-Secretary of State for Work and Pensions, the hon. Member for Hexham (Guy Opperman)—the Pensions Minister—who has a true passion for improving the future not only of his constituents in Hexham but of all our constituents.
This has been an incredibly well-informed debate and I hesitate to add anything, but I do want to bring my perspective, as someone who used to work on the dark side as a pension fund manager, and to make the obvious point that there are three main things that ensure that people have a good pension in old age. The first is starting as young as possible. I was interested to hear Members arguing about starting as early as 18. I certainly think that the Government should seriously consider such a provision, if people meet the earnings criterion. The second thing that makes people’s pensions better over the long term is tax breaks and employer contributions. The earlier that people can pay in the maximum before tax that they are allowed to and get the employer matching that amount, the better off they are going to be in retirement.
The third thing that makes people better off through their pension is lower charges. This subject has not yet come up during this debate, but it is incredibly important to put on the record. The charges in this incredibly competitive industry, in which the UK leads the world, can vary dramatically. I hope that the powers in the Bill will enable our constituents to see much more clearly on their pensions dashboard what they are being charged and for what. As someone who used to work in the industry on the receiving end of the charges, there is no question but that the compounding effect can have a meaningful impact on the final outcome of people’s pensions.
Will the Minister comment in his closing statement on the charges that the National Employment Savings Trust levies on our constituents? NEST is the body that was set up because, through auto-enrolment, there will be some very small and uneconomic pots that the industry will not want to take on. I recall from my time on the Select Committee on Work and Pensions that NEST itself charges really quite vicious amounts to people who are putting their money into a NEST scheme. I seem to recall that it was something like 1.8% up front and then an ongoing annual charge of 0.3%, which sounds low, but is not actually that competitive these days. Despite that, I understand that NEST has not been able to make enough money to repay the loan that the taxpayer gave to establish it. I would be interested in an update and in the Minister’s thoughts on how we can ensure that people who are using NEST do not end up paying particularly onerous charges.
Let me turn to climate change risk. The Treasury Committee, on which I serve, is currently doing an inquiry into green finance, and it is clear that the UK has a huge opportunity to make the most of our leadership—not only on climate generally, but also as a financial centre—to be the go-to place for green finance, green investment and green bond insurance. I heartily endorse the call of my hon. Friend the Member for Grantham and Stamford (Gareth Davies) for the UK to show the way not just by being the place where other countries come to issue green bonds, but by being the country that issues green bonds itself to invest in greening our economy.
I want to highlight something that we heard clearly in evidence this week. The former Governor of the Bank of England, Mark Carney, has repeated that the cost of climate risk is not being priced into our stock market. There is quite a significant risk that investments in some large companies that form a large part of the index in this country—we should bear in mind how much investment goes into indexed funds—are held as assets that could end up being trapped in value.
Guy Opperman
I am grateful to my hon. Friend for what she is saying, but on what Mr Mark Carney has said, she will be aware that he is a member of the Task Force on Climate-related Financial Disclosures. Under the Bill, the UK will be the first G7 country to bring that into statute. The advantage of that is that the very aspect that she has highlighted as a problem—FTSE 100 companies are not aware of what the risk is from climate change to the way in which they do business—will be tackled, as they will now be forced to disclose that on an ongoing basis to the wider market and individual consumers with pension investments. I believe that the issue raised by Carney, the Treasury Committee and others is addressed in the Bill and the consultation that accompanies it.
Harriett Baldwin
I welcome what the Minister says, and I did not want in any way to undermine the provision in the Bill and the incredible progress that it represents on our journey to a greener financial future. I welcome those steps wholeheartedly, but I wish to highlight that those risks, although disclosed, will be there. Many of our constituents, every month in their payroll, put investments into index-based funds in which those risks are inherent. It is incumbent on us all to recognise that that could be a big driver of UK returns, given that a significant portion of the index consists of carbon-based industries in the UK.
I make that point, and I make the point about charges, because the pension dashboard will play a vital role in showing people what they are paying for those returns in an environment where interest rates are virtually zero, where the index has quite a lot of climate-affected assets, where charges can be as high as those from NEST, the state-backed provider, and where investment returns could be lower for a protracted period as we recover from the pandemic. It is worth flagging the fact that giving information on charges in particular and the way in which they compound over a lifetime will be a powerful part of the very many welcome changes that we can see in this excellent piece of legislation.
Richard Thomson (Gordon) (SNP)
As my hon. Friend the Member for Airdrie and Shotts (Neil Gray) set out earlier, there is a great deal in the Bill that the SNP can welcome, including pension dashboards, allowing trustees to take cognisance of the environmental impacts of the investments under their control, legislation to help avoid the unsuitable transfer of funds and allowing the Pension Protection Fund to continue. Those are all good and welcome improvements to the regulatory and administrative landscape in which pensions operate.
When it comes to dealing with pensions—as Members have said, in many cases, that is the most significant investment that many of us make—it is crucial that we are aware of unintended consequences. As a cautionary tale, I remind Members of what happened when the ability of funds to benefit from advance corporation tax was removed. While Treasury coffers have swelled as a consequence, that sounded the death knell for many excellent final salary pension schemes. Those on the Treasury Bench may not care terribly much for that comparison, but it is the sort of cautionary tale with which we would wish to approach this to make sure we are doing our level best to avoid similar mistakes arising from past legislation and the present legislation, and it is on that note that I wish to focus my remarks.
The first issue I wish to concentrate on is one addressed by the hon. Member for Birmingham, Selly Oak (Steve McCabe) in relation to clause 123 and funding requirements for defined benefit schemes. It is obvious why we would all wish to be assured that schemes are funded to meet the liabilities they have, but if we are to insist on being able to demonstrate that too rigidly, there is a very grave risk that the resulting investment policy that needs to be enacted will become so conservative that it focuses on meeting current liabilities at the expense of delivering future benefits for members within the scheme.
Obviously, that could mean a change in investment strategy away from equities to secure but potentially lower yielding investments, such as bonds, fixed interest investments, property infrastructure and similar, rather than balancing that mix with other types of investment, which might be expected to deliver higher returns over the longer term, and that danger is very real. Paragraph 210 of the consultation the Pensions Regulator is undertaking says:
“We consider that trustees’ focus should be to ensure the security of members’ accrued benefits rather than to ensure the provision of future benefits.”
An estimated 21% of defined benefit scheme members in the UK belong to schemes that are still open to new members, and if the approach that seems to be favoured by the Pensions Regulator is followed for schemes that are open to new members, then as surely as night follows day, scheme investments will begin to ossify in favour of those preserved benefits, at the expense of the ability of these schemes to absorb new members, and that is something that will slowly be closed off to the detriment of those potential new members.
Clause 123 recognises the difference there needs to be in an investment strategy between schemes that are closed to new members and those that remain open. I do not believe that it is or should be the intention of guidance to close down such schemes to new members, but I think that is a danger this will have. Enshrining in legislation the ability of trustees to reflect the characteristics of the schemes that they manage in their investment strategies would help to avoid such an adverse and presumably unintended consequence. I encourage the Minister to ensure that such a clause or something that has similar effect is included in the final legislation.
The second point on which I wish to focus relates to something that is not addressed in the Bill at present. It relates to the treatment of multi-employer industry pension schemes, and I would like to cite the example of the Plumbing & Mechanical Services (UK) Industry Pension Scheme. I state for the record my interest as a member of the all-party group on plumbers’ pensions. For Members who are not familiar with it, this scheme is an industry-wide occupational scheme that provides defined benefits. It has over 35,000 members and has, over its life to date, had about 3,500 employers involved in the scheme. The scheme opened in 1975, and it closed to future accrual of benefits from the end of June 2019, with about 350 employers participating in it at that point in time. One of the issues here is the size of the scheme relative to the remaining employers, many of which are small businesses.
Employer debt legislation contains a number of statutory easements, which are available to many employers facing a section 75 debt under pension legislation—the Pensions Act 1995—when they close their businesses. However, those statutory easements do not cover all situations, such as where an employer has retired or has ceased trading, where the overall amount of the liability in relation to the scheme is small in comparison with the scheme’s size or where an employer has triggered a section 75 debt prior to the closure of a pension scheme to future accrual. In this particular instance, the trustee has been able to apply some existing easements allowed for in legislation, but there are a number of particularly sensitive cases where easements cannot be applied. As a result, individuals face personal bankruptcy, and companies that would otherwise be financially viable face being forced into insolvency.
I want to go into further detail about this case. The trustee currently has 72 employers to consider pursuing for payment where existing easements may not apply. Of those, 43 are incorporated and 29 are unincorporated. Of the 29 unincorporated employers, 20 have retired, and the existing statutory easements cannot apply where the employer has ceased trading. In these cases, there is no ongoing business, but because those employers were unincorporated, they have personal liability to the scheme, which means that their personal assets can be seized by the trustees and used to settle the employer’s debt to the scheme. The trustees advise that, under section 75, these 20 employers collectively have a liability to the scheme of £7 million. Even if each of those employers was made personally bankrupt, only a fraction of that £7 million is likely to be recovered.
I spoke this morning over the telephone to a member of a small local plumbing business in my constituency. He had written to me at the start of the year, and I will give the House a flavour of what he said, because his experience is sadly not untypical. He said:
“I am approaching retirement age, but retiral will trigger my section 75 debt as the law stands at the moment. My father started our employees on the… pension scheme almost forty years ago, long before it was mandatory to have a pension scheme. When I told him about this section 75 issue, my dad burst into tears and said ‘What have I done to you’. I said it was not his fault as he was only doing what he thought was a good thing for our employees by entering them into a pension scheme. Surely after almost 40 years paying into the scheme, all the payments that were due, it can’t result in me losing my house, my office building and my own personal money, which is by no means substantial, and being declared bankrupt.”
There are two methods that could be used to address that, and my party will table amendments on this in Committee. One is the introduction of a trustee discretion to allow trustees not to pursue a section 75 debt when it is below a de minimis threshold. The other is the alteration of deferred debt arrangements to permit employers in a scheme closed to future accrual to apply for a deferred debt arrangement, providing they meet other statutory tests.
That is exactly the sort of thing that I mean by unintended consequences, because I cannot believe for one moment that anyone would have deliberately set up a scheme or put in place a law of that nature with these sorts of outcome in mind. I hope that my party’s amendments in Committee will be accepted and incorporated, because the Bill provides the best opportunity that many will have to get these issues resolved and ease that burden on their minds.
On the whole, this is a good Bill, and we find much in it to support. It gives opportunities to improve the pensions and retirement savings landscape, and I hope that the Government will remain open to further suggestions on how the Bill might be improved as it progresses and heed the warnings, so that we can avoid these unintended consequences.
Aaron Bell (Newcastle-under-Lyme) (Con)
It is a pleasure to follow the hon. Member for Gordon (Richard Thomson), who made a lot of important points. It is also a pleasure and a novelty for me to speak without a time limit, but I will try not to test the House’s patience too much.
This is a very important Bill that delivers on our manifesto commitments and has consumer welfare at its heart, and I am glad that it largely enjoys cross-party support. I welcome the speeches from around the Chamber. I particularly welcome the fact that colleagues from the 2019 intake are speaking in the debate, and I see that there are another three of them yet to speak. Either we are not as young as we look, or we have taken the advice to heart that it is never too early to start planning for retirement.
As a member of the all-party parliamentary group on pension scams and someone who has a general interest in these matters, I am pleased to speak in favour of the important work that the Government have been undertaking. This important legislation will benefit members of the public and help people to plan for their future. It will have an important impact on people saving into pensions for their retirement and ensure that reckless bosses cannot gamble with people’s savings. It will transform the way that people get information about their retirement savings, and it will empower the Pensions Regulator by making it tougher and making its guidance clearer.
We have come a long way on pensions in the last decade, and particularly on automatic enrolment, which most colleagues welcome, but in some ways, we are still in the 20th century. Some pension schemes still provide once-a-year statements. That might well reflect the view that pensions are a long-term investment, and we do not want people to panic as their value goes up and down week by week, but when those statements are frequently being sent to old addresses, it is a problem. People have an average of 11 jobs throughout their career, and with automatic enrolment, they are now likely to have nearly as many pension pots. We really need to bring this into the digital age. At present, these information failures make it harder for individuals to get a holistic view of the pensions they are building up, even if they have the help of a financial adviser. Control over our pension provision, which is often our largest financial asset, is hugely important, and the pension dashboards will be a huge step forward for consumers.
Just to pick up on something my hon. Friend the Member for West Worcestershire (Harriett Baldwin) said, making charges more visible to everybody would be a huge benefit, because sunlight is often the best disinfectant. It will drive out schemes that are not competitive and push people into better-value schemes. Also, the recent reforms we have made mean that individuals can choose to bear more responsibility for risk and decision making, so it is right that they should have access to the information they need to make those informed choices. That will let them plan better for retirement and enable them to have good financial wellbeing as they get older.
I have heard the concerns from the hon. Member for Airdrie and Shotts (Neil Gray) and others about the dashboards, but I would say to him that I think regulation and legislation in all fields must go where the consumer is. A paragraph from the Which? report of February 2018 on dashboards states:
“It is clear that even if the government was to decide that there should only be a single government-run dashboard, other private sector dashboards would continue to develop outside of the regulated market. These may rely on screen-scraping or other potentially unsecure forms of transmitting customer data. They would even be able to screen-scrape data from the official government-run dashboard. If there were any problems with private sector dashboards then the consumer would have no easy method of obtaining redress, as they would remain outside regulation and outside the remit of the Financial Ombudsman Service”.
I cannot really put it better than that. Private sector dashboards are inevitable. Indeed, there are commercial products out there are already, looking at consolidation and so on. Drawing on my own experience in FinTech, these private sector solutions are likely to be more innovative and more responsive to consumer needs than the Government-driven solution.
Neil Gray
I take what the hon. Gentleman says, and I do not disagree. I understand that commercial dashboards are coming; that is not where the dispute is. What I and others across the House are looking for is for the Government to invest in and have a period to allow the Money and Pensions Service dashboard to bed in as the default position for consumers to go to, where they know they can get trusted impartial information about their pensions, and then to allow the commercial dashboards to go from there. That is the very reasonable position that the Lords took, and I think that we should agree to it in Committee. I ask the hon. Member to reflect on that.
Aaron Bell
I thank the hon. Gentleman for that intervention, and I ask the Minister to comment on that in his summing up, but I reiterate that we have to go where the consumer is. I understand the point he is making. We need clear supervision and a robust regulatory framework, as provided for in the Bill, and we need a non-commercial service, but we have to be realistic: people are going to go to these services first, and they are already springing up. We cannot be constantly trying to catch up. In this regard, I note the earlier intervention from my hon. Friend the Member for North West Cambridgeshire (Mr Vara), who is not in his place at the moment. These dashboards will encourage consolidation, and that may or may not be a good thing in specific cases, so we must continue to ensure that consumers have access to appropriate advice and that any administration fees are reasonable when consolidation takes place.
Turning to scams, in recent years there has been a significant increase in the number of members of the public being scammed out of their pensions. The FCA and the Pensions Regulator report that in 2018, 180 people reported to Action Fraud that they had been victims, losing on average £82,000 each. A total of nearly £31 million has been reportedly lost to pension scammers since 2017, according to complaints filed with Action Fraud. I therefore welcome the measures in clause 125.
To personalise the scams issue for a moment, a couple of my Newcastle-under-Lyme constituents contacted me about their experience in this area earlier this year. They have had to make very unwelcome changes to their retirement plans as a result. They, together with thousands of others, were convinced by commission-driven sales people to move their money into a scheme called Dolphin Trust, which is now called the German Property Group. The Minister might be aware of the scheme. It was set up to buy derelict listed German buildings in prime locations and redevelop them. In many cases, pension holders who invested were told, by unregulated salesmen who were paid up to 20% commission, that they would almost double their money if they left their savings in the scheme for five years. The scheme was often recommended by independent financial advisers, who advised their clients to invest via a self-invested personal pension.
As the House can imagine, the results were not as advertised. I thank the Treasury for its help with this case so far, but I would welcome further engagement with the Minister when that is possible. My understanding is that this specific case is currently with the Financial Services Compensation Scheme. That is the real human impact of retirement scams on people in my constituency, and I am sure in the constituencies of Members all around the House. I understand that the Government have already taken measures against so-called introducers, but I welcome the measures in clause 125 to strengthen consumer protection. As the Secretary of State put it in her opening speech, we need to have the option of
“prison for pension pot pinchers”.
I want briefly to touch on another couple of the elements of the Bill. I know that postmen and women, in particular, in Newcastle-under-Lyme will welcome the provisions enabling the introduction of collective defined contribution schemes. These have cross-party and industry support, and unions including the Communication Workers Union, as well as Master Trust and other pension providers, have expressed a desire to see more people benefiting from the advantages and risk-sharing that collective defined contribution schemes can bring. I think that that is broadly welcomed across the House. I will also mention the good work being done so that we use our pensions for the good of the planet, and the requirement that the Bill puts on trustees and managers, with a view to securing effective governance over the effects of climate change, and publishing information. That is not being prescriptive; it is about informing and empowering schemes and individuals to make decisions.
In conclusion, I pay tribute to the Minister for his passion for this subject and his willingness to engage with us. I also echo the remarks of the hon. Member for Birmingham, Selly Oak (Steve McCabe) about the Minister’s personal tragedy earlier this year. The sympathy of the whole House is with him.
Rob Roberts (Delyn) (Con)
As a financial planner for many years, I confirm that for a large majority of the UK population the topic of pensions is something to be avoided and put off to a later date. Looking at the sparseness of today’s call sheet and at the Benches around me, that seems also to be the case for many right hon. and hon. Members. Many UK pensions involve complicated borrowing and are hard to understand, and we cannot all be pension geeks like me and the hon. Member for Stalybridge and Hyde (Jonathan Reynolds).
In April 2006 we went through pension simplification—a misnomer if ever there was one. That was about the time that I was becoming involved in pensions, and if what came out of pension simplification is simple, I would have hated to have worked with what came before. This does not need to be complicated. Pensions are the simplest of things—they are an investment with a tax-efficient wrapper around them. People save for their retirement, with tax benefits as an incentive to do so. It is no more complicated than that.
Other industries have adapted and evolved to suit new technologies as they come up. The banking industry is a great example of that, and it has embraced new technological advances such as online banking. More than 76% of people in the UK now use online banking regularly, compared with just a third of people back in 2007. Just as the banking industry developed to meet the needs of modern society, it is now time for the pension sector to do the same and move into the 21st century, and the Bill seems to be the first step in doing just that.
A recent YouGov survey found that three in five workers have no idea how much they have saved in their pension, and more than a quarter of working age people with a pension say that they never check what is in it. Given the United Kingdom’s increasingly ageing population, it is more important than ever that individuals plan for the future and protect their savings, but currently, there are barriers to doing that.
As I have said in other debates in the House, my main reason for being involved with the Conservative and Unionist party is one of empowerment, and of enabling people to take control of their lives, make better decisions, and shape their own futures. Once again, I am proud to be a member of the party that empowers people to have the freedom and knowledge to make informed choices about their life, and form the retirement that they want and deserve.
The Bill enables people to make better decisions about their pension by giving them access to their pension savings in one place. Like other hon. Members, I support the idea of the pensions dashboard, which will make it much easier for people to see information about their pensions online. By having all their savings in one place, people will be more likely to keep track of them and engage with their pension pot, allowing individuals to understand their pension savings and make better choices along the way.
I remain cautious, however, because a little information can be a bad thing, and I worry a little about individuals who would benefit from professional advice trying to take complex decisions on their own, rather than seeking a properly qualified financial planner. As my hon. Friend the Member for Newcastle-under-Lyme (Aaron Bell) said, on average people have 11 jobs in their lifetime, and under the current auto-enrolment regime, they may have a different pension pot each time. It is therefore hard for people to monitor and keep up to date with their pension savings, to say nothing of the millions of people who have lost track of pensions from jobs they had decades ago.
The Minister and I have had many conversations about pension tracing, and I remain hopeful that because pensions have always been logged by a national insurance number, there is potential within the new dashboard system for a way to proactively inform individuals about pensions that they might have and not be aware of, without them needing to know the details of a job that might have been some significant time ago. According to the Association of British Insurers, 20% of adults admit to having lost a pension pot. The actual figure will be much higher, because some people will not even realise that it has happened. Research suggests that there is almost £20 billion in forgotten pensions; recovering that would be a massive boost for pensioners in these difficult times.
Mr L, for example, visited my office a couple of years ago wanting to access his £50,000 pension to clear the remaining balance of his mortgage and give him a little comfort. After a bit of investigation, we uncovered that he actually had £260,000, and we made a new plan not only to clear the mortgage but for him to retire seven years earlier than planned. That can be a transformative process to go through.
If we want to encourage people to engage with their pensions and their retirement plans, their pensions data needs to be readily available and we need to give them the right to choose how they engage with it, whether that is online, through an app on their phone, through the Money and Pensions Service or, indeed, via their own provider. The right to choose has already been extended to other areas of people’s financial lives. With the creation of a pensions dashboard, that right will finally be extended to pensions, and people will have the freedom to make their own decisions about their future.
I look forward to hearing the Minister’s plans for ensuring that data on multiple pensions cannot be viewed by competitor providers and that people’s personal information remains protected from predatory sales practices. I have some sympathy with the points made by the hon. Member for Airdrie and Shotts (Neil Gray) and others that the MaPS platform should be primary, but I recognise, as my hon. Friend the Member for Newcastle-under-Lyme just mentioned, that innovation often lies in the hands of private firms, normally to the benefit of the consumer.
Moving on from dashboards, the existing pension frameworks—defined-benefit and defined-contribution schemes—can create significant risk and cost for employers on one hand, and do not provide the most predictable retirement income for scheme members on the other. In addition to the dashboard, individuals in some circumstances will be provided with greater freedom of choice through the introduction of collective defined-contribution schemes, which are a better, more affordable and more reliable alternative for both scheme members and employers.
Under those schemes, savers in a company can pool their money collectively in a single fund that pays an annual pension income. By addressing the binary nature of UK pension legislation, the Bill will give individuals greater opportunities to invest in a variety of schemes that benefit them and their needs. As risk is shouldered collectively across the membership rather than by individual members, collective defined-contribution schemes will lead to greater stability and security. That is just another measure that shows that the Government are listening and working with the needs and views of both the industry and our constituents.
Let me touch briefly on charges and costs, which others have mentioned, and sound a note of caution that I hope my hon. Friend the Minister will heed. For many years, there has been a huge focus on costs and charges in pensions, and I worry that it is sometimes skewed the wrong way. I have seen a number of clients over the years who have transferred pension funds into options with much lower charging structures, only to see significantly lower growth. Something with a 1% charge that delivers a 5% return is a much better option than something that has a 0.2% charge but returns only 3%.
I am pleased that the Bill will strengthen the powers of the Pensions Regulator so that members of pension schemes have increased protection for their savings. That gives a fresh set of dentures to a regulator that previously may have lacked a little bite, and it is a welcome reform. Although TPR performs an incredibly important role in protecting workplace pensions and building people’s confidence in retirement saving, there has been a significant change in the industry since its creation in 2005, and it is time that it had some more authority, so I am glad that the Bill will update its role and powers so that it is fit to meet the needs of pensions in the 21st century.
The regulator will have greater powers to deter reckless behaviour, such as extended information-gathering powers, and new civil and criminal sanctions will be introduced. If we are to encourage people to save in their pensions for their future, it is right that they should feel confident that their savings will be protected by a robust regulatory structure. The measures in the Bill will build important trust in pension schemes and put consumer interests first.
Ultimately, the Bill showcases the heart of the Conservative and Unionist Government’s values: empowerment, freedom and choice. It will give people the freedom to make informed decisions about their future, the ability to choose where to save their pension and the confidence to make the right decision about their future and retirement, knowing that it will be protected, and I am pleased to support it.
In closing, may I also take a moment to say on my behalf—and I am sure, on behalf of hon. and right hon. Members from all parts of the House—how pleased we all are to see my hon. Friend the Minister at the Dispatch Box after his recent tragic loss? I know the whole House was devastated to hear his news, and we hope that he and his partner are doing well. Others have paid tribute to his passion and assiduity in preparing the Bill, and I add my voice to their praise.
Duncan Baker (North Norfolk) (Con)
It is an honour to follow the self-confessed pension geek and guru that is my hon. Friend the Member for Delyn (Rob Roberts). I hope that when I come to draw my pension, it is revealed, as in the story of his constituent, that it is actually five times greater than I ever expected it to be. I am sure it was all down to the wonderful advice that was given.
Rob Roberts
Past performance is no indication of future guaranteed performance. The small print says so quite clearly.
Duncan Baker
If I wrote a headline for this Bill, it would be something along the lines of, “If you want to save the planet, start a pension.” That would chime very well with my hon. Friend the Member for West Worcestershire (Harriett Baldwin), who is encouraging young people to start a pension, as I am myself, but in a roundabout way, this Bill does just that. While the thought of pensions may give rise to a tendency for many to glaze over and think about things another day, this piece of legislation is a welcome move. That is proven by the wide base of support. As the Minister has been roundly thanked, I will applaud him and add my thanks, because this is a really great piece of legislation.
While I cannot profess to having the same level of knowledge as some Members in the Chamber today, I was in a former life a finance director, and I recall feeling some dread when auto-enrolment first arrived. I remember bemoaning the scheme, which at the time was more expensive to administer than the meaningful contributions that an employee would pay in when the rates were so low. How those cynics were wrong, including me, because its success speaks for itself. We now have more than 10 million workers in an auto-enrolment scheme in this country. People did not opt out when the contributions increased. Nearly 90% of eligible employees participate in a workplace pension now.
With an ageing population, the need to save for one’s retirement is in anyone’s view vitally necessary, much like many of the constituent parts of the Bill. Auto-enrolment has created inertia to save. It trusts people to think about their retirement, but the next stage is to bring back control—this is why the Bill is so good and important—so that people know what they have and where it is. As the old saying goes, “If you cannot measure it, you cannot manage it”, and for that reason I wholeheartedly welcome the implementation of the pension dashboard in the Bill.
It is a common fact—we have heard it many times today—that people lose control of their pension pots. People move jobs many times throughout their career. We have heard it is about 11 times on average, and there is some £20 billion in pension pots that people no longer necessarily know the location of. The dashboard is a progressive and necessary step in continually improving our pension system and empowering people to know what they have and where it is, not to mention beneficial for pension companies and contributors given that we are always told how small pots are not the most beneficial or economically efficient. What is more, the Bill gives clarity, transparency and support to help make people make informed decisions.
I welcome clause 125. We have heard time and again of the dreadful and immoral scams to which people have sadly fallen victim. For many, pension savings are their largest financial asset. If someone falls victim to a scam, their loss can be just shy of £100,000. Adequate restrictions to protect consumers with a layer of due diligence and a red flag are a sensible brake, which will help to avoid such repercussions.
I welcome the introduction of collective defined-contribution schemes. CDCs create a collective pot from which everyone who owns and shares the fund can benefit, and we are already hearing welcoming noises about that. The Bill provides legislation and the regulatory framework for new collective money purchase schemes and, as such, it helps to widen the desire for alternative collective arrangements.
But back to saving the planet. Clause 124 represents a hugely significant step, and it is in tune with the speech that the Prime Minister gave yesterday. Climate change continues, quite rightly, to take centre stage in so much of our legislative agenda. This is the first pensions Bill ever to mention climate change. Pension trustees must now consider climate change as financially material to members’ investments. Under the regulations of the taskforce on climate-related financial disclosures, schemes must consider the response to climate change as both a risk and an opportunity in their governance risk management strategy, and they must publish that information.
When we think of the billions upon billions invested in pension funds, we can see that allowing pension schemes and the market to embrace the green agenda will enable people to put their own savings into helping us to achieve net zero. Perhaps for the first time ever—even if we never quite thought we would say this—saving for our retirement can now be seen as saving the planet as well.
Mr Richard Holden (North West Durham) (Con)
I will not be speaking for as long as I did yesterday in the Adjournment debate. I will just say a few words about the Minister, who is a great neighbour. He is the sort of neighbour that an MP would want to have next door, and he is always incredibly helpful and friendly. I echo the words of some of my hon. Friends about the tragedy that he and his wife, who are both personal friends of mine, have suffered. I wish them all the very best for the future. I add my name to the tributes that the Secretary of State paid to him in his role as Pensions Minister. He has been superb in government for many years. Whether he will continue in that role or be elevated—I hope he will be—who knows? He has certainly been great in his job.
I pay tribute to some of my hon. Friends from the 2019 intake who have made contributions. My hon. Friends the Members for Grantham and Stamford (Gareth Davies), for Newcastle-under-Lyme (Aaron Bell) and for Delyn (Rob Roberts) have a huge amount of personal experience in this area, and it is great to see that expertise being brought to the Floor of the House.
For many people, the two major contributions that Parliament and the Conservative Government have made to their lives will probably be the long-term positives of the last 10 years of auto-enrolment and the raising of the threshold at which people start to pay income tax. Those are probably the two largest financial measures of which they will feel the effects over a long period of their lives. The Bill builds on a lot of that great work.
The CDC scheme in part 1 is a welcome measure. I am glad that it has union support, and I know that Royal Mail workers in my constituency are looking forward to benefiting from it. On strengthening the powers of the regulator, from my conversations during the last few months with Members on both sides of the House about pensions issues that have affected their constituents over many years, it is clear that any such strengthening will be welcomed. I am glad to see that in part 3 of the Bill.
On part 5 of the Bill, we can all welcome the extra choice and empowerment delivered to our constituents by the introduction of the green initiatives that other hon. Members have mentioned.
I know that part 4 and the dashboard have been the subject of much debate today. I have had 11 jobs in the past five years, never mind a lifetime, so I very much welcome the proposal. However, I hope that the voters of Durham North West will change the habit of a lifetime and keep me in place for many years to come.
An aspect of auto-enrolment is that people go into it when they are aged 22 or earning over £10,000 a year. Many of my constituents start work at 18 and it would be good to see their circumstances considered if not necessarily by this Bill but in future, so that young people contribute as soon as they enter work. I started work at 16 and can only imagine the extra pension pot that I would have—maybe even as large as the one that my hon. Friend the Member for Delyn mentioned—if I had contributed from an even earlier age. When people start contributing early, those contributions have the greatest cumulative effect. I hope that, when the Government think of people in constituencies like mine who go straight into work at the age of 18, they will consider introducing measures that make saving from the earliest point possible even easier.
The Bill is forward thinking and builds on a lot of the good work done by Members in all parts of the House over the past few years. It strengthens protections for people and provides clarity, particularly in the proposal for a dashboard. As someone with many pension pots that I have now managed to amalgamate, I quite understand that this is an important step in the right direction for those who change jobs frequently or who are in different sorts of temporary work. I welcome the Bill.
Wendy Chamberlain (North East Fife) (LD)
First, I express my thanks to Members of the other place for introducing the Bill and for their work in bringing it to its current form. Clearly, much expertise and scrutiny have been brought to bear.
Secondly, I want to acknowledge that life expectancy is increasing and that that is good news. It also brings challenges and that is a good problem to have. Older people may now need a pension income that will last for 20, 30 or even 40 years and we should welcome that. As I said in the debate last week on the Social Security (Up-rating of Benefits) Bill, the triple-lock guarantee for pensions has never been more important. It is clear that many working-age people, and especially younger people, are not saving, and are simply unable to save enough, for their retirement. Final salary pension schemes, such as defined-benefit schemes, are increasingly closing to new entrants. This will mean that the state pension will become an increasingly important source of retirement income in the future. That makes this Bill and its consideration of how best to manage workplace pension schemes even more vital. As a result of the work in the other place, there is much to welcome.
I have had a number of jobs over my time in employment. I cannot beat 11 in five years but, at the last count, I am currently a member of four different pension schemes—both private and public sector and both defined-benefit and defined-contribution schemes. It is clear that, as work changes and more people move from employer to employer, such circumstances are more likely, and I welcome the Bill’s acknowledgment of this increasing reality for many.
I will restrict my remarks to a small number of areas. Other Members have outlined the details of parts 1 and 2 and the proposal to introduce collective defined-contribution schemes and collective money purchase schemes to allow savers to take advantage of market highs and avoid the lows. It makes sense to offer a more balanced alternative to having all the risk lying with either the sponsoring employer, as in defined-benefit schemes, or with the employee, as in defined-contribution schemes. The cross-party employer and employee support outlined in the Government’s consultation reflects that and, having outlined the importance of ensuring inter-generational fairness last week, I highlight the Lords amendment to clause 27, which would provide that, whenever the pensions regulator issued a notice requiring a scheme to submit a supervisory return, it must include a requirement that the trustees assess the extent to which the scheme is operating in a manner that is fair to all its members. I seek a response from the Minister on that amendment and on the steps that the Government are taking to ensure that such fairness is there from the outset of any CDC scheme.
On part 4, like many, I welcome the creation of dashboards that will allow people not only to see their current pension provisions all in one place but even find pensions they potentially did not know that they had. That is currently estimated to be one in five people. The burden of responsibility for risk-taking lies increasingly with the individual. They have more flexibility, but they need to have as much information as possible made available to them so they can make the best possible decisions and be protected from the scams that many Members have mentioned.
The recommendation for dashboards dates back to 2016, and I am disappointed that it has taken until now to see concrete measures. Further details on timescales for dashboards would be appreciated. In addition, I am interested in hearing from the Minister about the DWP proposals to allow a pension to follow an individual from job to job. Given the increasing responsibility of individuals, that is one way to ensure that people understand their entitlements, save accordingly and, potentially, reduce their dependence on the state pension in future.
On part 5, I want to highlight, like many, clause 123 and the amendment accepted in the other place relating to the treatment of open and closed defined-benefit schemes. I understand that the Pensions Regulator is concerned that the failure and subsequent cost to fund DB schemes is becoming a risk, but a great many DB schemes are still open. For them, being forced to de-risk would mean that they would not be able to continue to afford paying out as high a pension to their members.
In other words, DB schemes would be forced to make less risky investments, such as on Government bonds, which means that they would create less of a return on their investments, but still be required to pay out the same amount. Given that Government bonds and other low-risk investments will have very low rates for the longer term, as a result of covid, the risks to such DB open schemes’ viability becomes even more stark.
Yesterday, like the hon. Member for Birmingham, Selly Oak (Steve McCabe), I met executives of the railways pension scheme. They explained that closed schemes have a fixed end point in sight. They need readily available assets to pay pensions, and they invest in lower risk assets by default. Open-to-new-member schemes are more balanced, with new members replacing older leavers. Such schemes’ needs and objectives are fundamentally different, and they do not need to sell assets. Primary legislation is needed to recognise the different characteristics, and I hope that the Minister will indicate whether that will be supported in Committee.
Finally, the Liberal Democrats welcome clause 124—it is a welcome step—and the Minister’s comments on asset managers earlier. Beyond covid, the climate emergency remains the biggest future challenge to the UK. As I said at the outset, there is much to welcome in the Bill, but I echo the comments of the SNP spokesperson, the hon. Member for Airdrie and Shotts (Neil Gray), that it does not address previous pension injustices, including the persistence of a gender pension gap and the situation experienced by previous members of the plumbers’ pension scheme—like the hon. Member for Gordon (Richard Thomson), I am a member of the APPG and have affected constituents. I hope that those situations will be looked at further in Committee.
Jack Dromey (Birmingham, Erdington) (Lab)
Those who built Britain deserve nothing less than security and dignity in retirement. Pensions is not an easy policy area. It requires, on the one hand, careful long-term planning and management of the public finances and, on the other, the role that we play in this House in laying down the statutory framework for pensions. That is why, in government, Labour sought to establish consensus.
We introduced the Pensions Commission, which charted a new direction for United Kingdom pensions policy. Chaired by Adair Turner, it gained widespread agreement to reforms that, even at the time of the establishment of the commission, had been regarded as unthinkable. The lasting legacy of that was auto-enrolment, transforming the lives of millions, with 10 million more people now saving into a workplace pension.
I now turn to the Bill, with that spirit of constructive engagement in mind, and with a number of questions arising out of today’s debate. I begin by thanking the Pensions Minister for his outstanding work in carrying forward so much of the Bill. He is highly regarded across the House, as we heard from the right hon. Member for South Northamptonshire (Andrea Leadsom) and others.
In an unprecedented period, I am grateful to the Minister that, because of his persistence and engagement with us, because of the effective cross-party working there has been and because of the determination of those who have supported important measures in the Bill, it has finally now made it to this stage. I add just one other point: it is greatly to the credit of the hon. Gentleman that, in the most difficult of circumstances, that he has forged forward. I simply say, on this side of the House, we stand in solidarity with him and his wife.
As my hon. Friend the Member for Stalybridge and Hyde (Jonathan Reynolds) and the Minister have said, the Bill, as first introduced in the House of Lords, focused on three key areas: first, CDC schemes; secondly, the role of the Pensions Regulator; and thirdly, the pensions dashboard. Part 5 also included provisions on DB scheme funding and transfer rights. Now the Bill contains one further key area, and the hon. Member for North Norfolk (Duncan Baker) was right when he said that it is the first time that such a measure has appeared in pensions legislation. From the outset, it was our strong view that the Bill offered an opportunity to make progress on the role of pension schemes in combating climate change. Originally, there was not a single reference to climate change or to environmental concerns in the Bill. Now, there is a set of provisions in clause 124, headed “Climate change risk”, which require those managing pension funds to take climate targets into account in their overall governance and to disclose climate change risks and opportunities.
I pay tribute to the hard work of our colleagues in the House of Lords and those who supported them on a cross-party basis for putting climate commitments for pension funds into UK legislation for the first time ever. That is a tremendous achievement of which those who successfully argued for such provisions, including Baroness Sherlock, Lord McKenzie and Baroness Drake, should be proud. I thank not only those in the Lords for their level of support, but the range of organisations outwith Parliament, including ShareAction, the TUC, and commercial companies such as Aviva, for some of the necessary measures that we now see in the Bill.
I have one further point on climate change. In exchanges on the Floor of the House earlier this year, the Pensions Minister agreed that, at the appropriate stage, we should hold a climate change pensions summit. I hope today that he will reaffirm that commitment, not least because of this excellent debate and the excellent contributions from the hon. Member for Grantham and Stamford (Gareth Davies), my hon. Friend the Member for Birmingham, Selly Oak (Steve McCabe) and others who said that, during this great historic challenge of climate change, we are seeing not only the immense potential of investment by pension funds, but the extent to which that will greatly benefit pension schemes. Such a summit would be very welcome indeed.
On CDC schemes, I welcome the work that has been done by the Communication Workers Union and its deputy general secretary, Terry Pullinger, and by those in Royal Mail to bring us to this point. I am talking about a ground-breaking pension scheme forging a new and exciting pathway to a better pension for around 130,000 Royal Mail employees. This represents a truly revolutionary milestone for the UK pensions landscape. We support the provisions in the Bill that finally set up a framework for that to happen. If one looks internationally, at the experience of the Dutch, for example, we are talking about pension outcomes that are over and above—that are 20% and 30% better than—the traditional falling back on DC savings pots for those who are members of the scheme. It is important to be clear that we will always defend good defined benefit schemes and the provisions in this Bill must not undermine existing schemes. I would welcome the Minister’s committing himself to that.
Turning to the role of the Pensions Regulator, we support the strengthening of the existing sanctions regime by introducing new criminal offences and higher penalties for wrongdoing. The pensions landscape has been troubled in recent years by scandals, including those involving BHS and Carillion, to name just a few. Beyond the newspaper headlines, the mismanagement of pension funds was catastrophic for the scheme members involved. It is right that those who intentionally or knowingly mishandle pension schemes, or endanger workers’ pensions, should face severe penalties. That is why we wholeheartedly support the relevant provisions in the Bill, which I have termed “the Philip Green” clauses.
Crucially, we need to go further and to ensure that, on this issue of scams, decisive action must be taken at the next stage. My right hon. Friend the Member for East Ham (Stephen Timms) and the hon. Member for Amber Valley (Nigel Mills) rightly said that more needs to be done. My hon. Friend the Member for Blaenau Gwent (Nick Smith) told a harrowing story about the terrible consequences of workers who fall victim to pension scams. I always remember the terrible story, from when the Financial Guidance and Claims Act 2018 went through the House, of the Port Talbot shift worker who burst into tears when he met the Pensions Advisory Service, because he had been seduced into transferring out of his good historic scheme into a far inferior scheme. He was in tears because he had seen all those he supervised on his shift follow his example and all lose out as a consequence.
There are sharks out there, and pensioners and future pensioners need to be protected against them, which is why I welcome the strong commitment to debate in the next stages. Crucially, we hope we will arrive at a framework such that if an innocent individual is being seduced into making the wrong decision, alarm bells ring and it does not go ahead—the red flags have been described in this debate.
The pensions dashboard is an innovation that we support. There were some interesting contributions in what was an excellent debate—for example, from the hon. Member for Grantham and Stamford on the nature of pensions in modern Britain. The dashboard is truly a step in the right direction. We have always supported the concept of allowing people to access information about their pension savings more easily. We also support the idea—mentioned in contributions by the hon. Members for Amber Valley, for West Worcestershire (Harriett Baldwin) and for Newcastle-under-Lyme (Aaron Bell)—that individual citizens should be able to access information, including through the dashboard, on costs and charges.
Where we appear to differ from the Government is in our strong view that the dashboard should be run firmly in the interests of the public. It should be publicly owned, free at the point of use and available to all. We have agreed to disagree on that—the path down which the Government are going is that there will be a public dashboard and commercial dashboards—but Labour secured amendments in the other place to guarantee a one-year head start for a publicly owned dashboard before commercial rivals are allowed to enter the market, and to prevent commercial transactions on dashboards without primary legislation. Given the scams and scandals that have blighted the pensions world, the dashboard should not become another tool by which savers can be targeted by commercial initiatives that may harm their savings. I am concerned by soundings from the Government suggesting they will go back on these positive amendments to the Bill, so I ask the Minister: will a public dashboard be first? What is the Government’s intention on ever allowing transactions on the dashboard at any point?
Let me turn to other areas of concern. There were powerful contributions from my hon. Friend the Member for Birmingham, Selly Oak and the hon. Members for Gordon (Richard Thomson) and for Airdrie and Shotts (Neil Gray) on the issue of open and closed schemes. As the Minister is aware, there are grave concerns about the impact of the Bill’s provisions on open DB schemes. Prior to my becoming a Member of Parliament, in my former role in the old Transport and General Workers Union and then Unite, I worked hard to defend good DB schemes, such as the local government pension scheme.
As I said earlier, I do not for one moment accept the premise that somehow DB schemes are history or are not worth protecting. DB schemes currently have 10.5 million members, with £1.5 trillion under management. Those assets can be invested in sustainable and long-term ways, such as in infrastructure projects and initiatives—including those with a positive approach to climate change—as well as generating the best possible return for the scheme members. They remain a crucial part of the pensions landscape, so it is a legitimate concern that the Bill does not adequately recognise the difference between DB schemes that are open to new members and those that are closed. The former includes many public sector schemes. By overlooking that distinction, the Bill risks imposing overly conservative—with a small c— measures on open DB schemes that may ultimately threaten their sustainability.
With that in mind, we supported in the other place clause 123, which is aimed at addressing the issue and protecting the 1.1 million ordinary members of schemes that are currently open to new members and the further 7.6 million people who are members of schemes still open to future accrual. The Minister has expressed some concerns over the wording of clause 123 but does not necessarily seem to agree with its intent. Is he willing to confirm that he is open to working with us, across party lines, on appropriate amendments for discussion in Committee?
Drawing my remarks to a conclusion, the Bill is welcome —of that there is no doubt—but there are issues it does not address. The continuing cause of grievance, absolutely understandably so, on the part of the Allied Steel and Wire steelworkers is a desperate one. Many worked for decades, paying 100% of their pensions only to find, many years later, that they may only receive half of what they are entitled to. That is despite the fact that their campaigning led to legal changes that protected the retirement funds of many other members of wound up schemes. They have been fighting for their full pensions for almost 20 years. Tragically, some have died before getting the retirement income that should have been theirs to begin with. The problem is a complex one; the injustice is clear. Is the Minister prepared to meet them to discuss potential solutions?
There is also the cause, which we have raised frequently in this House, of the WASPI women—the Women Against State Pension Inequality Campaign. It is unacceptable that the ’50s women continue to be victims of the injustice they have suffered. I warmly welcome the Prime Minister recognising that injustice. I hope that in the next stages the Department is prepared to engage with the women concerned on potential solutions, including exploring targeting help for those worst affected.
Ending on a similar note to my hon. Friend the Member for Stalybridge and Hyde, we want a pension system that is cost-effective and fair, and which guarantees working people dignity and security in retirement. In the excellent contributions made from across the House, I will single out auto-enrolment as an example of the importance of going further. I think it was the hon. Member for Amber Valley who spoke about that. The way I have often put it is that 8% cannot be the summit of our ambitions. Auto-enrolment is a huge and welcome step in the right direction, but we need to go further and faster if we are to fulfil the objective of security and dignity in retirement.
In Committee, the Opposition will push for measures we want to explore: widening auto-enrolment; better protection against pension scams, because of the urgency of a growing scandal; and ensuring that the dashboard is run in the public interest. We hope the Government will continue, as they have done thus far, to work with us and other Opposition parties to achieve wider and longer-term policies that will protect people’s pensions. I will end on the point I started with: there is a sacred duty on all of us here to always champion the cause of security and dignity in retirement. The people of Britain deserve nothing less.
The Parliamentary Under-Secretary of State for Work and Pensions (Guy Opperman)
This is an important Bill for millions of everyday people: those who have already retired and those who are saving for retirement. The Bill makes pensions safer, better and greener. I thank colleagues from across the House for their support of the Bill. I am nervous when there is consensus in praise of a Bill. It is a bit like when the chairman of a football club indicates that they have confidence in the manager, and we all know how that goes in the normal course of events.
First, I would like to address some of the issues that are not in the Bill. State pensions are not a part of the Bill. The scope of the Bill makes provision for occupational pension schemes only. The points on the state pension are duly noted, but they are not within the scope of the Bill. On automatic enrolment, it is entirely true that the automatic enrolment review sets out our ambition to remove, in the mid-2020s, the lower earnings limit and the lower age threshold. That will happen, but in due course. On superfunds, I welcome the support in broad terms—I accept it is in broad terms—from the shadow Secretary of State, the hon. Member for Stalybridge and Hyde (Jonathan Reynolds), and the SNP spokesman, the hon. Member for Airdrie and Shotts (Neil Gray). I accept that this is an ongoing process. There is an interim regime, which has been brought forward by the pension regulator. It is something we hope to take forward, but I accept that the Government do need to address it in due course. On pensions taxation, many points have been raised. I am sure the Chancellor is listening avidly and will address the matter in due course.
The importance of the Bill has been shown by the many different and thoughtful contributions by hon. Members. The House welcomed the fact that certain Members have been willing to identify themselves as pension geeks, not least the shadow Secretary of State and my hon. Friend the Member for Delyn (Rob Roberts). I thank all colleagues from the 2019 intake who have contributed so brilliantly, including my hon. Friend the Member for Grantham and Stamford (Gareth Davies), who explicitly made the case for green gilts. I also thank my hon. Friend the Member for North West Durham (Mr Holden), who is my new neighbour. All I can say about him as a neighbour is that he is an awful lot better than the previous occupant of his seat, and I welcome him to it.
This Bill matters, and, as was put best by the hon. Member for Blaenau Gwent (Nick Smith), it matters most to the mums and dads in Tredegar. My hon. Friend the Member for West Bromwich West (Shaun Bailey) said that we need to look at the impact of this legislation, whether it is on the people of Tredegar or Tipton. I will be resolute in ensuring—to the best of our abilities within the confines of the Bill—that scams are stopped. It is crucial that we drive forward real change through clause 125 and the regulations that follow. As I said, I have written to the Chair of the Work and Pensions Committee, the right hon. Member for East Ham (Stephen Timms), and given detailed evidence to the Committee. I am quite sure that we can continue the dialogue to flesh out what that will mean in the regulatory process. I am keen that the Bill is utilised to the best of our ability and that it sets out a road map to ensure that people are not scammed through their pensions. We will stop those callous crooks and ensure that transfers are carried out appropriately.
Nick Smith
It is great to hear the Minister speak up for the good people of Tredegar, my home town. I accept that dashboards and transparency should help in understanding schemes’ performance, fees and important matters that affect pensioners across the country, but, as the Secretary of State said in her introduction, we have 40 million-plus pensioners and there are 40,000 different schemes. Will the Pensions Minister please tell us more about how he is going to ensure that dashboards are sufficiently regulated so that there are no future problems with this initiative?
Guy Opperman
I will come to dashboards in more detail. I am happy to discuss this with the hon. Gentleman individually. The long and short of it is that we are keen that there is a detailed authorisation regime and that there are suitable restraints in place to ensure that the system is not open to abuse. This is different from the type of dashboard envisaged by some, which is a repository of all data. We are definitely not going down that route. With the data team, we are designing the dashboard to ensure that it is data accessed by the individual, not a pot that all parties can take data from. It is a detailed conversation and one that I would be delighted to take up with the hon. Gentleman, but I assure him that our objective is to ensure that there are no problems of the kind he raised.
Let me turn to green technology and climate change. I look forward to my visit to mid-Wales and to working with the Welsh Government. I agree with the point made that if one wants to change the world, investing in a pension is unquestionably the right way forward. I endorse the comments of my hon. Friend the Member for West Bromwich West and my hon. Friend the Member for Grantham and Stamford, and I am certain that the Treasury is listening to the idea of green gilts as an alternative vehicle for pension funds to invest in on an ongoing basis.
There is no doubt that, by including TCFDs in the Bill, we are continuing a narrative: this Government are driving forward work against climate change more than any other Government in the world. We are the first Government in the G7 to legislate for net zero. We are leading the way on environmental, social and corporate governance throughout the European Union, as is acknowledged by all our partners in the EU. We are the first Government to legislate to bring TCFDs into law in this country. Without a shadow of a doubt, this builds on the work that we have done, and on the promises and assurances made by my right hon. Friend the Prime Minister in his speech to the Conservative party conference yesterday.
I turn to CDCs, for which there is welcome support across the House. Royal Mail, and all the postmen and women who support all our constituencies up and down the country, are keen to see this measure. I have worked extensively with the Communication Workers Union, Royal Mail and the various organisations that have supported this policy. I do not want to be too Blairite in a spirit of cross-party unity, but there is no doubt that CDCs are the third way in pensions, and a way forward that provides an alternative to the current regime.
With the dashboards, we are trying to bring pensions into the 21st century. We are building on the work that has been done in other markets, whether energy, banking or savings, all of which have similar things with open banking, savings apps and the ability to change an energy provider. I can assure the hon. Member for Birmingham, Selly Oak that the state pension will be part of the dashboard. On the formulation of the dashboard and what it looks like, many people want to talk about the end product. I merely want to get the product up and running, but the end product will, quite clearly, have something about costs and charges, which addresses the point that the hon. Gentleman raised, as did my hon. Friend the Member for West Worcestershire (Harriett Baldwin). I can assure her that charges are under review on an ongoing basis. The dashboard will also, we hope, do much to provide simpler statements, simplifying something that has been very technical for very long time.
We heard about the issue of small pots and the difficulties in understanding those on an ongoing basis. It may have escaped the House’s attention, but the Department has an ongoing small pots review that is working cross-industry to try to assess exactly what the particular problems are. That will include, I assure the House, a consideration of “pot follows member”. Clearly, all that would require future regulation, but we are definitely looking at it as a Department.
We believe very strongly in the importance of a Government-backed, impartial dashboard, and we have committed to having the MaPS dashboard available from the start. We strongly believe, though, that multiple dashboards will help a consumer base with differing priorities. In launching a product, do we expect the customer to find it, or do we launch the product where the customer is? There are different customers who have different expectations and needs, and some already have a relationship with a provider. A variety of dashboards can help to evolve the project.
Neil Gray
I thank the Minister for giving way. I want to say at the outset how pleased I am to see him in his place. He should rest assured that the thoughts of my family are very much with his. Likewise, I take a moment to ask the House to remember that my hon. Friend the Member for East Dunbartonshire (Amy Callaghan) would have been here, were it not for her health issues, as the SNP pensions spokesperson.
I think it is clear that Members on both sides of the House, even those on the Government Benches, are not far apart on the issue of the dashboard. Between now and the Committee stage, would the Minister be willing to discuss his intentions with me and with Labour Front Benchers and the Liberal Democrats to see what compromise could be sought in all our interests going forward? This is a really important issue for us. I know the Minister to be someone who seeks consensus where possible, and I hope he would like to do so again in this case.
Guy Opperman
I have already engaged in extensive discussions, but I would be delighted to continue to do so both in and out of Committee. I think it is very clear that the Secretary of State and I have gone to great efforts to try to take the House with us in that dialogue and debate, and I can assure the hon. Gentleman that that will continue.
Let me move on to address the powers of the Pensions Regulator. I think it is right for me to put on record that TPR has done a good job during Covid, and, as an organisation, it is definitely improving. I accept that there have been criticisms, but it has unquestionably progressed under the supervision of its current chairman. I agree with my hon. Friend the Member for Delyn that these regulatory powers provide a fresh set of dentures for TPR to ensure that its bite is a little more substantial than its previous bark. That is a fair point well made. This builds on work that has already been done.
Several colleagues have raised the issue of open DB pension schemes. The Government continue to engage with the schemes and the Pensions Regulator, and we want to understand the concerns. I met stakeholders last Friday, and I have discussed this with Opposition Members. The measures in the Bill are designed to deliver clearer funding standards while upholding the flexibility of the scheme funding regime. There is an ongoing consultation, issued by the regulator, which looks at a potential bespoke regime. I have already discussed with the individual schemes whether the consultation is the right way forward, but I am happy to continue that dialogue, as I am on other issues.
I thank many colleagues for their kind words and support for my wife and I following the death of our twin boys. It is genuinely appreciated. This House is a special place when we are presented with adversity. It brings us together, and I think it humanises us that, while we disagree politically, we share the same problems. I echo the comments made by the hon. Member for Airdrie and Shotts and wish the hon. Member for East Dunbartonshire (Amy Callaghan) well.
We are pushing ahead with an innovative and ambitious pensions agenda that is reforming retirement. It delivers on commitments made in a manifesto backed by the people of this country in December 2019. It makes our constituents’ pensions safer, better and greener—safer by cracking down on scams and unscrupulous bosses, better by utilising new technology to develop and create a dashboard, and greener by ensuring that we get to net zero through ethical and sustainable pension investment. I look forward to further discussion, and I commend the Bill to the House.
Question put and agreed to.
Bill accordingly read a Second time.
Pension Schemes Bill [Lords] (Programme)
Motion made, and Question put forthwith (Standing Order No. 83A(7)),
That the following provisions shall apply to the Pension Schemes Bill [Lords]:
Committal
(1) The Bill shall be committed to a Public Bill Committee.
Proceedings in Public Bill Committee
(2) Proceedings in the Public Bill Committee shall (so far as not previously concluded) be brought to a conclusion on Thursday 5 November 2020.
(3) The Public Bill Committee shall have leave to sit twice on the first day on which it meets.
Proceedings on Consideration and up to and including Third Reading
(4) Proceedings on Consideration and any proceedings in legislative grand committee shall (so far as not previously concluded) be brought to a conclusion one hour before the moment of interruption on the day on which proceedings on Consideration are commenced.
(5) Proceedings on Third Reading shall (so far as not previously concluded) be brought to a conclusion at the moment of interruption on that day.
(6) Standing Order No. 83B (Programming committees) shall not apply to proceedings on Consideration and up to and including Third Reading.
Other proceedings
(7) Any other proceedings on the Bill may be programmed.—(Michael Tomlinson.)
Question agreed to.
Pension Schemes Bill [Lords] (Money)
Queen’s recommendation signified.
Motion made, and Question put forthwith (Standing Order No. 52(1)(a)),
That, for the purposes of any Act resulting from the Pension Schemes Bill [Lords], it is expedient to authorise:
(1) the payment out of money provided by Parliament of any increase attributable to the Act in the sums payable under any other Act out of money so provided; and
(2) the payment of sums into the Consolidated Fund.—(Michael Tomlinson.)
Question agreed to.
Pension Schemes Bill [ Lords ] (First sitting)
Tuesday 3rd November 2020
(4 years ago)
Public Bill CommitteesRead Full debate Pension Schemes Act 2021 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 3 November 2020 - (3 Nov 2020)
The Committee divided: - Ayes: 2 / Noes: 10 - Question accordingly negatived.
The Chair
Before we begin scrutiny, I have a few preliminary announcements. I will stop the sitting if Members do not respect the social distancing guidance. I remind Members to switch electronic devices to silent. Tea and coffee are not allowed during sittings. If drinks have been brought in, please remove them from the desk. I know that most speeches are spontaneous, but if Members have speaking notes, please email them to our Hansard colleagues at hansardnotes@parliament.uk. That would be helpful. We will first consider the programme motion on the amendment paper. We will then consider a motion to enable the reporting of written evidence for publication. Given the time available, I am sure we can do both of those without debate.
Ordered,
That—
(1) the Committee shall (in addition to its first meeting at 9.25 am on Tuesday 3 November) meet—
(a) at 2.00 pm on Tuesday 3 November;
(b) at 11.30 am and 2.00 pm on Thursday 5 November;
(2) the proceedings shall be taken in the following order: Clauses 1 to 6; Schedule 1; Clauses 7 to 44; Schedule 2; Clauses 45 to 48; Schedule 3; Clauses 49 to 57; Schedule 4; Clauses 58 to 95; Schedule 5; Clauses 96 to 99; Schedule 6; Clauses 100 to 116; Schedule 7; Clause 117; Schedule 8; Clauses 118 to 120; Schedule 9; Clauses 121 to 123; Schedule 10; Clauses 124 to 129; Schedule 11; Clauses 130 to 132; new Clauses; new Schedules; remaining proceedings on the Bill;
(3) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 5.00 pm on Thursday 5 November. —(Guy Opperman.)
Resolved,
That, subject to the discretion of the Chair, any written evidence received by the Committee shall be reported to the House.—(Guy Opperman.)
The Chair
Copies of written evidence that the Committee receives will be made available in the room. We now begin line-by-line consideration of the Bill. The selection list for today’s sitting is available in the room. It shows how the selected amendments have been grouped together for debate. Amendments grouped together are generally on the same or similar issues. Please note that decisions on amendments do not take place in the order they are debated, but in the order they appear on the amendment paper. The selection and grouping list shows the order of debates. Decisions on each amendment are taken when we come to the clause to which the amendment relates.
Clause 1
Collective money purchase benefits and schemes
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Clauses 2 to 6 stand part.
That schedule 1 be the First schedule to the Bill.
Clauses 7 to 25 stand part.
The Parliamentary Under-Secretary of State for Work and Pensions (Guy Opperman)
It is a great pleasure to serve under your chairmanship, Mr Stringer. I thank colleagues for attending today’s debate. I hope to proceed with cross-party agreement on those matters that are relatively uncontested, so that we can make progress and then focus on and debate properly those matters that are genuinely contested.
I stand to introduce clause 1 and the associated clauses up to clause 25 and to speak in support of the new form of occupational pension that we are introducing, commonly called collective defined contributions. In CDC schemes, members and employers make fixed-rate contributions to the pension fund. At retirement, members receive their regular pension income paid out of the fund each year until death. The rate or amount of the pension is not guaranteed and will be adjusted annually depending on how much money is in the fund and the projected cost of providing benefits under the scheme. CDC schemes offer the security of an income in retirement, which we know many people value, without individuals having to purchase an annuity on retirement. However, CDC schemes do not require the employer to make additional financial contributions to the scheme if the scheme’s financial position weakens. CDCs have been introduced under a cross-party approach, with great support from all parts of the House. The pioneers of the scheme are the Communication Workers Union and the Royal Mail, which have proposed a way forward.
The Bill allows us to extend CDC provision to master trusts or non-connected multiple employers through further secondary legislation when appropriate, and we look forward to working with such employers in the industry on how such provision should operate and be regulated. It is a brave man who cites Tony Blair in aid of his proposals, but I genuinely believe that this is a third way in terms of pensions, as an alternative to defined-benefit and defined-contribution schemes. It is unquestionably something that huge numbers of people have sought to bring forward, so that we can address things in the main.
Ms Angela Eagle (Wallasey) (Lab)
The Minister talks about the third way. Will he also take a little time in his opening remarks to recognise that pensions policy is best if it is done cross-party? We are dealing with changes to the Pensions Act 2004, which was cross-party legislation that introduced opting in. Changes and tweaks to the system are far more likely to last across different Governments and across time if we have some form of cross-party consensus. It is not only a third way. The only way we will end up with a workable pensions scheme is by building in sustainability across Governments and across time. As a former Pensions Minister who put the auto-enrolment regulations on to the statute book prior to our loss of office in 2010, I am committed to cross-party working and I hope that the Minister is, too.
The Chair
This is an ideal opportunity to say that I do not think that members of the Committee will have any difficulty in catching my eye, but interventions should be brief and to the point.
Guy Opperman
I endorse that approach, Mr Stringer, but I also take the opportunity to welcome the cross-party approach to so much of pensions. I am conscious that two former Ministers of the Department for Work and Pensions are sitting on the Back Benches and that they will correct me and intervene regularly. I accept entirely that pensions policy works on a cross-party basis, whether it be automatic enrolment—which was introduced by the Labour Government through the Turner commission, brought forward by way of statute under the coalition, and expanded under this Conservative Government—or such successes as the Pension Protection Fund, which was one of the great successes of Blair’s Labour Administration, and the variety of reforms that we have introduced. There are some cross-party matters, such as the increase in the state pension age, that some parties do not necessarily wish to continue to own and embrace after they have left office, but such is the way of life.
As I tweeted yesterday, this Bill has, effectively, 98% cross-party agreement and, although there may be legitimate debates on how we progress, we have worked on that basis. The hon. Member for Birmingham, Erdington (Jack Dromey) and I have worked together on a tremendous cross-party basis. My wife often comments that I text him way too much. The practical reality is that I have also engaged repeatedly with the hon. Member for Airdrie and Shotts, who represents the Scottish National party. We have exchanged emails, trying to work out where we disagreed and where we agreed, and there is a great deal of common ground. Both SNP spokesmen made that clear on Second Reading, though there is legitimate debate regarding the best way forward on other matters. I look forward to those debates.
Neil Gray (Airdrie and Shotts) (SNP)
I concur with the Minister’s remarks on cross-party working. He said that CDC schemes, which we support, would become a third way, but can he clarify whether he sees CDC schemes as replacing good DB schemes? Clearly, we would not see them as an alternative but as a fall-back for when schemes run into trouble in other areas.
Guy Opperman
We will debate DB schemes, which I think have a great future. We have gone to great efforts to support the future of DB schemes. This is an alternative way forward that some organisations—Royal Mail is the classic example, but there are others who are looking at this—will welcome. Under no circumstances should it be implied or in any way taken that the Government will do anything other than support DB schemes on an ongoing basis.
Seema Malhotra (Feltham and Heston) (Lab/Co-op)
It is a pleasure to serve under your chairship today, Mr Stringer. May I thank the Minister for the collegiate way in which he has undertaken debate during the progress of the Bill and, indeed, prior to that, on the issues and decisions we are making?
I thank my hon. Friend the Member for Wallasey for her comments on the importance of a continuing cross-party dialogue on the issue of pensions. I was involved in some of the Labour’s Government’s work on addressing pensions inequality for women and the Turner commission. I also pay tribute to the hon. Member for Airdrie and Shotts for his contribution to the collegiate way in which we have all been working together and for raising important issues for debate.
I speak on behalf of the Opposition, along with my hon. Friend the Member for Westminster North. We also speak on behalf of my hon. Friend the Member for Birmingham, Erdington (Jack Dromey), who is unable to be with us this week. Before I begin, I want to thank the Committee Clerks, who are ever helpful, professional and a true credit to the House.
As the Minister well knows, we have always been clear that we support the Bill, but, as hon. Members can see, we have identified some ways in which we believe it could be made better. We will discuss those areas in detail as we progress.
I turn to the general provisions in parts 1 and 2 of the Bill, on collective money purchase schemes, which is the legislative term for collective defined contribution or CDC schemes. The provisions mark a welcome innovation. I join colleagues in congratulating the CWU and the Royal Mail on their groundbreaking agreement to pursue the creation of a CDC scheme. They have forged an exciting pathway to a better pension for around 141,500 Royal Mail employees. Members will be aware that my hon. Friend the Member for Birmingham, Erdington was closely involved in that process.
CDC schemes offer many potential benefits, as the Select Committee on Work and Pensions concluded in a 2018 report:
“Through the pooling of risk between scheme members, CDC may well…provide more generous pensions on average than standard DC saving…To offer more good choices is entirely consistent with both pension freedoms and promoting retirement saving.”
There could hardly be a more important time to focus on reducing risks to people’s pension savings. As we have seen, the coronavirus crisis poses a serious and significant risk to pension funds. Sadly, many members of defined-contribution schemes have suffered pension reductions of around 8% to 10%, due to the financial market reaction to the pandemic. In many cases, that has led to individuals deferring their retirement.
In that context, it is massively encouraging that the modelling conducted by Willis Towers Watson shows that the Royal Mail CDC scheme would have provided better outcomes for savers through this crisis than traditional DC schemes. According to the modelling, even with the severe level of market shock experienced earlier this year, there would have been no effect on current pension levels for CDC schemes. Future pension increases would have been affected, but only by 0.25% a year. That is in stark contrast to the losses that I have outlined for DC pension savers and is to be welcomed in the light of the turbulent economic circumstances we face for the foreseeable future. It is welcome, too, that supporters of CDC schemes make a wide and varied coalition, including the CBI and the TUC.
In summary, Labour supports part 1 of the Bill and the move to create CDC schemes provided, of course, that they are not used as a means of downgrading good DB schemes, a point that has already been made.
Stephen Timms (East Ham) (Lab)
I am very pleased to be serving under your chairmanship, Mr Stringer. Like others, I very warmly welcome this proposed legislation for CDC pensions, and congratulate Royal Mail, the CWU and everyone involved on the success of their joint efforts to achieve the statutory framework that is needed to deliver them.
My hon. Friend the Member for Feltham and Heston referred to the previous Select Committee on Work and Pensions report on CDC schemes, published in July 2018. That report said that CDC schemes had the potential to “transform the pensions landscape”, and it also commended Royal Mail and the CWU on the “ground-breaking agreement” they reached at that time. It added:
“To offer more good choices is entirely consistent with both pension freedoms and promoting retirement saving.”
The Royal Society of Arts has long supported CDC provision, and I want to bring to bear on our discussion some of the points it has made in welcoming this proposed legislation. It points out, as my hon. Friend has just said, that CDC schemes are likely to provide a much higher income in retirement—at least 30% higher, it says—than the alternative of individual saving and then buying an annuity, and that that improvement is achieved by sharing longevity risk and targeting higher asset returns than an annuity provider. The RSA believes that the Bill provides a good framework for introducing CDC schemes, noting in particular that the regulator will act as a gatekeeper to ensure that only well-designed CDC schemes can open. It suggests that authorisation requirements for opening a CDC scheme and the process to verify continuing viability should not be unduly cumbersome, and that there should be a proper balance of prescription in scheme rules and trustee, actuarial and regulatory oversight.
Unlike DB schemes, a CDC scheme cannot go back to the employer and ask for more funding, so CDC pensions do need to vary if things prove better or worse than predicted. Those variations in other countries where CDC schemes are in place can generally be accommodated by raising pensions by more or less than inflation, but after the 2008 crisis the Dutch reduced their CDC pensions by 2% on average, and in one of the Dutch schemes the level of pensions being paid was reduced by 6%. Understandably, that caused a furore, so people in a CDC pension need to know what might have to be done depending on what happens in financial markets in the future.
Does the Minister agree that this places a premium on effective communications with members of CDC schemes? During stable times, CDC payments may seem pretty reliable, as had been the experience in the Netherlands, where they were uprated each year in the expected way. For many years, the Dutch system had experienced no problems with that, nor had the potential for reductions been clearly explained to pensioners, so when the reduction came—2% on average, 6% in one case—it caused a lot of anger, for understandable reasons.
My hon. Friend referred to the model put together by Willis Towers Watson, I think at the request of the RSA, to model how a CDC pension would respond to the drop in capital values over the first quarter of this year. As she said, that model showed that the Royal Mail scheme would have been pretty robust. The Bill will allow the Royal Mail proposal to proceed, and other private sector organisations to create similar arrangements, but it does not allow for unrelated companies to work together to create a single CDC pension plan. Since effective pensions require economies of scale, that in effect excludes smaller companies from the legislation’s provisions, and from the option of a CDC—at least for now.
The Chair
Before I call Neil Gray, let me make it clear that we are not discussing clauses 27 and 47 now. I allowed what the right hon. Member for East Ham said to pass, because he referred to earlier clauses, too.
Neil Gray (Airdrie and Shotts) (SNP)
It is a pleasure to take part in this Bill Committee with you in the Chair, Mr Stringer. Like the Labour spokesperson, I pay tribute to the Minister, and to the hon. Member for Birmingham, Erdington, for the cross-party work that brought the Bill to this point. We welcome the Bill as it has arrived from the Lords, though we have concerns about some of the amendments put forward. It is an important piece of legislation, and the part that brings about CDC schemes has arrived in a good state, which is why there are so few amendments to these clauses. The Minister has obviously done a good job on the drafting from that point of view.
I thank the Clerks for their time and patience in working with me, my hon. Friend the Member for Gordon and our staff in putting forward our amendments and priorities. We greatly appreciate all their help and support.
Following on neatly from where the Chair of the Select Committee left off, we very much support the creation of CDC schemes. We pay tribute to Royal Mail and the CWU for the work that they have done with the Government to get the Bill to this stage. As I intimated in my intervention on the Minister, and as the Chair of the Work and Pensions Committee, the right hon. Member for East Ham, also intimated, the CDC schemes cannot be seen as a panacea or the right solution for everybody. It is important—I think this will be a theme of our discussions—that people are given access to as much impartial information about their pensions as possible, giving them confidence to make informed decisions about their savings.
For the reasons that the right hon. Gentleman outlined, I wish to put on the record again that although the SNP feels that CDC schemes have major benefits—certainly for some scheme members in DC schemes—we would not wish them to be seen as a replacement for good DB schemes or for people to feel that they are necessary. I look forward to the rest of the debate, which I feel may well be rather more contentious than the issues that we are discussing at this early stage of the Committee.
Guy Opperman
I echo the support for the Clerks from this side of the Committee. We had a very helpful session yesterday, and they have been very helpful throughout. I will address the four or five points that have been raised.
On communications, I utterly endorse the point made by the Chair of the Select Committee. He will, I hope, appreciate that over the last three years, one of the major things that I have tried to drive forward in the Department is communications across the level. We are using simpler statements, by taking the 10 to 43-page pension statements that very few people read—putting them in a kitchen drawer and not necessarily taking them on board—and providing a simpler two-page statement and a written version. Our pensions dashboards create an amenable version of the online version, with great, ongoing communication.
On CDCs, I totally endorse the points that the right hon. Gentleman made: it is vital that we learn the lessons from the Netherlands, and that we ensure good communication. The possibility of fluctuations in benefits will be made clear and transparent in key member communications at points throughout their pension journey, including by providing details of fluctuation risks at the point of joining, by emphasising benefit changes in both active and deferred members’ annual benefit statements, and by making clear in retirement information packs that benefits can change during retirement.
Quite simply, that point was not made clear to members in the Dutch example. Some may not have taken it on board at the start, while others perhaps did not quite understand the situation as well as they would have had it been explained to them. We hope that we have learned that particular lesson and have very much taken that on board. I know that the two organisations that are looking at CDCs are very conscious of that and, to their great credit, have held multiple roadshows around the country, talking about this and engaging with people long before the legislation was introduced.
The reality of the situation for the CWU and Royal Mail was that their endorsement of the approach would not have been possible without member engagement from the very start. They have probably engaged more with a pension scheme than anyone has ever done before, prior even to the drafting of the legislation. They very much wanted that engagement to take place.
Ms Eagle
Clearly, the changes that the Bill would make allow for pioneering in the CDCs that Royal Mail and the CWU have introduced to be put into effect. Will the Minister say a little about how other organisations —smaller employers, perhaps—might try to get into the CDC space? Clearly, Royal Mail and the CWU are an unusual combination, both in the size of the industry and their buy-ins—very few employers are of the same size as the CWU, which represents its members, and Royal Mail, which wishes to offer this particular CDC.
Guy Opperman
I agree that large employers, such as Royal Mail, which employ nearly one out of every 200 full-time working employees in this country, will look at that and say it is a potential way forward.
Before I come to the hon. Lady’s point, I want to address DB briefly and make it clear that CDC is intended to offer a further pension-saving option for employers and their workers, should they wish to make use of it: it is for the employers and the workers to decide the type of benefit they wish to have via their occupational pension scheme. That has always been the right of the employer fundamentally, but also engaging with the employee. We specifically amended the subsisting rights provisions via clause 24 to prevent existing DB benefits in the scheme from being converted into CDC benefits. I hope that I have addressed in full the DB issue, which was also raised separately by the right hon. Member for East Ham.
Stephen Timms
I am grateful for the Minister’s reassurance on communications. Will good communications be a consideration for the regulator in determining whether a proposed CDC scheme should go ahead?
Neil Gray
To build on that, does the Minister see the engagement, which he has rightly described as one of the most extensive from an employer and an employee-representative organisation in terms of changes to pension provisions, as being the gold standard going forward, if an employer seeks to switch from a DC to a CDC scheme in the future? Is that the bar that needs to be met?
Guy Opperman
I am now straying into industrial relations and how best to manage a company to take someone’s employees with them in a complex negotiation about future pension rights. All I can say is that I have worked and sat down regularly with the leading individuals in the Communication Workers Union and the individuals who have been running Royal Mail—that has changed slightly as it has gone along. I have seen the way in which they have engaged with their workforce and had a proper conversation up and down the country in a series of roadshows. With a large unionised workforce in the modern era, that is the right way in any event. I would certainly endorse that approach. It is clear that the company and the employees have been able to work together—working with the union, working with representatives—and it seems to me that, while I would not say the phrase is “gold standard”, it is an advisable way to proceed and it is good company relations to have a proper dialogue and engagement with individual employees.
The short answer I gave to the Chair of the Select Committee was yes, but the longer answer is that there is a whole supervisory regime, which we will discuss later, under clause 27 and thereafter, which must be submitted to the regulator in order to qualify to be accepted as a CDC. The practical reality of that is that I cannot see a way in which the regulator endorses and allows a company to go down the route of a CDC without all aspects of that communication being considered. Clearly, there are secondary regulations that follow. It is not in the specifics of the Bill, as I understand it. I make the point, when I am answering questions, that I am doing this utterly blind, so it has to be from my memory because I cannot take any notes from anybody. That is the fun of a covid Committee, as the right hon. Member for East Ham will know from chairing a Select Committee.
Guy Opperman
The practical reality is that there is a supervisory regime that must be embraced as part of the application to the regulator to become a CDC. I believe that that will be comprehensively addressed and it is my intention that that should be so in the relationships that we have.
The right hon. Member for East Ham asked about clause 47 in ballpark terms and the speed and expedition. I take the point that we are not debating those matters but yes, I accept that we need to press ahead with that. I wish to do so. I have been working on the Bill for the best part of two and a half years. It has not been for lack of trying. We started it prior to the general election and had to pause and start again afterwards, so it is not for the lack of trying to progress it. Both Royal Mail and the CWU are very keen to expedite it.
Stephen Timms
Can the Minister raise our hopes that perhaps in the next 12 months or so, there might be regulations that allow multi-employer CDCs to be set up?
The Chair
Could the Minster be brief, as that moves us into a debate on clause 47, which comes later in the agenda?
Guy Opperman
The final question that I was asked was about extensions on DCs, and the answer to that is yes.
Question put and agreed to.
Clause 1 accordingly ordered to stand part of the Bill.
Clauses 2 to 6 ordered to stand part of the Bill.
Schedule 1 agreed to.
Clauses 7 to 25 ordered to stand part of the Bill.
Clause 26
List of authorised schemes
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Government amendment 6.
Clauses 27 to 44 stand part.
That schedule 2 be the Second schedule to the Bill.
Clause 45 stand part.
Amendment 25, in clause 46, page 36, line 41, at end insert—
“(e) require information to be made available to The Pensions Regulator relating to actions taken by the scheme to ensure diversity considerations are taken into account in the recruitment of the trustee board with regard to—
(i) age;
(ii) gender; and
(iii) ethnicity.”
This amendment is to require pension schemes to send information on the diversity of the trustee board to TPR.
Clauses 46 to 48 stand part.
That schedule 3 be the Third schedule to the Bill.
Clauses 49 to 51 stand part.
Guy Opperman
Clauses 26 to 51 complete the parts of the Bill that apply to Great Britain, but not to Northern Ireland. I will briefly address the two amendments. Government amendment 6 removes the provision put in primarily by Liberal Democrat peers in the House of Lords to incorporate a specific requirement of fairness. Unquestionably, as with much of the debate that we will have in Committee over the next two days, it is about the ways in which we proceed where the objective is agreed, and the objective is clearly one of fairness. The Government do not feel that clause 27(3) is appropriate, however, and we will seek to overturn it.
Requiring trustees to make such an assessment is likely to generate confusion unless further clarity is provided, and it may result in legal disputes. We have specifically and intentionally avoided referencing fairness in such a way in any of the CDC provisions, but I make clear to the Committee that we intend to use regulations to set out clear principles and processes that schemes must follow to ensure that different types of members are treated the same where justified.
Those requirements would form part of the authorisation process for the CDC schemes, overseen by the Pensions Regulator. Regulations under clause 18, for example, will require CDC schemes to ensure that there is no difference in treatment between different scheme member cohorts or age groups when calculating or adjusting benefits. That is a clearer, better and more effective approach to delivering fairness in practice, and it is supported by the Institute of Faculty of Actuaries.
I also pray in aid—as we have all cited our support for them—the note submitted by the Communication Workers Union and Royal Mail in written evidence to the Bill. They jointly addressed this specific point, saying:
“We welcome discussions on how to ensure the fairness of future CDC schemes. Royal Mail’s scheme is designed to address the possibility of intergenerational unfairness by not using capital buffers and explicitly preventing the trustees from favouring one group over another. The DWP acknowledged this in its 2019 consultation response. When it comes to Lord Sharkey’s amendment, we agree with Government that we should give careful consideration to how reporting on fairness might work in practice and share their concerns with the additional reporting requirements the amendment introduces. We therefore support the Government amendment which removes Lord Sharkey’s amendment from the Bill.”
I suggest that that statement is telling, and I invite the Committee to support the Government amendment.
Neil Gray
Before we decide what to do on this amendment, I am keen to hear from the Minister. He suggested that if the clause was allowed to stay as it is— as it was amended by the Lords—it could garner legal challenge. Could he clarify where he sees that legal challenge coming from and why he thinks that is a concern?
Guy Opperman
If clause 27(3) provides specifically for fairness, it may be open to interpretation and mean different things to different people. The legal advice we have received is that it would be inappropriate to include that in the Bill, and that it is far better to address the matter in detailed regulation rather than through a single word in the confines of the Bill.
Ms Eagle
The Minister is trying to achieve fairness across cohorts, and different people will have different interpretations of that. Such schemes are reliant on the general performance of the stock market, investment and what is going on in the world economy. Does he agree that fairness is subject to all those swings and roundabouts?
Will the Minister give the Committee some idea of what he would regard as fair, given that annuities were grossly unfair for those who happened to retire at a time when the market was taking a dip? What would he regard as “fairness” in the requirement that he will put in regulations?
Guy Opperman
Having been a 20-year lawyer, whose last client was a very famous Mr Ed Balls—I had to represent him when he was Secretary of State for Children, Schools and Families, five weeks before the 2010 general election—I am loth to start defining fairness, as a Government Minister, specifically because of the problem that has been identified.
I can say that we are attempting to ensure that members are treated fairly, and that has been part of the central thrust of our work on CDCs from the outset. We have learned from the problems experienced by the Dutch model, which allows schemes to make different benefit adjustments to different groups of members. That transferred contributions from savers to pensioners. The UK system will not work in that way. We intend that regulations under clause 18 will require CDC schemes rules to contain provisions so that there is no difference in treatment between different cohorts or age groups of scheme members when calculating and adjusting benefits. If the scheme design does not do that, it will not be authorised. That goes to the whole proposal under the supervisory regime and the submission.
Further—we will come to the word “bespoke” later in our consideration of the Bill—this is an opportunity for individual schemes. The examples have been given of a small care home scheme coming together, and of the vast might of Royal Mail. Clearly, those are very different organisations. I hope that the regulator will look at them in slightly different ways with an overarching code of principles that allows it to permit such a scheme to go ahead. I will resist the hon. Lady’s kind invitation to provide the exact definition that, we submit, would be one of the problems with clause 27(3).
Ms Eagle
We are here to tease out what the Government mean in the Bill, ahead of the unamendable regulations that have not yet been written. I hope that the Minister will indulge our temerity in using the Bill Committee to ask some relevant questions.
What the Minister said earlier about the Dutch schemes is correct. By reducing the available pensions, some choices were made between existing pensioners and those who were saving. His tone suggested that he judged that to be unfair. He states that he wants to achieve fairness between cohorts in CDCs, but how will that be done in reality?
Guy Opperman
I am invited to give a view on the future consultations on the points that the hon. Lady raises. The term “fairness” can be open to interpretation and can mean different things to different people. We envisage that regulations will clearly set out the principles and processes that schemes should follow to ensure that all types of members in CDC schemes are treated the same, where appropriate. Setting the requirement in regulations will give us the opportunity to consult on the approach that is to be taken. I respectfully suggest that rather than defining that in the Bill, the appropriate way forward is to consult, and to use all the opportunities that consultation entails for submissions on what that should look like, so that detailed regulations can then be taken forward.
Guy Opperman
I will give way once more, but I am not sure I can improve on the answer I have already given.
Guy Opperman
No; I can merely repeat the answer I have just given, which is that the regulations under clause 18 will require schemes to contain provisions so that there is no difference in treatment between different cohorts or age groups of scheme members when calculating and adjusting benefits. If the scheme design does not do that, it will not be authorised.
I will try to expand on that and give a better answer. There is a two-phase process. In the first phase, a company must come forward to the regulator and seek permission to go down the CDC route; that goes back to the way in which the company and the employees work. A separate set of regulations will then be the framework on which that is judged. I suggest that this is specific to individual companies, because fairness will be different for different organisations and they will be treated in different ways. There is a supervisory regime that must be gone through, and there will be a consultation on regulations regarding how it will be administered. For the present purposes, that is the best I can give to the hon. Lady.
I will now address amendment 25, which is about the actions of the regulator in relation to diversity considerations, taking into account the recruitment of the trustee board. This issue was raised in the other place as a point of debate. The Pensions Regulator is part of an ongoing discussion, and in February this year it launched an assessment of the appropriate way forward, looking at trustee board diversity across all schemes. It plans to set up an industry working group to bring together the wealth of available material and experience to help pension schemes to improve the diversity of scheme boards. I suggest it would be premature to pre-empt the outcome of the regulator’s work in this area. It has indicated to me, unofficially, that it will respond by Christmas. It is certainly the case that this Government has brought forward, on a cross-party supported basis, environmental, social and governance regulations in respect of investment. We would certainly hope that organisations that treat their investments with due account to social and governance matters would also take an appropriate way forward in that respect.
Seema Malhotra
It is a pleasure to respond to the Minister’s comments. I thank him for laying out the Government’s thinking on the clauses and amendments in this group. I will speak to Government amendment 6 and briefly to amendment 25, tabled by my right hon. Friend the Member for East Ham.
I thank the Minister again for his speech and the arguments that he has laid out for seeking to remove the amendment tabled by the noble Lord Sharkey and cross-party colleagues in the other place, which was agreed by peers in June. The Minister commented that, in his view, some of the concerns could be addressed by the implementation of clause 18. I want to come back to why I am concerned that may not go far enough; perhaps this will be an issue of ongoing debate as the Bill proceeds, and in regulations.
The amendment included by those in the other place was very considered. It spoke about
“the requirement that trustees make an assessment of the extent to which the scheme is operating in a manner fair to all members”.
I believe that is the additional wording in the Bill. It is a very considered amendment, which could only be useful in keeping on the agenda of trustees the important analysis that should take place in relation to decision-making—to be sure about the best possible input and considerations in relation to the performance of the scheme for all its members.
I alluded in my opening remarks to the considerable insecurity that we face as a nation, exacerbated by the impact of covid-19 and its disproportionate impact on different groups and different generations, in terms of the economy and levels of employment and therefore saving into pension schemes. People’s personal finances are likely to be under great strain in the coming years. Not only is there that insecurity, but it is increasingly difficult to encourage young people to save for retirement, with all the other cost pressures in life—paying off debts, for example, or the fact that, at the moment, the average age at which they will purchase their own home is around 34. There are considerable pressures on the personal finances of the next generations, as they plan ahead for their lives.
Thinking about our institutions and how we continue to consider and embed intergenerational fairness should be on Parliament’s radar in all our work. In that context, we see unprecedented public policy challenges in ensuring fairness between different groups in society—from those in hard-hit industries, such as aviation and hospitality, to those affected by the way education is being delivered in the times in which we are living, which could continue beyond the next few months into the next few years, with all that uncertainty. We have also seen that black, Asian and minority ethnic communities have been hit harder by the health and economic impacts of this terrible virus. We can look at income today, but we are really talking about income tomorrow, and the impact on tomorrow of savings today.
It is incumbent on the Government to think about fairness between generations, and how we can stop young people bearing the brunt of the uncertainty and hardship caused by the economic havoc that we are experiencing right now. The impact on them could go unchecked in the medium and longer term. Concern about intergenerational fairness was raised by many respondents to the Government’s consultation on the Bill’s provisions.
Clause 27, as amended in the other place, sought to deal with some of those concerns. It effectively acknowledges that there may be a divergence in interests between different cohorts or sets of members in CDC schemes. Importantly, it does not compel any particular kind of action, but requires trustees to consider fairness and assess the extent to which the scheme is fair to all members. To Opposition Members, that is a very sensible suggestion, and we struggle to understand why it should be controversial for the Government.
I appreciate that the Minister outlined some comments from the CWU and others about the interpretation. He also mentioned treating people in the same way and his interpretation of the current wording of clause 18, which I was just reviewing. If there are different considerations in relation to levels of savings, other ways of joining a scheme or different circumstances, it may be necessary to look differently at different cohorts. Treating people fairly may not always mean thinking of them as the same. When we are thinking about fairness, we may need to be a bit more nuanced in our consideration of different needs and circumstances, and the potential impact of a decision on all cohorts.
Perhaps a different way of interpreting the amendment that was made in the other place would be to see it as enhancing the intention behind clause 18. I repeat that the amendment did not compel any particular kind of action, but made it more explicit what trustees should consider. Baroness Stedman-Scott, the Parliamentary Under-Secretary, said in the other place:
“I welcome the sentiment behind the proposed amendment; it is something to which we want to give further consideration. We need to give careful thought to how such reporting might work in practice and would want to work with trustees, administrators and the regulator to ensure that any such requirement is proportionate, appropriate and clear. We would also want to consult on any such approach to make sure that it is effective. I reassure all noble Lords that we will give this matter careful consideration. Should we need to bring forward such a requirement in regulations, we already have sufficient powers in existing legislation to require schemes to report on fairness in CDC schemes if warranted.”—[Official Report, House of Lords, 30 June 2020; Vol. 804, c. 605.]
I hope that the Minister will continue to keep this issue under review, because we think it is very important for the sustainability of fairness and confidence in schemes. The very considered wording that was proposed and passed in the other place could help the Government in securing the intended outcomes that he described as being behind clause 18. Perhaps he can provide more detail on his plans to incentivise trustees to assess and report on the extent to which CDC schemes are operating in a manner that is fair to all.
My right hon. Friend the Member for East Ham may make a few comments on amendment 25, which is intended to require pension schemes to send information on the diversity of the trustee board to the pensions regulator. We believe in the value of this amendment, which is also supported by other colleagues—the SNP in particular. It is important to ensure that there is a diversity of voices in decision making. The debate about diversity on public and private boards comes in cycles. Diversity on public boards was considered under the last Labour Government, with quotas for diversity in recruitment. This is not a party political matter; a lot of research shows that diversity in decision making leads to better and safer sustained outcomes.
When looking at public funds, for example, the diversity of needs should be understood at the decision-making table. We do not need to rehearse the arguments for ensuring that different voices are represented at decision-making tables, whether that relates to gender, those with disabilities or those from particular minority communities.
The same is true of boards in the private sector. Research undertaken by business schools shows that diversity on decision-making boards has often led to considerably better returns on investment, and indeed shareholder returns. There is no sustained, credible argument that not having diversity on boards leads to better business outcomes.
I do not understand why this would not be an important consideration. Amendment 25 simply says that pension schemes should send information on the diversity of the trustee board to the Pensions Regulator. I am sure my right hon. Friend the Member for East Ham will share more information about how trustee boards are less diverse than other boards. That cannot be right for boards that have an increasingly important role in decisions about funds and investments, and about inclusivity and fairness.
This is not only an important consideration in terms of social justice; it is about the performance of the schemes. It is about recognising the importance of having diverse voices and voices that are representative of those within the schemes and those who may benefit from the schemes in the future. This is a matter of obvious importance that should not raise concerns, and it should be included in the Bill.
Stephen Timms
I apologise for raising clause 47 in the previous debate; I probably should have waited until now. I am glad we had that debate and I welcome the Minister’s assurance that regulations to enable multi-employer CDCs will come forward within the next year.
I will confine myself in this debate to clause 46 and amendment 25, which stands in my name on the amendment paper. I am grateful to the hon. Members for Airdrie and Shotts and for Gordon for adding their names to it, and to my hon. Friend the Member for Feltham and Heston for the important points she has just made in favour of it. I thank ShareAction for its work on this topic and for the briefing it has provided.
We are all familiar, as my hon. Friend has just reminded us, with the criticism that there is insufficient diversity among directors of FTSE 100 companies. There has been progress, but the Government targets are going to be missed and there is still a long way to go among major company boards. Some 68% of board members are male and only 7.4% are from black, Asian or minority ethnic backgrounds. That proportion falls to 3.3% in the most senior board positions: chair, chief executive and finance director. Only just over half of boards have any ethnic minority members at all.
Ms Karen Buck (Westminster North) (Lab)
I ask my right hon. Friend to confirm my understanding, which is that when we talk about diversity, we are not simply talking about it being a good thing to have a range of different experiences and backgrounds; all the evidence from across the commercial sector is that diversity increases performance because of the range of perspectives that it brings to bear.
Stephen Timms
My hon. Friend is absolutely right. She and I took part in a debate on a similar issue around 10 years ago, on the Welfare Reform Bill. She is right on this point, and that is an argument that I want to come to in a moment.
I hope the approach that I am advocating will be applied to other pension trustee boards in the UK in due course, because according to a report on diversity published in March by the Pensions and Lifetime Savings Association, which we used to call the National Association of Pension Funds, 83% of pension scheme trustees are male; 50% of chairs of trustee boards are over 60; a third of all trustees are over 60, while only 2.5% are under 30; 25% of pension schemes have trustee boards that are entirely male; and only 5% of schemes have a majority of female trustees. This is a particularly stark picture if we look at the make-up of pension scheme trustee boards at the moment.
As the Pensions and Lifetime Savings Association comments:
“It seems clear that occupational pension scheme trustee boards have generally not implemented robust diversity policies as effectively as FTSE 100 boards”.
Stephen Timms
My hon. Friend makes an important and interesting point. If we are to be confident that these new scheme trustees will make decisions that are fair to both the working members of the schemes and to pensioners, it is important that the voices of working age members should be taken fully into account in the trustee board’s decisions. She makes a good argument about why diversity, specifically in respect of age, is important in this context.
It is not as though there is no evidence that diverse trustee boards do a better job. My hon. Friend the Member for Westminster North has just reminded the Committee that there is a substantial, growing body of evidence that diverse company boards make more effective decisions than homogeneous boards. We have talked about age, but we should not forget that the gender pensions gap, which is nearly 40%, is almost twice the size of the gender pay gap. The issues here are stark.
The Pensions Regulator commented on diversity in trustee boards for the first time last year:
“Our view is that pension boards benefit from having access to a range of diverse skills, points of view and expertise as it helps to mitigate against the risk of significant knowledge gaps or the board becoming over-reliant on a particular trustee or adviser. It also supports robust discussion and effective decision making.”
Amendment 25 would require those who put boards together to report to the Pensions Regulator on steps to ensure diversity considerations are taken into account in the recruitment of the trustee board, with regard to age, gender and ethnicity. I know that the Pensions Regulator has set up an industry working group to consider this issue, as part of the consultation that the Minister referred to, and to raise the profile of it. However, to be effective, that group needs data, and this amendment would help to provide it. I think the result of the amendment would be not only greater fairness but better trustee decisions. I commend the amendment to the Committee.
Richard Thomson (Gordon) (SNP)
It is a pleasure to serve under your chairmanship, Mr Stringer.
I will confine my brief remarks to amendments 6 and 25. I listened carefully and with interest to what the Minister said about the rationale for trying to withdraw clause 27 from the Bill. I agree that with him that in trying to come up with a legal definition of fairness, it will always be nebulous. There are clear difficulties around that, which is why I do not think the initial intention behind the clause was to provide absolute legal clarity.
I was reassured to a large extent by what the Minister said about the steps that would be taken to set up CDC schemes—by definition, schemes that are obviously unfair will not pass approval. The difficulty I have with that argument is that all that is being asked in clause 27 is that there is a requirement for trustees to make an assessment and nothing further. It is useful to have a process of self-challenge and continuous improvement, looking at aspects of the schemes that are directly under their control and that they can directly influence and alter. It is good to always have that consideration of whether the scheme is operating as fairly as possible for all present and future members and those taking benefits from it. My question to the Minister is, very simply, where is the harm? Even after taking on board all that he says, I still do not see the harm that lies in the Bill as it stands.
Moving on to amendment 25, I hear exactly what the Minister says about the requirement that already exists on trustees to be fit and proper people. My observation is that there are many potentially very fit and proper people who do not currently find themselves on boards, advisory committees or any of the governance structures around pensions, and who could nevertheless make a very good contribution to the running of those schemes.
Speaking from personal experience, prior to being elected as the Member for Gordon, I was a councillor in Aberdeenshire. Through that role, I was one of the Convention of Scottish Local Authorities nominees to the Scottish local government pension scheme advisory board, whose representation was equally split between employers’ representatives, of which I was one, and trade union representatives. The trade union representatives were all extraordinarily capable and represented quite accurately the diversity of the scheme members whose interests they were there to represent. In all honesty, the employers’ representatives perhaps did not represent that quite so well. I played my own part in skewing that representation.
The requirement to report back on the membership characteristics is a very useful tool in trying to understand whether all that is reasonable is being done to ensure that trustees and those in positions of governance on pension schemes are as representative as possible not just of the membership, but of the interests of the membership, and that we are giving as many people as possible the opportunity to fully skill up, participate and play the role that they can do. As things stand, we are missing out on the talents of many fit and proper people. Again, I do not see the difficulty in simply recording and reporting that information as part of the cycle of continuous improvement and self-reflection on whether we are achieving all that we seek to do.
Ms Eagle
I want to support, or enhance, the comments that have just been made by Opposition Members about the two issues that we are discussing in this group of amendments: amendment 25 on diversity, which was tabled my right hon. Friend the Member for East Ham, and the issue of intergenerational fairness and how it can be properly guaranteed in CDC schemes.
I hope the Minister will reaffirm on the record, in no uncertain terms, his agreement with the principles behind the amendment on intergenerational fairness that was made in the other place, even if he has issues with how one defines fairness in law. I have to say that, in social justice terms, we would have made very little progress in the whole of our society if we quibbled about the meaning of fairness in law. Just because it is difficult to define, it does not mean that we should not assert it or seek to bring it about.
The Minister’s response is a rather a technical answer to the principle that has been asserted by the change that their lordships made to this part of the Bill. His responses to my questions earlier did not fill me with confidence that he knew how the principle would be brought about if the amendment that their lordships put in the Bill was taken out. He simply seemed to say that it was a good thing to assert, and that it would be brought about by regulations that have not yet been written. He could not really give us any thoughts about how it might be guaranteed in the future, although he is asking us to take out an amendment that has actually been made to the Bill. He is asking us to exchange something that is really quite good and not damaging for something that is very nebulous and does not exist yet—it might do at some point in the future—in regulations that will be unamendable. We will have to take them or leave them when they come to the House, so I am slightly worried about that.
As is his wont, my right hon. Friend the Member for East Ham has zeroed in on the issue of diversity on boards and given us some shocking figures about what is happening on pension trustee boards. That ought to raise many alarm bells about potential group-think and about how the decisions made by trustee boards are not representing the interests of the many people who have pension savings in a way that we would find modern or appropriate.
Amendment 25 is a modest amendment. My right hon. Friend is asking only for the publication of information. He is not doing what I might do, which would be much more radical and would probably include all sorts of things, such as quotas and positive action, in order to make a real difference quite quickly. It is a modest amendment. If the Minister cannot accept that it is and does not have the good grace to support it, I will be rather disappointed.
Guy Opperman
I will try to address some of the issues raised. In respect of the approach of the regulator, the regulations for CDC schemes will require schemes to provide information to enable members to understand the unique risk-sharing features of CDC schemes. That will be underpinned by clause 15, which we have already debated. It requires the regulator to be satisfied that a CDC scheme has adequate systems and processes for communicating with members and others. Regulations will also require that scheme information is made available more widely to other interested parties, including employers, on a publicly available website. The practical reality is that we have learned from the Dutch model, which some argue had intergenerational fairness issues, and are producing a considerably fairer approach.
The Chair
Before I ask the Committee to reach a decision on clause 46, does the right hon. Member for East Ham wish to press amendment 25 to a vote?
Stephen Timms
I am very grateful for the support that has been expressed and for the points that the Minister has made. I take his point that there is a consultation under way. I very much hope that the regulator will decide to require information on diversity from the schemes that are set up, and that it will continue to do so as the trustee board develops. However, at this stage I will not press the amendment to a vote.
Clause 46 ordered to stand part of the Bill.
Clauses 47 and 48 ordered to stand part of the Bill.
Schedule 3 agreed to.
Clauses 49 to 51 ordered to stand part of the Bill
Clause 52
Collective money purchase benefits and schemes
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Clauses 53 to 57 stand part.
That schedule 4 be the Fourth schedule to the Bill.
Clauses 58 to 95 stand part.
That schedule 5 be the Fifth schedule to the Bill.
Clauses 96 to 99 stand part.
That schedule 6 be the Sixth schedule to the Bill.
Clauses 100 to 102 stand part.
Guy Opperman
With respect, Mr Stringer, I propose to address all these matters together. Clauses 52 to 102 replicate the measures outlined in clauses 1 to 51 and apply them to Northern Ireland, which has a different system. This required us to replicate the measures in their entirety. In discussing clauses 1 to 51, I outlined why CDCs are the appropriate measure, and I ask the Committee to imagine that I made the same speech, at great length, in respect of clauses 52 to 102.
Seema Malhotra
I will not make any further comments. I agree with the Minister.
Question put and agreed to.
Clause 52 accordingly ordered to stand part of the Bill.
The Chair
I propose to put as a single question that clauses 53 to 57 stand part, that schedule 4 be the Fourth schedule to the Bill, that clauses 58 to 95 stand part, that schedule 5 be the Fifth schedule to the Bill, that clauses 96 to 99 stand part, that schedule 6 be the Sixth schedule to the Bill, and that clauses 100 to 102 stand part.
Stephen Timms
Would it be in order, Mr Stringer, for me to ask about clause 98 in this part of our discussion? It is the counterpart to an earlier clause and will introduce regulations to enable CDC schemes in Northern Ireland to be extended to include multi-employer schemes. Can the Minister reassure us that in Northern Ireland, as in the UK, the plan will be to introduce regulations to enable that within the coming year?
Guy Opperman
It is very hard to turn down such a great man as the right hon. Member for East Ham, and I fully understand why you have given him some latitude, Mr Stringer. The answer is that I cannot be precise. Clearly, it is a matter for the Northern Ireland Government and the various civil servants who will take the legislation forward, but we expect them to take a similar approach. If I am wrong, I will write to the right hon. Gentleman to correct the record, but that is my expectation.
Clauses 53 to 57 ordered to stand part of the Bill.
Schedule 4 agreed to.
Clauses 58 to 95 ordered to stand part of the Bill.
Schedule 5 agreed to.
Clauses 96 to 99 ordered to stand part of the Bill.
Schedule 6 agreed to.
Clauses 100 to 102 ordered to stand part of the Bill.
Clause 103
Grounds for issuing a section 38 contribution notice
Question proposed, That the clause stand part of the Bill.
Guy Opperman
I am grateful to you, Mr Stringer, and to colleagues for the progress we have made in respect of collective defined contributions. We now turn to part three of the Bill, on regulatory powers. The powers are, in broad terms, agreed, as I understand it, subject to debate on clause 107. It is entirely right that we have set those out in defined benefit and regulator consultations over many years and in the preparations for White Papers and Green Papers, and that enhanced powers will be given to the regulator on an ongoing basis. I recommend the regulations to the Committee.
Seema Malhotra
We will not be making any further comments. We support the Minister on these clauses.
Stephen Timms
This part of the Bill gives new powers to the regulator, so it is worth recapping the problems that gave rise to the need for them. Most of the thinking here came from the joint work of the former Work and Pensions Committee—I pay tribute to my predecessor as its Chair, Frank Field—and the Select Committee on Business, Innovation and Skills, after the awful problems at two firms: BHS and Carillion.
BHS had two defined-benefit pension schemes. They were in a combined surplus of £43 million when Sir Philip Green bought the company in 2000. The surplus gradually declined and the schemes fell into a combined deficit in 2006, following the period when large dividends had been paid to members of the Green family. By the time of the sale of BHS in 2015, the value of the schemes’ assets was almost £350 million short of their liabilities. As the schemes fell into deficit, the BHS board repeatedly resisted requests from the scheme trustees for increased contributions.
In 2012-13, there were negotiations over a deficit recovery plan and they concluded with a 23-year recovery plan. At the time, eight years was the median rate for a recovery plan and 95% of comparable schemes had a recovery plan of less than 17 years. The plan we got in the case of BHS was for 23 years. The payments under that plan barely covered the interest on the scheme’s deficit and so the deficit continued to grow even while that plan was being followed.
The two Select Committees concluded that the Pensions Regulator had acted too slowly. Having received the 23-year plan in September 2013, it did not send the first information request to the trustees until January 2014. The Committee added, however, that the onus for resolving problems was on Sir Philip Green.
In the case of Carillion, it left a pension liability of around £2.6 billion. The 27,000 members of Carillion’s defined-benefit pension schemes will now be paid reduced pensions by the Pension Protection Fund—one of the biggest calls ever on that fund. I agree with what the Minister said earlier about the success of the fund, which was introduced by the previous Labour Government.
Ms Eagle
I support my right hon. Friend the Member for East Ham, who has crystallised some of the dangers in private sector schemes. I do not want to add to the excoriating verdict of his predecessor Committee in the two cases mentioned, except to say that this does have an effect on the willingness of individuals to save into pension schemes. Although people might not know the detail of this behaviour and the losses it has caused to retirement income, some out there in the ether will use the lack of effective protection that has resulted from the failure both of regulation and in pursuing effectively those who engage in this kind of larceny. Individuals who may otherwise be pension savers choose not to save into a pension and regard it as a bit of a mug’s game because their money is not properly protected. They know that there are scams and that a range of people out there—from the great killer sharks who loot pension schemes, to those who do dodgy things at the margins—are causing people who were saving into pension schemes, in good faith, to lose benefits in retirement.
How will the Minister drive the Pensions Regulator to be far more proactive and effective? Later, we will come to the Bill’s measures on scamming and the even worse end of bad behaviour, but that is for a future part of the Bill. I hope the Minister can reassure us that he will insist that the regulator transforms its passive attitude into a much more aggressive one that not only actively deters but drives this appalling behaviour out of the whole of the pension scene.
Guy Opperman
I utterly endorse the speech of the right hon. Member for East Ham. I did not disagree with a single word of it. I could wax lyrical about why the Government, with the support of the Work and Pensions Committee and the special joint inquiry it set up with the Business, Innovation and Skills Committee to address BHS, have introduced this overdue legislation, which is linked to a much-enhanced regulator with a strong direction from Select Committees and the Government that there should be a much more robust approach. The new chief executive of the Pensions Regulator was appointed by the Secretary of State and me with a specific exhortation that they take a different approach.
The actions of Philip Green at BHS and the Carillion case, with which the right hon. Gentleman is extraordinarily familiar, scarred all Members of Parliament. No matter what our political party, we have all seen the impact that those cases have had on individual members of our communities. I take the point that the hon. Member for Wallasey made: these scandals involving organisations and companies that have not been sufficiently regulated, and for which the regulator has not, to be blunt, had the power, to intervene and take a different approach, have affected people’s perceptions of the sanctity and safety of their pension.
We have gone to great effort to ensure, on a cross-party basis and taking on board the various Select Committee recommendations, that we give the regulator enhanced powers. We will come to the significant reality of the criminal sanctions that clause 107 outlines. Without a shadow of a doubt, we are in the business of ensuring that callous crooks who put a pension scheme at risk are not able to function as they did in the past. I most definitely endorse every comment that was made.
Question put and agreed to.
Clause 103 accordingly ordered to stand part of the Bill.
Clauses 104 to 106 ordered to stand part of the Bill.
Clause 107
Sanctions for avoidance of employer debt etc
Neil Gray
I beg to move amendment 19, in clause 107, page 90, leave out lines 5 and 6 and insert—
“(c) The person neglected to act in accordance with their duties and responsibilities.”
This amendment and amendment 20 are intended to avoid the risk that routine behaviour by parties involved with pension schemes and others would be judged criminal, and thereby to protect professional advisers from criminal liability for carrying out their role.
The Chair
With this it will be convenient to discuss the following:
Amendment 20, in clause 107, page 91, leave out lines 3 and 4 and insert—
“(c) The person neglected to act in accordance with their duties and responsibilities.”
This amendment and amendment 19 are intended to avoid the risk that routine behaviour by parties involved with pension schemes and others would be judged criminal, and thereby to protect professional advisers from criminal liability for carrying out their role.
Clause stand part.
Clauses 108 to 116 stand part.
That schedule 7 be the Seventh schedule to the Bill.
Clause 117 stand part.
That schedule 8 be the Eighth schedule to the Bill.
Neil Gray
Amendments 19 and 20 are in my name and that of my hon. Friend the Member for Gordon, and for the reasons that other members of the Committee have outlined we support part 3 of the Bill. We are also incredibly supportive of the principles of clause 107, which introduces new criminal offences aimed at deterring occupational pension schemes, sponsoring employers or scheme trustees from engaging in wrongdoing in relation to their pension scheme. We would not table the amendments if we were not concerned, and if serious concerns had not been raised about the clause.
We think the clause will act as a strong deterrent against those who would wilfully run a scheme down, as we have seen happen in the not too distant past, and as was outlined earlier by the Chair of the Work and Pensions Committee, the right hon. Member for East Ham. However, the new criminal powers are wide-ranging and have the potential—I am sure it is unintentional—to criminalise routine behaviour by parties involved with pension schemes and those who are not directly involved at all, such as lenders and those doing business with a pension scheme’s employers. That could have damaging knock-on effects for the viability of the pension scheme, if those who dealt with it, or employers, deemed that that legal risk was intolerable.
We have been working with the Institute and Faculty of Actuaries, which the Minister previously quoted in his favour in relation to part 3 of the Bill, as it has serious misgivings about the impact that the clause could have. It suggests that a wide range of conduct has the potential to have a detrimental effect on the likelihood of scheme benefits being met, in which case schemes might fall foul of the proposed current wording of clause 107.
The Institute and Faculty of Actuaries says, for example, that such conduct might include a Government entity terminating an outsourcing contract, where the contractor has a pension scheme; an employer giving employees a pay increase; a Government increasing corporation tax or business rates; a landlord increasing rents, where the tenant has a pension scheme; trustees or a scheme actuary granting an augmentation or increase to members without additional employer contributions; or a bank refusing to lend to an employer. That view is also supported by the Pensions and Lifetime Savings Association.
Our amendments would protect professional advisers from criminal liability for carrying out their role. That could be achieved in the Bill if the duties and responsibilities of an individual were considered when determining whether a person intended to commit an offence. The amendments would clarify matters in adding the question of negligence, which we feel is the intention behind the clause, but which is not explicit. They would also make it clear that a person’s role and responsibility should be considered.
The intended effect is not to change the policy aims of the legislation—far from it—but to clarify the extent of the powers and, in doing so, protect professional advisers from criminal liability for legitimately carrying out their roles. We therefore hope that the Government will accept the amendments.
Stephen Timms
I have listened with great interest to the case that the hon. Member for Airdrie and Shotts has been making. I have also been contacted by a reputable industry body, the Pensions Management Institute, as well as the Institute and Faculty of Actuaries, which has been mentioned. They expressed alarm about the consequences of clause 107, which the hon. Gentleman has raised concerns about.
I have seen, for example, letters to the Minister from the Joint Industry Forum, which is a genuinely cross-industry group. One is dated 11 December last year, and the other is dated 9 September this year. They suggest possible changes and discussions with officials about how the difficulties could be overcome. I hope the Minister will tell us what discussions there have been since those letters, to try to resolve the problem, and what his conclusion was.
Guy Opperman
I would like to provide some reassurance on that particular point. I am acutely aware of it and have engaged at length with many different organisations. It is certainly not the intention to frustrate legitimate business activities where they are conducted in good faith. It is important, however, that where the elements of offences are met, no matter who has committed it, the Pensions Regulator should be able to respond appropriately. Any restriction of the persons would create a loophole for these people to potentially act in such a way.
The new criminal offences proposed in the Bill make it clear that an offence is committed only if the person did not have a reasonable excuse for doing the act or engaging in the course of conduct. Crucially, what is reasonable will depend, obviously, on the particular circumstances of the act, but the burden will be on the regulator to prove that the excuse was not reasonable. The regulator will be publishing specific guidance on these powers after consulting industry, but ultimately it is for the courts to decide that an offence has taken place, and, if so, the appropriate punishment.
The amendments also seek to remove the reasonable excuse defence—as set out in sections 58A and 58B—and replace it with a narrower concept of negligence. The existing defence of reasonable excuse is wider in definition than that proposed by the amendments. Therefore, the current defence provides more protection and a greater safeguard to potential targets. What is considered negligent is, in fact, specific and relies on case law—the law of tort, as I am sure the hon. Member for Airdrie and Shotts is aware—therefore introducing the concept of negligence would not help individuals to determine if what they were doing would be deemed negligent.
Stephen Timms
I have a real worry about this. Is the Minster saying that, for example, if a trade union successfully called for a higher pay rise than was initially offered, the company subsequently failed and there was a problem with the pension scheme, that the trade union would have to say that it had a reasonable excuse for pressing its pay demand? That seems a strange arrangement for us to be entering into.
Guy Opperman
It is for the regulator to show that that was not a reasonable approach. The burden is on the regulator to bring the offence and to prove it. I will choose my words carefully because this is subject to further regulation and consultation by the regulator, but it is certainly not the case that this is to catch everybody in how they conduct their normal business. However, there has to be a capability to identify and then prosecute and bring action against all persons, if they are found to have committed an offence without reasonable excuse. The ask is to narrow down the scope of the offence. We have just had a debate about circumstances where people have potentially committed things in the past.
Neil Gray
I understand the Minister’s riposte, but there are two points here. First, the amendment covers reasonable excuse by allowing consideration to be given to the person’s role in the trust. For instance, in a trade union, to take the argument of the Chair of the Select Committee, consideration would be given to the person’s role.
Secondly, the Minister is asking us to wait until the Pensions Regulator has consulted and says how it thinks it should deal with the matter, but by that point it will be too late to ensure that we have got this measure right. I hope that the Minister looks again at this point and provides better comfort to the likes of the Institute and Faculty of Actuaries, which has a very broad base of professional expertise, and which suggested the amendments. I hope for a more favourable response from the Minister.
Guy Opperman
I am happy to write to the hon. Gentleman and set out the position in more detail. I come back to the simple point. If a trade union has a reasonable excuse for asking for a pay rise for its members, given their circumstances in an organisation, there is no reason why it should have any concern whatsoever. The starting point is whether someone has a reasonable excuse to progress a particular thing. If it is clearly part of normal business activities, I would not anticipate a problem.
Stephen Timms
I wonder whether the Minister would agree that it does seem very odd that a trade union making a legitimate pay claim might have to worry about whether it is committing a criminal offence because of some future damage to the pension scheme. I am very surprised that the Minister is putting in place measures that would have that effect.
Guy Opperman
This is in the context of the offence of avoidance of employer debt. We start with the very eloquent exposition that the hon. Member for Airdrie and Shotts gave on where employer debt arises and contributions are not made to pension schemes. One has to then look at the individuals and their approach. I do not believe that including a reasonable excuse defence will in any way hold back normal, traditional business activity. I can give that reassurance: traditional business activity would clearly include union work. This is clearly an issue that the regulator is very conscious of. On the one hand, we want a more robust approach. On the other hand, we want to ensure that normal business activity goes ahead. I believe that this is the appropriate way forward.
Neil Gray
I cannot say that I am wholly satisfied with the Minister’s explanation. The two amendments would narrow and focus the intention of the clause and ensure that protection is given to people who are legitimately carrying out their duties to the pension scheme and who have related business or commercial interests, and, indeed, Government bodies that interact with employers or a scheme. I therefore intend to divide the Committee.
Question put, That the amendment be made.
Pension Schemes Bill [ Lords ] (Second sitting)
Tuesday 3rd November 2020
(4 years ago)
Public Bill CommitteesRead Full debate Pension Schemes Act 2021 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 3 November 2020 - (3 Nov 2020)
The Committee divided: - Ayes: 9 / Noes: 7 - Question accordingly agreed to.
The Committee divided: - Ayes: 2 / Noes: 9 - Question accordingly negatived.
The Committee divided: - Ayes: 7 / Noes: 9 - Question accordingly negatived.
The Committee divided: - Ayes: 7 / Noes: 9 - Question accordingly negatived.
The Committee divided: - Ayes: 7 / Noes: 9 - Question accordingly negatived.
The Committee divided: - Ayes: 7 / Noes: 9 - Question accordingly negatived.
The Committee divided: - Ayes: 9 / Noes: 7 - Question accordingly agreed to.
The Chair
Before we resume our scrutiny, I remind Members to maintain social distancing. Hansard colleagues would be grateful if Members could email their speaking notes to hansardnotes@parliament.uk.
I understand that there was some uncertainty about the effect of the grouping of amendments with clauses 107 to 117 stand part. I have therefore decided to exercise the Chair’s right to amend groupings, and I am grateful to the Minister for his flexibility. Once we have disposed of amendment 20, I will allow a debate on clause 107 stand part, with which it will be convenient to debate clauses 108 to 116, schedule 7, clause 117 and schedule 8. Mr Gray, do you wish to move amendment 20?
The Chair
The amendment is not moved.
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Clauses 108 to 116 stand part.
That schedule 7 be the Seventh schedule to the Bill.
Clause 117 stand part.
That schedule 8 be the Eighth schedule to the Bill.
Seema Malhotra (Feltham and Heston) (Lab/Co-op)
I am grateful to be able to make some comments about clause 107. This morning’s debate gave us the opportunity to put on the record some of our thoughts and to acknowledge our support for part 3 of the Bill. There has been some debate, and I seek some further assurances from the Minister.
On the role of the Pensions Regulator, we support strengthening the existing sanctions regime with the introduction of new criminal offences and higher penalties for wrongdoing. The pensions landscape has been troubled in recent years by scandals, including the BHS and Carillion scandals, which have had catastrophic consequences for the scheme members involved. My right hon. Friend the Member for East Ham and my hon. Friend the Member for Wallasey also made that point. The Minister made the important remark that callous crooks who put at risk other people’s pensions cannot be allowed to get away with it.
It is right that those who intentionally or knowingly mishandle pension schemes or endanger workers’ pensions face severe penalties, which is why we wholeheartedly support the relevant provisions in the Bill. The only note of concern is the scope of the provisions, and I refer to the very helpful and instructive debates in the other place on that issue. We are firm in the view that the offence must apply to unscrupulous employers or directors of companies, but there is fear that it is so wide in scope that pretty much anyone involved in the management of a pension scheme could be exposed to sanctions, including third parties such as advisers, banks and even trade unions. Colleagues from the SNP have made some of those points effectively.
Government representatives have assured us that the courts will have the necessary discretion to ensure that only those who have genuinely been involved in wrongdoing will be caught by the new offences, but I note that pensions lawyers have realised similar concerns to those that we are raising today. It would be helpful to have further confirmation, following the Minister’s comments this morning, of whether there are further plans to review whether the offences work as intended or whether there are any other unforeseen consequences.
The Parliamentary Under-Secretary of State for Work and Pensions (Guy Opperman)
Welcome to the Committee, Mr Robertson. We hope that we will be well behaved under your chairmanship.
I take the hon. Lady’s points on board, and I will repeat, as if I said them all, the comments that I made in respect of amendment 20. I stress that subsection (2)(c) sets out a complete defence to any particular assertion of wrongdoing, namely the
“reasonable excuse for doing the act or engaging in the course of conduct”.
The hon. Lady talks about the future. The regulator, who has rightly been much talked about today, is very mindful of the debates in Parliament and of what is said in this place and the other place. I have discussed the ongoing regulation, and the fact that we are going to have to introduce further regulation on these particular clauses and set out the guidance in more detail. I hope that will reassure her that the comments have been taken onboard and that we are not using a sledgehammer to crack a nut.
We all accept that there are grave and serious incidents, such as those that happened with BHS, Carillion and others, but we also want to ensure that the pensions system functions in a fair way. The hon. Lady will also be aware that, as always, all powers are kept under review. It is certainly my hope that we will introduce another pensions Bill before too long. As with any matter, were there to be any disagreement about the implementation, we can always revisit that.
Neil Gray
Obviously we have missed out on the amendments tabled alongside the Institute and Faculty of Actuaries. Between now and Report, will the Minister commit to discussing with some of those stakeholders, such as the IFoA, and with us, to lay out how he can allay the fears of stakeholders, if he cannot allay ours?
Guy Opperman
As always, I am delighted to discuss with anybody. There is no doubt that we have done huge amounts of discussion and engagement already. My approach would normally be to set out in writing, as a preliminary, what I feel the position is and how we can provide the assurances, and discuss them off the back of that. At any stage, any parliamentarian is perfectly entitled to engage with the regulator and discuss their concerns, because it will be for the regulator to issue the guidance following Parliament passing the Act. I am sure that we can address the point being made.
Question put and agreed to.
Clause 107 accordingly ordered to stand part of the Bill.
Clauses 108 to 116 agreed to.
Schedule 7 agreed to.
Clause 117 ordered to stand part of the Bill.
Schedule 8 agreed to.
Clause 118
Qualifying pensions dashboard service
Guy Opperman
I beg to move amendment 7, in clause 118, page 104, leave out lines 20 to 22.
This amendment would remove a subsection which requires regulations under inserted section 238A of the Pensions Act 2004 to include a requirement excluding facilities for engaging in financial transaction activities from a qualifying pensions dashboard service.
Mr Robertson, may I address Opposition amendments 1, 2, 15, 14, 4 and 5 at the same time, on the strict understanding that, of course, individual votes will occur as and when needed?
The Chair
Is that agreed? Yes. Therefore, with this it will be convenient to discuss the following:
Amendment 1, in clause 118, page 104, line 41, at end insert—
“(5A) In subsection (5)(b), the “state pension information” to be prescribed must include—
(a) a forecast of the individual’s future state pension entitlement,
(b) information relating to the individual’s forecasted total income through the State Pension in the ten years following their 60th birthday,
(c) information relating to the individual’s estimated total income through the State Pension in the ten years following their 60th birthday, had the pensionable age for men and women not been amended under the Pensions Act 2011,
(d) a statement of the difference between the forecasts in (5A)(b) and (5A)(c).”
This amendment seeks to require the provision through the pensions dashboard service of information relating to the effect on the state pension income expected by those affected by changes to the timetable for equalisation of the state pension age made by the Pensions Act 2011.
Amendment 2, in clause 118, page 104, line 41, at end insert—
“(5A) In subsection (5)(b), the “state pension information” to be prescribed must include——
(a) a forecast of the individual’s future state pension entitlement,
(b) an estimate of what the individual’s future state pension entitlement would have been if the “triple lock” had not been implemented in 2011/2012 and that entitlement had instead increased in line with the minimum amount which could have been provided for each year in draft orders laid before Parliament under section 150A of the Social Security Administration Act 1992,
(c) a statement of the difference between the forecasts in (5A)(a) and (5A)(b).
(5B) In subsection (5A), “triple lock” means the policy of uprating the basic State Pension, the additional State Pension and the new State Pension by the highest of—
(a) the increase in average earnings,
(b) the Consumer Prices Index (CPI), or
(c) 2.5%.”
This amendment seeks to require the provision through the pensions dashboard service of information relating to the effect of the “triple lock” on state pension forecasts.
Amendment 15, in clause 118, page 104, line 41, at end insert—
“(5A) In subsection (5)(b), the “state pension information” to be prescribed must include the individual’s State Pension age and any changes to State Pension age affecting that person made under the Pension Act 1995 or any subsequent legislation.”
This amendment would ensure that an individual’s State Pension age (and any recent changes to that age) are clearly displayed on the dashboard.
Amendment 14, in clause 118, page 104, line 41, at end insert—
“(5A) Requirements prescribed under subsection (2) must include a requirement to provide information relating to the performance of pension schemes against environmental, social and corporate governance targets.”
This amendment would add information on environmental, social and corporate governance targets to the list of information displayed on the dashboard.
Amendment 4, in clause 118, page 105, line 20, at end insert—
“(6A) A requirement under subsection (6)(d) may require the provider of a pensions dashboard service to ensure that the needs of people in vulnerable circumstances, including but not exclusively—
(a) persons who suffer long-term sickness or disability,
(b) carers,
(c) persons on low incomes, and
(d) recipients of benefits,
are met and that resources are allocated in such a way as to allow specially trained advisers and guidance to be made available to them.”
This amendment would require that specially trained advisers and guidance are made available to people in vulnerable circumstances and would provide an indicative list of what vulnerable circumstances should include.
Amendment 5, in clause 118, page 105, line 20, at end insert—
“(6A) A requirement under subsection (6)(d) may require the provider of a pensions dashboard service to communicate to an individual using the dashboard the difference between—
(a) provision of information,
(b) provision of guidance, and
(c) provision of advice.”
This amendment would require the provider of a pensions dashboard service to ensure that users are made aware of the differences between “information”, “guidance” and “advice”.
Guy Opperman
I am delighted to speak to clause 118, which I accept is a matter for debate. It relates to the pensions dashboard, which has been the product of a huge amount of work thus far to get it to this stage. The clause gives the Secretary of State legislative powers in relation to England, Wales and Scotland to create a set of requirements that pensions dashboard providers must meet in order to be considered a qualifying pensions dashboard service.
Only qualifying pensions dashboard services will be allowed access the approved infrastructure, providing pensions information to consumers. These requirements may include what information is provided and the circumstances in which it must be provided. They may also include requirements relating to data security, identity verification and standards, ensuring that the information shown to the individual is accurate, secure and consistent across all dashboard providers. This information may cover state, occupational and personal pensions. The pensions dashboard will bring together an individual’s savings from multiple pensions, including their state pension, online and in one place. Clause 118 defines the service itself and provides powers to set the standards required of a qualifying dashboard service.
The provisions are complicated and extensive, but I will try to explain how data flows will be dealt with, because we have frequently been asked, particularly on Second Reading, how data will move through the pensions dashboard infrastructure and how an individual can access that data. The first step will be an individual logging on to their choice of dashboard. If that is the first time they have used the dashboard, the next step will be to verify their identity. Once their identity has been verified, information will pass from the pension finder service to connected pension schemes, asking them to match the individual’s information. If the pension scheme finds a match, it will confirm that to the pension finder service and then respond to the individual via their chosen dashboard that it holds some data for them. When the individual next logs on to their dashboard, the information from the pension scheme will be viewable by the individual.
The best analogy for how that information becomes viewable on a dashboard is probably the cashpoint idea. Whatever cashpoint individuals use, they can view the current balance of their account on the screen. However, the operator of the cashpoint is not able to see that information, as it is encrypted and only unlocked in combination with one’s cash card and a personal identification number. Dashboards will operate in a similar way. The information will be shown on screen but will not be viewable or collected by the organisation delivering the dashboard. The decryption of the data will happen only after an individual has logged in and asked to have the data presented. I should note that an individual can give delegated access to their information to an independent financial adviser or under Money and Pensions Service guidelines. This delegated access is time-limited and can be revoked at any point.
That is a broad outline of the provisions and what we are trying to do with the dashboard. Self-evidently, this project has been many years in the making. It is supported by industry and by consumer groups across the country. It is also a logistical challenge on an epic level, with nearly 40,000 schemes having to operate and provide data in a suitable format so that it can all be accessed. It is with regret that the Government are having to legislate to force providers to provide the data. I would have preferred the industry to have done this itself, but it is unquestionably the case that we now have to compel it to provide the data. It is quite clear that we also have to regulate this process.
Progress of this particular part of the legislation includes the amendment to clause 118, inserted by their lordships, in respect of financial transactions. The Government resist this amendment and will seek to overturn it. There are many reasons why this is not an appropriate way forward, but we strongly believe that the fundamental reason is that prescribing and preventing financial transactions both misunderstands what a dashboard is intended to be and would place undue restrictions on what it can do. While a dashboard will initially provide a simple find-and-view service, we expect dashboard functionality to evolve over time. We want to allow for innovations that could give members more control over their pension savings, which is why it is vital that we do not, at this stage, limit the future capabilities of the system. That applies to a number of different amendments that we will deal with.
New regulations on activity will ensure that dashboard providers will be subject to a robust regime, including Financial Conduct Authority authorisation and supervision. We want to make dashboards easily accessible for members of different ages and with different priorities and preferences for viewing their pension savings.
The practical reality is that if financial transactions were prevented, the idea of consolidation, for example, would be exceptionally hard to progress with. All aspects of greater understanding of a larger or lower contribution, and any aspect that required any financial aspect to it, would be prevented. It is certainly not something that we would support at this stage.
Harriett Baldwin (West Worcestershire) (Con)
The Minster is making a powerful case for rejecting the approach that was taken in the other place. Could he elaborate on the costs of this platform, and who ultimately will pay for building a pensions dashboard?
Guy Opperman
The costs are substantial. There are a variety of ways in which this is being paid for, but first and foremost, it will not be paid for by the individual. Our constituents will be able to access the dashboard, and the facility that we are creating, for free. My hon. Friend will have to forgive me for giving a generalised answer, because I cannot give the pounds, shillings and pence now, but I will be happy to do so in writing before Report.
The cost is fundamentally met in respect of the work on state pension; there was a budget announcement many years ago for the expensive work that is required by Her Majesty’s Revenue and Customs to provide the state pension provision as part of the dashboard, as it is our intention that state pensions will be part of this from day one. I believe that £5 million was set aside to pay for that part.
There is ongoing payment for the Money and Pensions Service, which is through a variety of means. Some is from Treasury funding, but it is paid for primarily through the pension levy, which pays for a variety of things in the usual way, from the regulator to the Pension Protection Fund and the Money and Pensions Service. Ultimately, the cost is borne by individual schemes and members, but not by the individual constituent accessing the dashboard—it is not expected in any way that there should be a cost for doing that.
It is clearly our intention and desire that a commercial dashboard should be available. That leads me to a point that I will come back to in more detail: do we go to where the customer is, or do we make the customer come to us? In this particular example, we strongly believe that we should go to where the customer is.
It is entirely right that we design a system with a data portal that could in no way be utilised for bad purposes, but that could be accessed by an individual, whether they are presently with Aviva, PensionBee or another organisation. They can then work with a particular independent financial advisor—whether my hon. Friend the Member for Delyn in a former life or other independent financial advisors—who would have to be specifically approved to do this work. They already have a relationship with those people and they are already in the position of having an understanding. If we do not have that commercial capability, we will lose out on a significant chunk of the market and there will be a significant deficit in the ability of what we all believe is a great idea to have a practical effect. That is the fundamental point in respect of costs. I am happy to give my hon. Friend the Member for West Worcestershire a detailed breakdown before Report and Third Reading.
I may return to Government amendment 7 but I shall first try to address amendments 1, 2 and 15 on the state pension. I am certain that I will be invited to comment on a variety of matters relating to the women’s state pension increase, but my only comment at the outset is that it is not the Government’s intention to amend the Pensions Acts of 1995, 2007, 2008 or 2011. We intend that the state pension will be part of the original provision of the dashboard. We are working with HMRC, which is responsible for that information, so that we can identify the date of state pension age and the amount that people might be expected to receive at the present stage. We do not intend to take into account what their entitlement would have been with or without the amendments to the 2011Act, as proposed in amendment 1, or what it would have been with or without the benefit of the triple lock, as proposed in amendment 2, or in respect of the 1995 Act, as proposed in amendment 15. I am sure that I will be tempted to cast a view on the future of the triple lock, but I am delighted to say that that is a matter for the Chancellor. As we discussed in the Social Security (Up-rating of Benefits) Bill, the decision has been made in respect of the upcoming year of 2021-22, and that is the extent of the matter at present.
Amendment 14 concerns the extent to which the dashboard should add information on environmental, social and corporate governance matters. I am delighted to have been the Minister who brought ESG into part of this country’s pensions system and drove forward change in the pension and asset management systems, with due credit to Chris Woolard and the Financial Conduct Authority for changing their original views and coming on board with our timetable. I am utterly in support of the principle of ESG and of ensuring that individuals have as much information, on a long-term basis, about what their pension fund is being invested in. However, I shall resist the amendment for several reasons.
First, we intend that the dashboard should start with simple information. We want to ensure that the information available in the dashboard service is easily understood by consumers and that the impact on user behaviour is considered. Trustees must have a policy on ESG and must disclose it in any event, but we do not think that the provision of that information should be prescribed in the Bill, and nor do I want to prejudice the pensions dashboard programme consultation, which began earlier this year, about what information could be shown. The consultation specifically includes signposting users to schemes’ statements of investment principles and implementation documentation, including information on schemes’ ESG policies and work. The programme will publish an initial version of a proposal for data standards by the end of the year, and we will respond in respect of what specific information will flow from that at a later stage.
Amendments 4 and 5 in the name of the hon. Member for Airdrie and Shotts deal with people in vulnerable circumstances. Although I applaud the principles behind them, the matter is slightly more complicated than the amendments necessarily make it appear. I am happy to explain in more detail at a later stage, but it starts with the fundamental principle that the Money and Pensions Service, which oversees the dashboard programme, has a statutory objective to ensure that information and guidance is available to those most in need of it, bearing in mind in particular the needs of people in vulnerable circumstances. It must have regard to that in the development of pensions dashboards.
The pensions dashboard programme usability working group—a catchy title, I accept—will explore how best to help users to understand the information being presented to them and where they can get more help, including those who are most vulnerable. That could include making recommendations about mandatory signposting to guidance and/or advice. Money and Pensions Service guiders are trained to recognise that some customers may need additional or different types of help.
The Financial Conduct Authority will seek to introduce a new regulated activity and amend the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, consulting on rules relating to that activity. That may also include a requirement to signpost users to guidance and to provide information about how to find regulated financial advice. We believe that the best way to do that is through the FCA rules and not in the Bill.
I will make two other points on the vulnerability issue. The Department for Work and Pensions, the FCA and the Money and Pensions Service all have a duty to comply with the public sector equality duty in section 149 of the Equality Act 2010. Although dashboard providers will be regulated, there has also been a recent consultation on guidance on the fair treatment of vulnerable consumers, and that will be responded to in guidance published by the FCA either later this year or in early 2021.
My final comment on the proposals on vulnerable individuals would be on the potential difficulty where, as I explained a dashboard is merely a find-and-view service. Were the amendments taken to their ultimate conclusion, they would require a pension scheme to make further inquiry of the individual themselves before the release of the information. I fear that the practical reality of that in a find-and-view service of this nature is neither appropriate nor in the best interests of all parties. I entirely accept the principle behind the amendments, but I believe that we may be able to navigate the problem in an alternative way.
Seema Malhotra
I am grateful to have the opportunity to respond to the Minister, and I thank him for those detailed remarks. I wish to speak against amendment 7, and I will lay out my arguments, and to speak to our amendments 15 and 14 and the reasons why we tabled them. I do not intend to push them to a vote, but we will listen to what the Minister has to say.
It is disappointing to see the Government row back on the positive progress on commercial transactions that was made in the Lords. A serious concern of ours, which was raised in the other place, is that the introduction of commercial dashboards paired with the ability to engage in commercial transaction activities would make it easier for savers to be encouraged into detrimental pensions decisions and inappropriate products.
Guy Opperman
I am certain that the hon. Lady does not want to make an issue of this, but does she not accept that it was the Conservative Government who sat down over Christmas and amended the Bill specifically to address TCFD recommendations and to include climate change in the Bill? We added a new clause on climate change. I totally accept that Labour colleagues worked on a cross-party basis to do that, but it would be wrong to say anything other than that the Government started the process to ensure that climate change was in the Bill and that the TCFD was part of it, and we are doing a consultation on the implications of it. I am sure she does not want to mislead the Committee on that.
Seema Malhotra
Indeed, I acknowledged in my opening remarks the Minister’s commitment to this agenda. He has also acknowledged Labour’s working with the Government on this agenda, but also helping to secure the amendments that have led to the new subsections in the Bill. The amendments require trustees and managers to take into account the Paris agreement and domestic climate targets in the overall governance, and disclosure of climate change risk and opportunities. It is a credit to the way in which we have proceeded on this agenda that for the first time climate change has featured in domestic pensions legislation.
The amendment would build on the commitments by providing information relating to the scheme’s performance against environmental, social, and corporate governance targets, adding to the list of information on the dashboard and empowering individuals to better understand the role their savings play in tackling climate change and achieving other social and environmental goals. We are aware that the Government intend to keep the dashboard simple at first—indeed, the Minister commented on that in his opening remarks—but we note that Baroness Stedman-Scott said in the other place:
“We are very interested in how dashboards can support and increase engagement, including whether information on areas such as ESG, which trustees are required to cover as part of their disclosure obligations, may be incorporated into the dashboards. This is to be informed by user testing and may evolve over time.”—[Official Report, House of Lords, 26 February 2020; Vol. 802, c. GC163.]
I know that the Minister has had further conversations on this issue. He also referred to the ongoing consultation about what could be on the dashboard. However, I hope that he will be able to confirm that that is something he hopes to implement as the dashboard is developed further.
Neil Gray
It is a pleasure to serve under your chairmanship, Mr Robertson, during this important part of the Committee’s deliberations. Like the shadow Minister, Scottish National party Members are concerned about Government amendment 7. We strongly support the premise of a pensions dashboard and hope that allowing people greater access to information about their pensions will encourage informed choices that ensure long-term savings and investments that provide dignity in retirement. However, we are concerned that the Government amendments to this section of the Bill will mean that the creation of the MaPS dashboard could be a missed opportunity.
Amendment 7 is a case in point. It would allow commercial dashboards to facilitate financial transactions, which we feel is a mistake and is a big reason why we want a lead-in period before commercial dashboards become operational. We feel that the impartial information that we want the MaPS dashboard to provide should be entirely separate from transactions, at least to begin with. That position is supported by the Pensions and Lifetime Savings Association, for all the reasons outlined by the shadow Minister.
Providing digital platforms to bring together a person’s savings landscape is a huge step forward, but exposing that information to marketing and commercialisation will remove the power of the saver to access information that is presented impartially and without commercial motive and hand it to organisations that will encourage individuals to take big decisions about potentially their largest financial asset. As the shadow Minister said, it could also make people vulnerable to scammers.
The UK Government appear not to have learned from the oft-worn problems associated with pension freedoms. Customer satisfaction in Pension Wise is high, and its evaluation score published last month makes for good reading, yet only 14% of all pension pots accessed—not people who access their pots, but pots accessed—were accessed after receiving guidance from Pension Wise. The House of Commons Library report earlier this summer highlighted that, as a result of pension freedoms, more people were choosing to shift their savings from secure defined-benefit schemes to riskier defined-contribution schemes, and a large proportion of those drawing down their pension were doing so without seeking advice or guidance. That is likely to be exacerbated if commercial dashboards are allowed to contain financial transactions. We think that is really risky. Allowing financial transactions to take place on the dashboard without having first assessed and accounted for the risks is clearly a recipe for trouble, and I urge the Government to reconsider.
We want the dashboard to provide as much information as possible for savers, which is why we tabled amendments 1, 2, 4 and 5 and support amendments 14 and 15, tabled by the Labour Front Benchers. These amendments seek to add information relating to a person’s state pension to the dashboard, ensuring that the impact of policy changes can be tracked by savers. Amendment 1 would show the detriment suffered by 1950s-born women. The Bill’s scope to provide more meaningful help and support to women born in the 1950s, who have seen their state pension age increase with little or, in some cases, no notice, is extremely limited. We have been clear and consistent in our support for women born in the 1950s. We want the Government to carry out a full impact assessment of the detriment suffered by them from various changes, and to use that to inform payments to be made to them. However, these amendments are as far as the Bill’s scope allows us to go. They would give these women more information about how the state pension changes have affected them. They would also act as a strong deterrent against this type of mishandled policy change happening again.
Public dashboards should be as clever as possible, to account for complexity in individual circumstances and to more accurately project lifetime savings. That view is shared by some of those who have provided evidence to the Committee, including the Institute and Faculty of Actuaries and the Pensions and Lifetime Savings Association. Therefore, the SNP has tabled amendments to mandate specific information on the dashboard.
Rob Roberts (Delyn) (Con)
It is a pleasure to be able to speak to clause 118 and discuss the related amendments. I am delighted finally to be here. I am sure that my hon. Friend the Minister will not thank me for pointing out that it was the Budget speech in 2016 that said that we would have a fully functioning dashboard by 2019. We got there in the end, or we are getting there in the end. I am delighted that we are making progress.
It is very important for everyone to remember—I failed to do so and have caused a lot of hair pulling for the Minister and his team over the last few weeks—that the Bill seeks to lay out the foundation, the framework, for the data standards that will be adopted and is not necessarily about getting bogged down in the minutiae of what the dashboard will look like in the end and the final functionality of it. We live in an information age. The watchwords of both the Pensions Regulator and the Financial Conduct Authority for at least the last decade have been all about informed decisions. Pensions are a vital part of anyone’s life and they need to catch up with the rest of the world. We risk non-engagement from this and future generations if we cannot give them the information that they want in the manner in which they want it.
Auto-enrolment has been an amazing thing and has seen millions more people saving in pensions. We have a complacency risk coming down the line; people think that where we are with auto-enrolment is going to be sufficient to get them the retirement they dream of. We run the risk of that not necessarily always being the case, but that is another story for another day.
Auto-enrolment has led to multiple pots over many people’s working lives. How do we track those? How do we service them? How do we maximise their value? How difficult is it now for consumers to be able to look at all of those different pots and understand how they relate to each other and what that is going to mean for them at the end of the day?
I was delighted that about six weeks ago the Minister put in place a small pots working group, which will be very useful in understanding where to go in relation to small pots. There are currently 8 million or so in the UK, with the expectation that by 2035 that will have gone up to around 27 million. It is a huge issue that needs addressing. The biggest problem with small pots is their erosion over time due to the effect of charges. We definitely need to address that issue in some way.
On the amendments, I start with Government amendment 7. The ability to conduct transactions is not inherently bad and there are already safeguards in regulations. To rule out every type of transaction in primary legislation feels heavy-handed.
In Committee in the Lords, Earl Howe said:
“It is of course very important that individuals access advice and guidance before making decisions on undertaking significant pensions transactions.”—[Official Report, House of Lords, 2 March 2020; Vol. 802, c. GC207.]
I completely agree with the noble Earl. The regulations are in place around what is significant; it is the word “significant” that is key. There is no need to rule out everything in primary legislation. Why go to all the trouble of informing people about what they have got, if we do not give them any means of interacting with it?
Financial transactions could be to increase or decrease a contribution level or make a one-off lump sum payment. How empowering it would be for the consumer to be able to do that and look, in real time, at the impact of those changes on the end result. We must not restrict the ability to make any transactions; regulations around what transactions should be allowed are already there and will undoubtedly be strengthened in further regulations down the line.
Talk about people losing the safeguards around DB schemes or being moved into DC are wildly off the mark. That cannot be done now, so why on earth would anyone be able to do it just because we change from paper transactions to making transactions through the dashboard? We do not allow it now; why would we allow it in future? It is a ludicrous and scaremongering suggestion, and I do not like it.
Amendments 1, 2 and 15 are not relevant. The dashboard should show what people are going to get, not what they would have got if the rules were different or they had not changed or the Government had not changed this or that policy. It is supposed to be an accurate picture of what someone is actually going to get, at that time. Seeing multiple sets of figures, only one of which is correct and actually relevant to what they are going to get, would just cause confusion for the consumer.
Unfortunately, as many people have let out of the bag, the amendment on the state pension age and the WASPI women in particular was tabled specifically to highlight a campaign issue and the unfairness of a Government policy decision. It cannot be good law and it will create a horrible precedent, however well-meaning the amendment might be, to put such provisions in primary legislation. I hesitate to say it, but it feels a little like tabling amendments to incite dissatisfaction in previous Government policy, but I am sure that hon. Members would never seek to do that.
The Minister said in his opening remarks everything that I had written down on amendments 4 and 5. I found amendment 14 very interesting. People who are concerned with environmental, social and corporate governance targets will always seek them out, and always have done. We do not need to force that information on people who do not want it. Believe it or not, plenty of people think that their pension is something to provide them with an income in retirement, not necessarily a tool to solve the ills of society.
There are consumers who want that level of detail, and they will undoubtedly be able to select the dashboard provider that meets their needs and gives them all the information that they want, but there is no need to make that happen in primary legislation because the market will work itself out and the people who want that information will be able to access it via other providers.
Seema Malhotra
I understand that the hon. Member is concerned about the provision of information, but can he see a downside to it being there?
Rob Roberts
No, but I also do not see a downside to lots of other types of information being there, so why this type and not others? The purpose of primary legislation should not necessarily be to say all the things that should be there. Lots of things potentially should be there, but that does not mean that they have to be there, and prescribing that they must be there does not really fit in.
Seema Malhotra
I understand that, but the information is designed to assist in decision making, and may be helpful for those who are reviewing their pensions. In the context of much change across society and concern about such issues, does the hon. Member agree that that information may be helpful to those who want to base decisions on ESG information, and has no downside for those who do not?
Rob Roberts
That may be, but as I mentioned earlier, it muddies the waters. If people want to access that information, there is a slew of providers out there. If they want the one that provides the most ESG information, they will gravitate towards it. We do not need to override the general public’s ability to make an informed choice by legislating to make it happen. As I mentioned earlier, “informed choices” are the big words. The ability to go that way should be entirely left in the hands of the consumer.
As I said, the Minister mentioned everything that I wanted to on amendments 4 and 5, but I reiterate that I am very happy to see the pensions dashboard finally taking a few steps closer towards completion. Hopefully the clause will stand part of the Bill.
Ms Angela Eagle (Wallasey) (Lab)
It is a pleasure to see you in the Chair this afternoon, Mr Robertson, after the dynamic chairing from your colleague this morning; we made a lot of progress. I will make some observations about dashboards, and talk particularly about Government amendment 7, which, as colleagues know, removes the Drake amendment that was added in the other place. However, I will first comment on how potentially beneficial a good working pensions dashboard coming into existence would be for many millions of pensioners looking to plan for their retirement.
Many of us who have been involved in pensions policy making—in Opposition, in Government or both—know that the holy grails in this area are: first, to get people to think about pension saving in the first place; secondly, to get people, especially when they are younger, to think that they may ever reach retirement age, and to start planning for what their income might be when they get there; and thirdly, having established from a young age that interest in considering what their income will be when they are older and in setting money aside to ensure that they have a secure income, to ask them to navigate the current pensions landscape in the UK, which is asking an awful lot of most of our citizens, because it is extremely complicated and changes over time. We have the confluence of many different sorts of pension availability, from the much more effective DB schemes, which used to be more common but in which 10 million people still have savings, it has to be pointed out, to the evolving and developing DC and individual savings schemes.
Guy Opperman
It has been a while since I have been compared to a duck, but I know there was a compliment buried in the comments about the depth of the swimming I am doing to try to persuade the Committee. Let me be blunt about the Herculean nature of the task: there are 40,000-plus schemes to be created, with a common dataset to be agreed and then made capable, plus all of the information from state pensions. While I revere everything that the former Chancellor George Osborne did—clearly, there were many great qualities that the great man had— it was a little optimistic of him, by anybody’s interpretation, to say in 2016 that this would be produced by 2019. He also anticipated greater engagement by industry and that it would lead the way. I do not wish to have a dig at industry, but the only reason we are mandating this process is that, while we always have to add regulatory guidance, the industry did not take the opportunity it had to embrace it.
I repeat the point I have made on many occasions, both in this House and outside it, to various industry organisations: it is for the industry to prepare—this relates to the point raised by my hon. Friend the Member for West Worcestershire—its data appropriately, in such a way that it is dashboard compliant on an ongoing basis. I make the strong point that failure to do so will have consequences for the individual organisations, and will clearly have consequences for our constituents, who would not be able to access that particular data.
My hon. Friend the Member for Delyn made a fair point about the small pots problem, which the Chair of the Work and Pensions Committee and I have discussed in private and also debated in broad terms in public. Both of us remain concerned that there is a proliferation of pots, that costs and charges implications apply, as the hon. Member for Wallasey outlined, and that solutions need to be found. We are coming together—including the Work and Pensions Committee—to try to find those solutions. Clearly, one solution would involve consolidation, whether on the basis of ability to take small pots that have been eaten up by costs and charges, or on the basis that one is absolutely passionate about a particular ESG issue and wishes to consolidate around an ESG provider. All of those things would be prevented if I were to allow this amendment to continue. I have great respect for the guru of all pensions matters, Baroness Drake, who I have engaged with at length over the last couple of years. However, I believe she is mistaken in her approach to this, and I do not wish to rule out the capability for financial transactions.
If I have not been clear previously, I make it clear now—as the hon. Member for Wallasey invited me to do—that the original product of the pensions dashboard will be simple. It will be a simple find and view service that will then be built on and overlaid as time goes on, not least because not all particular providers will be on board from the word go. I could wait and wait, and then have a big bang moment whereby every single provider was ready and everything was done. Alternatively, the MaPS can start and other organisations slowly but surely come on board and the process is rolled out as it goes forward. I certainly do not believe that we should rule out the issue of financial transaction.
Guy Opperman
Let me finish the point and then I will give way. On the specific amendment inserted by their lordships, it is unclear what activities would be considered financial transactions. The advice I have been given is that the amendment is very widely drawn and would require new primary legislation before such activities could be commenced in the future. Obviously, while pension Bills are like buses—we wait for ages for one to come along and then do two in a month—I do not anticipate one coming along in a great hurry, though I hope there is another one before the close of this Parliament. However, we definitely assume that this would cover consolidation of pots, transfers between providers, and potentially the raising or lowering of one’s contributions to an individual pension. In those circumstances, it would be utterly illogical, given all the other comments that we are making about the desirability of such an approach, to rule out financial transactions.
Neil Gray
Even if I leave to one side what the Minister says about the need for amendment 7, why is he not dealing with this incrementally? Why take the risk not just of allowing commercial dashboards to happen straightaway but of allowing them to be transactional straightaway? Why not build confidence in the system among consumers with the MaPS dashboard, allow a bit of a buffer before commercial dashboards come onstream to ensure that consumers understand what they are entering into, and then, when the regulator and the Government can assess the risks of the transactional ability of the commercial dashboards, come to a point where that is allowed? Why all at the same time? It seems far too risky to me.
Guy Opperman
That is an outstanding point, which I am sure the hon. Gentleman will make in respect of clauses 119 and 122 on delay to the onset of the dashboard. Many of the points that the hon. Member for Wallasey made relate to costs and charges, which we will come to later, and to the one-year delay argument. I do not believe that it is appropriate for something that is allowable at present—any one of us could go to our individual provider—
Neil Gray
The Minister must understand the greater risk from digitisation when the full suite of people’s financial savings—their biggest financial assets—are sat there. For some people who are perhaps not as digitally savvy as others, and who might be taken in by scams, that is a huge risk. At the moment, the paper-based system is rather different.
Guy Opperman
We will come to scams and the work that the Work and Pensions Committee and the Government are trying to do to enhance the protections on an ongoing basis. It is clear that the Financial Conduct Authority regards this as a regulated activity. There will be an authorisation process for individual providers that wish to be able to do it. It will not be automatic by any stretch of the imagination. We are very mindful of this, as are the pensions dashboard working group, various other user groups and the consumer protection organisations that are part of it—from Citizens Advice, to Which? and others. They are utterly committed to ensuring that this will be a safe process. Going back to the fundamentals of the Lords amendment, I do not believe that it is in the consumer’s interests to rule out financial transactions. I certainly would not support that.
Gareth Davies (Grantham and Stamford) (Con)
Does the Minister agree that if we look around the world at where commercial transactions have been incorporated into dashboards—for example, in Israel and Denmark—we see that there have been no cases of mis-selling, so any risks spoken about in this debate are somewhat overblown, given that there is no precedent?
Guy Opperman
I am grateful to my hon. Friend for that point. That does not mean to say that we do not have a regulatory system that ensures that there are protections, but the nature of a dashboard and international examples definitely suggest that this is an empowerment and an assistance to individual consumers.
Guy Opperman
I will press on, because I am going to answer some of the points that the hon. Lady made. I am mindful that we have spent some time on this particular point and we have a lot to get through.
On matters related to the state pension and triple lock, I leave the triple lock to the Chancellor with good blessing and understanding. I will not get into a rehash of many arguments over the state pension changes made from 1995 and which continued over 13 years of Labour Government. The policy was supported by certain Labour Ministers, including in the DWP. Then, obviously, there was a change of Government and the policy was not necessarily supported. When the hon. Lady talks of the way that people have been treated by the Government, that means all Governments since 1995.
I have persistently defended the actions and the civil servants of the DWP throughout the period between 1997 and 2010. Interestingly enough, so have the courts, because we have recently had the Court of Appeal decision in the BackTo60 claim, which found comprehensively in favour of the Government—not just this Government, but previous Governments—in respect of all matters that apply, including notice.
Stephen Timms (East Ham) (Lab)
It is worth putting on the record that the worst problem was what happened with the Pensions Act 2011, as I think the then Pensions Minister, Steve Webb, has since recognised.
Guy Opperman
I am not going to comment on his capabilities. The bottom line is that that was a persistent level of policy making made by successive Governments from 1993 onwards and utterly continued by the Labour Government, who, to the best of my recollection, proceeded to raise the state pension age to 65 by 2020 in the 2007 or 2008 Act. It was then clearly increased in the 2011 Act. One can argue about why that was done. Perhaps it was a consequence of the great former Prime Minister Gordon Brown’s efforts at manhandling the economy, or perhaps there were other reasons for taking that approach. However, I make the point that I have consistently defended individual Ministers and the Department for their consistent approach to addressing something that all other western countries have done in respect of state pensions. They have all approached it in broadly the same way.
We want the dashboard, and I accept that there is a desire to have many other things on it. We want it to be a simple interface that is accessible to all and that is not overlaid by many different things. With user testing over time, it is possible that more information will be outlined, but the comparable example I give—namely, simpler statements—is appropriate and right.
Seema Malhotra
I seek clarification on the Minister’s position on ruling out and ruling in. He has said that he does not want to rule out financial transactions on the dashboard in the future, but did he also say that they would not be ruled in without primary legislation?
Secondly, the Minister said that some pension schemes may not participate. What will and what will not be compulsory? For those that might not share all the information, will there be an obligation to share some, so that somebody could look at the dashboard and have a complete scan, even if they do not have all the information, in order to know that they have pots out there?
Guy Opperman
I will deal with the first point about financial transactions. If we accepted the amendment as drafted by the House of Lords, we would not be able to proceed with financial transactions without future primary legislation. I passionately believe that, with the suitable guidance and protections that we all want, consolidation is appropriate, and that would be a financial transaction. It should definitely be permissible on an ongoing basis, arising out of information proceeded and obtained by a dashboard. It is absolutely that sort of empowerment that the dashboard will offer, and it is entirely the right thing.
Clearly, that is my view. There is a dashboard delivery organisation and the Money and Pensions Service, and a whole host of user groups are also involved. I have communicated my strong view. I certainly do not want to rule it out in the future, which is the desired effect of the amendment. The reality is that if I allow Baroness Drake’s amendment to go ahead, it would restrict the capability of the dashboard massively in the future. That is not something I am prepared to do.
I have addressed many different points. Given the time, I will pause there and let others reflect.
Question put, That the amendment be made.
Seema Malhotra
I beg to move amendment 11, in clause 119, page 108, line 20, after “scheme,” insert—
“(iva) the total cost of charges incurred for the administration of the scheme”
This amendment would add information about the total cost of charges incurred for the administration and management of occupational pension schemes to the list of information displayed on the dashboard.
The Chair
With this it will be convenient to discuss
Clause stand part.
Clause 120 stand part.
Amendment 13, in schedule 9, page 179, line 14, after “scheme,” insert—
“(iva) the total cost of charges incurred for the administration of the scheme”
This amendment would add information about the total cost of charges incurred for the administration and management of occupational pension schemes in Northern Ireland to the list of information displayed on the dashboard.
That schedule 9 be the Ninth schedule to the Bill.
Amendment 12, in clause 121, page 112, line 45, after “scheme,” insert—
“(iva) the total cost of charges incurred for the administration of the scheme”
This amendment would add information about the total cost of charges incurred for the administration and management of personal and stakeholder pension schemes to the list of information displayed on the dashboard.
Clause 121 stand part.
Seema Malhotra
I am grateful for the opportunity to speak to amendments 11, 12 and 13, all of which make the same point: that the total cost of charges incurred for the administration of the scheme should be displayed on the dashboard. We believe that this issue is important because the creation of a pensions dashboard creates a real opportunity to introduce much-needed transparency on pensions costs and charges.
Pensions charges can be very difficult to understand or to compare and the lack of transparency can lead to people paying excessive charges without realising it, eroding their hard-earned savings. Improving disclosure in this way is essential for consumers, who need to understand the risks attached to their investments. In a study by Which? carried out in 2019, 300 people were asked for their thoughts on a pensions dashboard. Some 77% said they would be likely to use one. State pension entitlement was the information that 74% of people most wanted to be included. That was followed by projections of total retirement income, 62%; current pension value, 55%; and charges, 54%. Clearly the inclusion of that type of information would be popular with dashboard users and would help people to use their pensions freedoms to protect their savings rather than fall victim to disproportionate charges.
Information about costs and charges is vital if consumers are to use dashboards to understand which pensions they could use to make additional contributions, whether any of their pensions have excessive charges and when making decisions about how to access their pensions using pensions freedoms. Research by PensionBee found that more than 70% of non-advised drawdown customers accessing their pensions paid more than 0.75% in charges, costing them £40 million to £50 million a year extra – more than £175 million since pensions freedoms were introduced. The long-term impact of high costs and charges for income drawdown can be significant and result in people being able to take less income out of their pensions or running out of money more quickly.
Transparency of charges is a particular concern because the DWP appears to have agreed with the arguments of some in the industry that putting costs and charges on the simpler annual statement would confuse people. The result is that instead of being provided with specific information about how they are paid, people would be signposted towards what could be pages and pages of information on charges. Which? has noted that an approach that believes that consumers are best served by not knowing how much they pay for pension scheme services is irreconcilable with the objectives of the pensions freedoms and the expectations placed on consumers in retirement.
It clearly may not be in the interests of commercial providers to make that information transparent, so I end with a question to the Minister. If the Government do not intend to support Labour’s amendment, which at this stage we plan to press to a vote, how will they ensure that people have the information that they need to avoid excessive charges and avoid making decisions that they may come to regret because they did not know about those charges in the first place?
Ms Eagle
I want to briefly add some emphasis to the points made by my hon. Friend the Member for Feltham and Heston from the Front Bench. This is really a battle between those who like to add horrendously high charges, in very small print, and transparency so that people can make decisions in possession of the right kind of information. Surely enabling that transparency is at the heart of what the pensions dashboard is all about. Financial services, particularly things like pensions, have always featured a uniquely complex, difficult and opaque pricing system, which can often eat away significantly at the money that people who are investing can expect to live on when they retire.
Thankfully, trail commission has now been abolished, at least to my knowledge, but it has been replaced with other opaque pricing systems that take people’s money away. The hon. Member for Delyn was right to say that pots that are very small are being eaten away by charges. Most people who put money into pots would have had no real knowledge or understanding of the price of keeping that money there, because it would not have been up front in the information; it would have been hidden away in hundreds or perhaps thousands of pages of tiny print.
The amendments, which I fully support, are all about getting price and cost transparency on the dashboard, which was clearly created to include such information. I will not understand it at all if the Minister has reasons for not doing so.
Rob Roberts
I rise to speak briefly to amendments 11, 12 and 13. I did not mention it earlier, but the general problem with small pots being eroded away by charges, especially in the auto-enrolment phase, is that many of them have set charges in pounds rather than percentage-based charges. If someone has 10 pots of £1,000 and they all have the same percentage charging structure, the charges will be exactly the same as one scheme with £10,000 in it; what causes the problem is that some schemes have a set charge in pounds per year.
Unfortunately, an awful lot of the time we focus too much on the cost of plans and the impact of charges: the principal-based tail is wagging the outcome-based dog. It is the outcome that is most important, because people cannot spend the principal; they spend the outcome. That is easily illustrated: if scheme A has a 0.5% charge and a return of 5% a year, and scheme B has a 1% charge and a return of 7% a year, scheme B is a better scheme despite having a higher charge. It is not the charging that is important.
The hon. Member for Wallasey mentioned people who will be put off from investing in schemes that are looted and abused in such ways. She was 100% correct; there were many nods on both sides of the Committee Room at the idea that that would put people off. Focusing too much on charges also potentially puts people off. It is worrying and scary, and potentially angers the consumer, who would not understand the figure for the total charges if it is expressed in a significant way. If we say, “Over the lifetime of your plan, you will incur £30,000-worth of charges,” without some kind of explanation or context showing what that relates to, people will see that as excessive and ridiculous.
Neil Gray
I do not think it is fair to characterise this as a focus just on charges. New clause 11 contains an idea for how small pots can be managed, in terms of the unintended consequences of automatic enrolment. I struggle to understand the rationale of the hon. Gentlemen’s argument about the lack of transparency being provided to consumers and enabling them to take informed decisions about the plans they enter into. I do not see the logic of suggesting that hiding that or allowing schemes to continue putting it in the small print is beneficial to consumers.
Rob Roberts
I am not necessarily advocating a lack of transparency; I am advocating a focus on the outcome, rather than on every element of the journey along the way. There are lots of things that we currently do not talk about, in terms of the costs and charges. We look at the costs and charges of the scheme in general, and it is not necessarily a requirement for the costs and charges of the individual funds that make up the scheme to be included in those calculations. There are lots of things that could be included in there, but it is the outcome that is important, not necessarily the minute detail of every element along the way.
Richard Thomson (Gordon) (SNP)
I do not think anyone would disagree that overall it is the outcome that is important, but historically the trouble is that consumers have often been encouraged to look at outcomes that may or may not have been realistic over an extended period of investment, and have not had the full awareness that they ought to have had of the charges. Surely as part of educating the consumer we should be drawing their attention to the charges and helping them to understand them in the context of everything that is important. If we want engaged, informed consumers, surely we should not be telling them not to worry their little heads about the charges; we should be making it transparent and open.
Rob Roberts
I understand the hon. Gentleman’s point, but it is for the regulator to determine how projections are shown and what information the individual requires to make an informed decision. It does not necessarily belong in primary legislation. It should come later, and the regulator should implement it. I understand that point, but amendments 11, 12 and 13 would all do exactly the same thing: they all focus on the wrong things, when I believe we should be focusing on the outcomes.
Guy Opperman
I hope to be able to bring some agreed consensus on this. Colleagues will be aware, because they have read the Bill in great detail, that subsection (2)(a)(iii) on page 108 sets out what pensions information should be provided. It includes
“the rights and obligations that arise or may arise under the scheme”.
It is very much the case that individual costs are already envisaged as being part of the clause and the scheme.
I will explain why I will resist this amendment. First, the context is that it is already in the Bill. Secondly, if I have not made it sufficiently clear in the past, I am happy to make it clear today that we anticipate that costs and charges should be a part of dashboards in the future, but the question is when and how? There is common ground that in the longer term, there should be an understanding of what individuals are being charged for the service they are being provided. There is a much wider debate, which we have tried to have to the best of our ability, about how it is that a pension is run and then the individual is burdened with individual costs, depending on the nature of the different schemes.
I am very clear that, first, I consider the provision otiose because it is already within the confines of the Bill. Secondly, it is the Government’s intention that costs and charges should be part of dashboards in the future. Thirdly, we value transparency. Lord knows I started this morning with the point that simpler statements are being introduced. Contrary to what the hon. Member for Wallasey said, simpler statements will include costs and charges.
Ms Eagle
I thank the Minister for his full explanation of some of the work that is ongoing, and I appreciate that it is a difficult issue. First, will he give the Committee some idea of the timescale for when we could get that important information into the dashboards? Could he be a bit more specific? Secondly, does he not accept that if standardisation is mandated by the Government, people will adjust and change in order to standardise and be in competition with other providers? It will bring some coherence to what is at the moment an extremely complex and confusing area.
Guy Opperman
To answer the second point first, there is already standardisation. There is already the charge cap, which allows a certain limit above which an individual cannot charge any more. That charge cap provides a certain percentage that can be incurred for the work provided. There is an ongoing discussion regarding automatic enrolment. If I have a tiny pot of £100 and that has been eaten away on an ongoing basis, then clearly the charges on an annual basis will slowly eat away into that small pot. If I have a much larger pot and I have a small standardised charged capped price that I am being charged, then it is clearly much easier for the pot to be preserved. How one approaches that going forward is extraordinarily difficult.
There is also the diversity of the products being provided—the point made by my hon. Friend the Member for Delyn—and ensuring that there is that diversity is appropriate. How does one try to balance those two things? That is what we are trying to do, with due respect. When will we do this? It seems to me that there are two answers. It is hoped—I use the word “hoped” given that we are now on 3 November—that by the end of this year, or the beginning of next year, these various pieces of work will come together and the Government will publish their views on them. I have been a little preoccupied with this and there are other things that are going on. The small pots review does not report back to the Department until 23 November.
In addition, the dashboard delivery group is at the same stage looking at this precise point about how it will provide this on an ongoing basis. It published its updated programme a week ago—I will have to do this off the top of my head, and if I have got it wrong I will correct it at a later stage—and its expectation is that it will provide more detail at the beginning of next year as part of what the dashboard will look like.
I come back to one final point. The original dashboard was proposed to be a simple find and view system; it is not proposed that this will have complex overlay at the start.
Neil Gray
That is all the more reason why allowing these amendments to be made is so important, to ensure that eventually it is mandatory to provide information and transparency about fees and charges. I do not think that anything the Minister has just said would preclude the amendments being accepted. It is a competitive market, there will be different elements within the market that will offer administrations and charges for different products, and that is their whim and their right. I go back to the point I made to the hon. Member for Delyn. I do not see how we are benefiting the consumer by denying them access to that information at that point of access, which is going to be crucial, and I am yet to hear from the Minister why that cannot happen.
Guy Opperman
I should have pointed out that we already have legislation within the occupational pension scheme regulations 2018, which already require trustees to publish detailed information on costs and charges on a publicly available website. Members are told where this information can be found on their annual benefit statements. Obviously, we are doing it on simpler statements as well.
On the specific point raised, the hon. Member for Airdrie and Shotts keeps coming back to different charging structures that exist across the pensions landscape, and information about costs and charges are not often directly comparable between schemes. There is a risk that we fail to engage people with their pensions by presenting too much information of a differing nature, or worse, that misunderstanding of costs and charges presented without proper explanations of value for money results in poor financial decisions. It seems to me that the way it is drafted as well, speaking specifically to the administration of the scheme, hides a much wider problem: how does one address the individual nature of differing schemes and the individual costs that apply? With respect, although I have great sympathy for the amendment, I invite the hon. Gentleman not to press it.
Ms Eagle
Before we leave this point, what the Minister has described is a pensions landscape that is so complex that he is saying it is almost impossible to make proper price comparisons across the piece. If a consumer wants to make a decision on where to invest their money, what the Minister is saying is that at the moment we have a system that is so complex, and where comparisons are so hard to make, that it is impossible. What does that say about the landscape we are presiding over, and what have we got wrong? I have some ideas of my own, but now is not the time to talk about them, Mr Robertson. I appreciate that. It is an astonishing admission from the Minister that that is the situation we are in.
Guy Opperman
I had ended my speech, but I do not think that is a fair characterisation. There is a charge cap that applies already. It is a standardised charge cap. The difficulty is that there are different types of schemes charging different things and that is perfectly permissible. The flip side of the argument made by the hon. Member for Wallasey would be to have only one type of pension scheme—which, by the way, is what the Labour Government introduced. Automatic enrolment is one type of pension scheme. Yet, within the one type of pension scheme, which we all adore and agree is the greatest thing, there are problems on the charging of the individual, which is exactly why we are trying to improve the matter by doing the small pots review.
I take the point that the hon. Lady is passionate to try to improve the situation. My door is always open to hear her views but, with great respect, this is a simplified system that can get better, which is why we are doing the dashboard and why we are doing simpler statements.
Question put, That the amendment be made.
Seema Malhotra
I beg to move amendment 16, in clause 122, page 116, line 37, at end insert—
“(2A) Before any other pension dashboard services can qualify under section 238A of the Pensions Act 2004 (qualifying pensions dashboard service) the Secretary of State must lay before Parliament a report on the operation and effectiveness of the pensions dashboard service, including the adequacy of consumer protections.”
This amendment would require the Secretary of State to report on the operation and effectiveness of the public dashboard service (including consumer protections) before allowing commercial dashboards to operate.
The Chair
With this it will be convenient to discuss the following:
Government amendment 8.
Amendment 3, in clause 122, page 116, line 42, leave out “one year” and insert “five years”.
This amendment would extend to five years the period for which the Money and Pensions Service dashboard would have to have been running before commercial operators could enter the market for the provision of pensions dashboards.
Seema Malhotra
We hugely regret that the Government are seeking to remove the amendment, introduced by Baroness Drake, that would have required the Money and Pensions Service dashboard to be up and running for a year before other commercial dashboards could be launched. It has always been Labour’s firm position that just one publicly run dashboard would be the best way to ensure that people receive trusted information about their pensions.
The Work and Pensions Committee produced a report on pension freedoms in 2018, in which it recommended a single public dashboard, to ensure that it would be free from commercial pressures and could provide individuals with a reliable source of information about their pensions. As that Committee noted, this would be in line with the examples of Australia, where a single dashboard is hosted by the Australian Taxation Office, and Sweden, where the only dashboard is run by a public-private partnership.
As the report stated, dashboards should first and foremost provide consumers with accurate and impartial information about all their pensions in one place. In a multiple dashboard system, providers would have incentives to use their dashboards to promote their own products or otherwise discourage switching away. There is also a danger that dashboard providers could use different underlying assumptions, producing rival income projections from the same raw data.
The pensions dashboard was conceived as a means of empowering consumers, to promote competition in the product market. There is a risk that in a multiple-dashboard system, providers could instead compete on the information provided. Which? and the Association of British Insurers have argued that regulation would be necessary to ensure that the dashboards were consistent. There is a simpler solution. By providing information on all pension entitlements in one place, the pensions dashboard would be a vital tool in informing and engaging customers, and empowering them to exercise pension freedoms in their own interest. A single, publicly hosted dashboard would be the best way of providing savers with simple, impartial and trustworthy information. However, the Government have said their intention is to progress plans for multiple dashboards.
Rather than preventing the introduction of commercial dashboards for a set period of time, our compromise amendment would merely compel the Government to review the operation of the public dashboard, including the adequacy of consumer protections, before allowing for commercial rivals to operate. If commercial dashboards are to be allowed, there must be strong and proactive regulation of all pensions dashboards and any other organisations involved in the storage, processing and presenting of pensions data. Organisations such as The People’s Pension and Which? have said that clear legal duties need to be placed on the operators of dashboards to act in the best interests of consumers.
The Government also envisage a role for what they call integrated service providers, which will store vast quantities of pensions data. It is not clear whether the Government intend for them to be regulated, or for the Money and Pensions Service, the TPR or the FCA to be able to authorise them and set regulatory standards. Unless the regulators have the ability to set standards and intervene in the operation of ISPs, any problems in the ISPs market will have to be tackled by contacting the individual pension schemes. That would be time-consuming and could lead to long periods of time when individuals’ pensions data is unavailable on pensions dashboards. Any scandals or data breaches that occurred in unregulated ISPs could also have a significant detrimental impact on the reputation of pensions dashboards and the overall framework for people to access their pensions data securely and safely.
The common-sense step proposed in the amendment would allow proper consideration to be given to the risks proposed by private providers. In many ways, the concerns underpinning the amendment are similar to those associated with Government amendment 7—that the introduction of commercial dashboards, paired with the ability to engage in commercial transaction activities, would impact on the reliability of the information presented to savers and open up the risk of people being persuaded into disadvantageous pensions positions.
I would be grateful for the Minister’s views on this matter, which I understand he is keen to share. If he still intends to progress with commercial dashboards, will he announce concrete steps and detail on how and when they will be regulated by the FCA? I am sure he will say a few words about integrated service providers. Will they store vast quantities of pensions data, and will they be subject to regulation and standards that are set by the TPR, MaPS and the FCA?
Neil Gray
To follow on from the shadow Minister’s comments about amendments 8, 16 and 3, this debate takes us to probably the greatest area of contention in the Bill, which is contentious because of the Government’s intention to remove the Lords amendments that require a year’s buffer before commercial dashboards can enter the market.
It is not just the SNP, Labour or other Oppositions parties that have concerns, but a great number of stakeholders. The Pensions and Lifetime Savings Association says that
“the Government should ensure the first pensions dashboard will be a single, non-commercial product hosted by the Money and Pensions Service (MAPS) and that no other dashboard should go live until a full consumer protection regime is in place.”
In addition, rushing to introduce transactional capabilities is likely to put savers at greater risk of scams and mis-selling. It would be better to wait a year or two, rather than undermine consumer protection.
The PLSA does not support Government amendments 7 and 8, which would allow dashboards to be used to provide transactional services and remove the requirement for the non-commercial pensions dashboard service run by MaPS to have been established for one year before other dashboards services can provide services. The PLSA supports amendment 16, which would require the Secretary of State to report on the operation of the public dashboard service, including consumer protections, before allowing commercial dashboards to operate. It also supports amendment 3, which would extend to five years the period for which the MaPS dashboard would have to have been running before commercial operators could enter the market for the provision of pensions dashboards.
Similarly, the Institute and Faculty of Actuaries says: “The first dashboard must be a single, non-commercial platform. We think it is important that the first dashboard be non-commercial and hosted by the Money and Pensions Service. Initial non-commercial dashboards will to provide greater clarity for consumers and build confidence and trust in the dashboard ecosystem. It will also make it easier for regulators to learn more about how savers use such platforms, and enable them to adjust consumer protection regulation accordingly. In the medium term, multiple commercial dashboards could be permitted to facilitate innovation and choice. However, these platforms and the communications with savers need to be properly regulated to ensure strong consumer protection. We do not support new Government amendments 7 and 8, which would allow the dashboards to be used to provide transactional services and remove the requirement that the non-commercial pensions dashboard service, run by MaPS, must have been established for one year, before other dashboard services can provide services.”
We are clear that commercial dashboards should not be opened to the market for at least a year and we strongly oppose UK Government attempts to undermine that. We feel that a year’s buffer was a compromise position, as there are many people concerned about having commercial dashboards at all, especially when the Government intend them to be transactional. We tabled amendment 3 to underline our opposition to any watering down of the Bill as it stands.
The Lords amendment was a compromise. The UK Government are now unilaterally forging their own path, breaking the cross-party consensus that otherwise would have existed. As the hon. Member for Wallasey rightly said, it is crucial for good governance and good pensions legislation. It seems the Government are looking to implement both commercial and financial transactions on dashboards, before assessing the risk, before assessing consumer behaviour and interaction with the MaPS dashboard, and before taking full cognisance of the risks of pension freedoms, which we are only just starting to understand. Time is the wisest counsellor of all, Mr Robertson.
We want to empower people to make informed choices about their lifetime savings. The public service pensions dashboard is a welcome step towards that and will transform consumer engagement with pensions over the long term, and reunite individuals with lost pension pots. Pensions dashboards run by commercial operators should not be opened to the market until the publicly run MaPS dashboard has been running for a least a year.
We have a long-standing additional commitment to the establishment of a standing independent pensions and savings commission. The scope of the Bill does not allow us to stretch to that on this occasion, but later in deliberations we will consider whether a commission looking at the terms of this Bill should be established. Such an organisation would first be tasked with looking at when commercial operators should be able to enter the market for the pension dashboards.
In our view, the MaPS dashboard, or public dashboard, is a wasted opportunity unless it is properly marketed and promoted by the Government as a safe, independent and impartial space for people seeking information about their pensions. We feel that it would get swamped by commercial operators seeking to promote their own dashboards and their own commercial interests.
We caution the Government to be canny, to take their time and to learn from the implementation, first of all, of the public dashboard, before they move too hastily and have to play catch-up in the regulatory format, because people fall foul by making poor decisions about what is their greatest financial asset.
Guy Opperman
I accept that the issue is complex. On the one hand the Government are being urged to proceed with the dashboard and it has been rightly pointed out that we have displayed slowness, in some respects. On the other hand, we are being urged to delay in respect of this particular matter. We do not believe that this is the appropriate way forward, as the Lords indicated, and there are a multitude of reasons why that is the case.
I start with the initial 2018 consultation. The principle behind that was that consumers should always have access to a publicly backed service, which we have legislated for, but should also have the freedom to choose to access the information in the way they feel most comfortable. I go back to the point I made to my hon. Friend the Member for West Worcestershire: do we build a service and make the consumer come to us, or do we build a service where the consumer is already comfortable, in circumstances where there are sufficient protections around that?
Consumers have clearly stated that they expect to be able to access a dashboard through a variety of channels. The pensions industry holds an in-depth knowledge of its customer base, and this represents an opportunity for consumer-focused innovation to create platforms that individuals can engage with. We believe that allowing multiple dashboards is the most effective way to drive consumer engagement and really begin to put people in control of their savings.
Seema Malhotra
The Minister is right that there will be no storage of data on the dashboard––in a sense, it is drawing in that data dynamically––but could he explain the role of the integrated service providers?
Guy Opperman
I explained this at great length earlier, but I will attempt to repeat what I said. I will jump through the verification hoops. The reality is that an individual gets verification and the information passes from the pension finder service to the connected pension schemes asking them to match the individual’s information. The pension scheme finds a match and confirms it to the pension finder service, which responds to the individual via their chosen dashboard saying that it holds the data. When the individual next logs on to their dashboard, the information from the pension scheme will be viewable by the individual. I drew the analogy of the cashpoint, which, I suggest, is the appropriate analogy, whereby if I bank with Barclays and I withdraw from an HSBC account, Barclays does not know what is in my account. That is the process by which we are trying to proceed.
Shaun Bailey (West Bromwich West) (Con)
On a slightly parallel point, with the advent of open banking, we had similar discussions on sharing data and the fears around how it might be used commercially. What we have seen is that, with a robust regime and buy-in from many of the stakeholders, it seems to have worked. Many of the fears that were advanced then and that have been articulated today have not really come to fruition. Does my hon. Friend agree that while we can talk about the legislation, it is the buy-in from stakeholders that will ensure that this succeeds?
Guy Opperman
There is no question: we are deliberately learning the lessons from open banking and the process whereby we took all our various bank accounts and made them accessible under a strict regulatory regime so that our rights were not infringed. There is now a massively enhanced consumer programme that empowers the consumer, drives down costs and does all the other things that we know open banking does. With great respect, I suggest that that is a very good example.
The big difference is that in open banking we are dealing with a relatively small number of banks in this country, unlike in, say, America, whereas with pensions we are dealing with 40,000 different schemes. But the principles are exactly the same. We have learned from the regulatory process and I have met the chief executive of Open Banking. My officials and the dashboard delivery team are engaging with them. No disrespect, but the problems that the Committee has rightly identified today are exactly the same sort of problems that were identified with open banking. These are the same consumer protection organisations, and I shall come to the approach of Which?, which is probably the No. 1 consumer protection organisation in the country. It is firmly on the side of the Government and disagrees with the amendment. My hon. Friend drew me to that.
Neil Gray
I draw the Minister back to points that he made earlier, when he said that the information provided on the dashboard will be taken sequentially so that it will be added to over time as we test and learn. Why then in this case are we not operating sequentially? Start with the MaPS, the public dashboard, and bed that in as the point of contact where people have the confidence to go for impartial information about what they are getting, without having to be exposed to marketisation. Learn from that, and then move to the position where commercial dashboards can operate. Learn from that experience, and then bring about transactionality through the dashboard in that process.
Guy Opperman
I will delay the introduction of the Which? elements for a moment. Amendment 16, for example, would delay the introduction of other dashboards, which would stifle innovation that could benefit consumers. We feel strongly that the potential exists for the production of a game-changing new system that would enable something that is not possible at the present stage, but that would suddenly be second-guessed and denied, and we will lose much momentum behind the project.
The Committee should not take just my word for it. I will briefly share the comments of Which?, from its submission on Second Reading on this proposal. It addressed this amendment, saying: “This amendment ensures that the publicly owned dashboard will have to be operational for at least a year before commercial dashboard services can operate if the Bill becomes legislation in its current form. Which? agrees with concerns that lessons will have to be learnt on the application of the dashboard, especially with regards to the use of data.
However, we do not believe that this amendment is the answer. It is a precautionary approach, and the risk is that by stymieing the development in this way, the industry will take away its innovation, drive and investment —all of which could benefit consumers. By enabling an individual to access their pensions data safely and securely via non-government providers, this can help to support take-up and engagement with dashboards by increasing the number of channels that individuals can access this information and increasing awareness. It can also help drive innovation to enable individuals to make the most of the information available via dashboards. This will only be possible if dashboard providers are permitted to provide tools and services using this data.
Furthermore, this amendment risks us being left with a dashboard that does not do as much as initially anticipated, resulting in consumers not being as engaged. This could represent a huge missed opportunity. It is crucial to ensure that dashboards are both safe and fully functional to give consumers the most choice and the most exposure to innovation.”
The hon. Member for Airdrie and Shotts will be aware that there is already the Pension Tracing Service and “Check your State Pension”, both existing organisations that address these particular points. There is no question but that the words expressed by Which? adequately address the point that it would be utterly wrong of us to promote and push forward the dashboard in circumstances where, upon its launch, even in its primitive format, we said, “You cannot access the dashboard through the provider or financial adviser you’ve been with for 30 years. You may only go through the Money and Pensions Service.” I therefore respectfully say that this is not the right approach and not something the Government support.
In respect of the delay and the parliamentary scrutiny, I would like to make two points. Parliamentary scrutiny is already taking place through the introduction of secondary legislation, which will be subject to the affirmative resolution procedure. The Money and Pensions Service is already legally required, according to the 2018 Act on this issue, to report annually to the Secretary of State on its objectives and functions. This includes the operation of the dashboard, and that report is laid before Parliament, which can debate it if it wishes.
The development of the pension dashboard does not end at the launch. The pension dashboard programme will continue user testing and research on an ongoing basis. That is the whole point of incremental delivery. The amendments, if passed, would no doubt have the consequence of delaying the production of commercial dashboards for some considerable time—the note on which escapes me, but I will try to remember—by requiring a report to the House of Commons and then a further consultation on user testing, which would effectively put back commercial dashboards, certainly by a year, and potentially by two years.
The five-year proposal that the hon. Member for Airdrie and Shotts has put forward would clearly sound the death knell for any commercial dashboard on a long-term basis. With no disrespect, I think that would be a massive missed opportunity.
Neil Gray
Amendment 3 is a probing amendment so that we can set out the fact that our feeling was that the Lords amendment was compromised. By quoting Which?, as the Minister rightly has, he seems to be suggesting that we are arguing against commercial dashboards altogether. We want a reasonable buffer in place, and we do not feel that that year would be lost for innovation or for developing a dashboard. Commercial organisations would be perfectly capable of catching up when the time came. That year would allow the Government to ensure that the MaPS dashboard is properly promoted and utilised by people and used for its intention, which is to inform good decision making for long-term savings and investments for a good return on income.
Guy Opperman
I am not sure that I can amplify or improve upon the comments that I have already made, save to make the point—again, I believe—that commercial dashboards will have to be part of the accessibility of this particular programme, and I genuinely believe it entirely right that they should be part of it from the word go, so that we can go forward together with those two particular products. Quite frankly, we keep coming back to the point that we should go to where the customer is already, rather than forcing the customer to go to some other place.
Guy Opperman
Other countries have done things in different ways—they do not necessarily have the pension system that we have. We have a very substantial private pension system; some other countries will not have such private pension systems—the hon. Lady will have to ask them. It is argued that the right way forward—having looked at what countries such as Israel and Denmark have done—is to have a parallel system and two systems, commercial and public, working together. We already have a public system, whether it is “Check your state pension” or the pension tracing service, that exists with commercial providers. What we do not have is the great capability of dashboard and I believe, with respect, that we are doing the appropriate thing to drive that forward.
Seema Malhotra
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendment proposed: 8, in clause 122, page 116, leave out lines 38 to 45.—(Guy Opperman.)
Question put, That the amendment be made.
Pension Schemes Bill [ Lords ] (Third sitting)
Thursday 5th November 2020
(4 years ago)
Public Bill CommitteesRead Full debate Pension Schemes Act 2021 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 5 November 2020 - (5 Nov 2020)
The Committee divided: - Ayes: 9 / Noes: 6 - Question accordingly agreed to.
The Committee divided: - Ayes: 6 / Noes: 9 - Question accordingly negatived.
The Chair
Before we resume, I remind the Committee that we need to respect the social distancing guidance, and I will intervene if the guidelines are breached. Also, if hon. Members have speaking notes, it would be helpful to our Hansard colleagues if those notes were sent to hansardnotes@parliament.uk.
Clause 123
Funding of defined benefit schemes
The Parliamentary Under-Secretary of State for Work and Pensions (Guy Opperman)
I beg to move amendment 9, in clause 123, page 118, line 1, leave out subsection (2).
This amendment would remove a subsection which requires the Secretary of State, when making regulations or prescribing principles or matters under Part 3 of the Pensions Act 2004, to ensure that certain purposes are achieved as regards pension schemes.
The Chair
With this it will be convenient to discuss amendment 18, in schedule 10, page 185, line 29, at end insert—
“221C Guiding Objectives
(1) In exercising any powers to make regulations or otherwise to prescribe any matter of principle under this Part, the objectives of the Secretary of State must include—
(a) supporting the ability of the trustees of a relevant scheme to decide the funding and investment strategy for the scheme taking into account the current and future maturity and liquidity of the relevant scheme consistent with the trustees’ duty to invest assets in the best interests of members and beneficiaries; and
(b) avoiding the specification of requirements in relation to funding and investment strategies that are likely to accelerate the closure of relevant schemes.
(2) In subsection (1), “relevant scheme” means an occupational pension scheme that is not near significant maturity and is open to new members and is reasonably expected to remain so, either indefinitely or for a significant period of time.”
Guy Opperman
It is a pleasure to serve under your chairmanship, Mr Stringer. I thank colleagues for their attendance and all the parliamentary staff as we try to progress parliamentary business in difficult times.
Clause 123 introduces schedule 10, which amends part 3 of the Pensions Act 2004. The clause is necessary, because it introduces amendments that improve the existing statutory framework for defined-benefit pension scheme funding and strengthen the enforcement powers of the Pensions Regulator to protect members’ pensions better. It follows from the DB White Paper and various consultations that have taken place for a considerable time.
The Government are seeking to overturn the amendment made in the House of Lords. This is with no disrespect to the other place. I respectfully suggest that no Government can commit to ensuring that contributions remain affordable or that scheme closures are not accelerated. We cannot be bound to ensuring that all schemes that are expected to remain open are treated differently from other schemes, as open schemes in this category do not all share the same characteristics. Some will be maturing, just like closed schemes, and it opens up the potential for abuse. A closed scheme could reopen to very small numbers of new members, circumvent safeguards and pursue a riskier investment strategy that would otherwise be inappropriate.
We do not want good schemes to close unnecessarily, or to introduce a one-size-fits-all regime that forces immature schemes with strong sponsors into an inappropriate de-risking journey. What we do want is to build on a well established scheme-specific funding regime that takes account of the key metrics of individual schemes in enabling trustees to assess what can reasonably be supported in terms of investment risk. To ensure that members’ benefits are protected and schemes do not take inappropriate risk, it is vital that trustees look at the characteristics of each scheme and balance scheme liquidity and investment risk with maturity. Open schemes with a strong sponsoring employer that are immature and have managed their risk appropriately should not be forced into an inappropriate de-risking journey.
I make it clear that the Government can commit to using the regulation-making powers available to ensure that the secondary legislation works in a way that does not prevent appropriate open schemes from investing in riskier investments where there are potentially higher returns as long as the risks being taken can be supported and members’ benefits and the Pension Protection Fund are effectively protected.
Neil Gray (Airdrie and Shotts) (SNP)
There is a problem with encouraging good open schemes to de-risk. We know where the bond market and gilts market is right now; we know that that puts them at risk. Baroness Altmann has intervened this week to say:
“If you decide to ‘de-risk’, then you are also deciding to ‘de-return’, taking away the upside potential that is so vital for making DB affordable. Deficit schemes just keep getting worse and contributions keep on rising. QE”—
quantitative easing—
“has undermined funding of all DB schemes”.
Is it not crucial, then, that amendment 18, which is the compromise, be allowed to go through, to ensure that good DB schemes are allowed to stay open and continue? Otherwise, as is the position at the moment, the Government are putting those at risk.
Guy Opperman
With no disrespect to the hon. Gentleman, I disagree with the premise of what he said, and I disagree with Baroness Altmann, whom I spoke to only two days ago as part of ongoing consultation with their lordships and other peers as to the nature of this type of scheme. I can only reiterate—
Guy Opperman
The context is that the regulator has a consultation on this issue. The schemes wish to have a different situation to what is proposed by the regulator. It is worth making clear what the consolation is saying because it supports the argument that the Government are making, and not that of the schemes. Does the regulator’s consultation make it clear that all open schemes will not be treated like closed schemes and forced into an inappropriate and expensive de-risking? To answer the question, I refer to paragraph 475 of the consultation, on page 109:
“We acknowledge that if such schemes do continue to admit new entrants and do not mature then the scheme will not actually reach significant maturity. We are content that such a scheme retains the same flexibility in its funding and investment strategies that all immature schemes have.”
The regulator adds later in paragraph 481, on page 111:
“This is on the basis that open schemes have a longer time until they become significantly mature than closed schemes (some are not expected to mature at all) and longer investment horizons. Because of this extra flexibility, they can expect higher investment returns over the long-term which can be reflected in their discount rate assumptions.”
I want to make it clear again—I have said it once, but I will say it again—that the Government are not proposing to introduce a one-size-fits-all funding standard and neither is the regulator. Its proposals seek to secure a reasonable balance between the protection of member benefits, fairness between schemes, and the ability of schemes to take more investment risk, especially where an immature scheme has a strong employer and expects to remain open and in a steady status for a long time. There is an ongoing consultation. On 2 October, I met with individual schemes making this case and discussed it for over an hour. I have also engaged with the peers who are the proponents of this amendment.
I regret to say that the Government do not agree that amendment 18 is an appropriate compromise. The amendment is unnecessary and unhelpful. We state that trustees are required to act and exercise their powers, including their investment decisions, in the best interests of their members and we are not seeking to change that. Trustees must first and foremost carry out the terms of the trust in accordance with the trustee, the rules of the scheme and the applicable law. Legislation must set the boundaries within which the trustees can exercise their discretions and ensure that their legislative duties operate in such a way as to protect all members by also protecting the PPF and its levy payers.
There is no mention in amendment 18 of the ability of the sponsor to pay more in the future if investments do not perform as expected, and that must be part of a scheme-specific regime that assesses whether risk is supportable in a transparent and rational way. It is reasonable for schemes to invest in return-seeking assets to try to keep costs down, if that risk is supportable. Indeed, the Government have made that clear—I am the Minister who brought forward the illiquid proposals, which permit investment in venture capital, renewables, social housing and the like. The Government are not against such investment as part of a balanced portfolio. We are not in support of amendment 18.
Neil Gray
The Minister protests strongly the Government and TPR’s intentions. Why then not allow those protections and the intentions of the Government to be on the face of the Bill? The Opposition’s amendment 18 would satisfy those concerns and ensure those protections and also what those open schemes are calling for.
Guy Opperman
With respect, I do not agree. The proposals in amendment 18 are not in accord with the proposals in the consultation by the regulator. As I have outlined, there are significant problems with such an amendment, and it is not something that this Government, or any Minister in my position, could support.
Seema Malhotra (Feltham and Heston) (Lab/Co-op)
It is a pleasure to serve under your chairmanship, Mr Stringer. I thank the Minister for his opening remarks. He has had considerable dialogue with the hon. Member for Birmingham, Erdington (Jack Dromey), who I know is sorry that he cannot be here today. I will speak to Government amendment 9 and also Labour’s amendment 18 on his behalf. I also thank the hon. Member for Airdrie and Shotts for his interventions.
We regret that the Government seek to remove the amendment made to clause 123 in the Lords. As the Minister is aware, there are grave concerns about the impact of the provisions in the Bill on open DB schemes, which includes many public sector schemes. Labour has been clear all along that we do not accept the premise that good DB schemes are not worth protecting.
Seema Malhotra
I thank the Minister for his intervention, and I am happy to see that that commitment continues to be made. Nevertheless, it is not least because DB schemes currently have 10.5 million members, with £1.5 trillion under management. The Minister will have noted that the Pensions Regulator recently made clear its desire to
“develop an approach that works well for open schemes”,
stating that it wishes to
“secure a reasonable balance between protection of member benefits, fairness between schemes, and flexibility for schemes to fund and invest as they wish—especially where they have a strong covenant and a long-time horizon.”
The new subsection (2)—as amended with this objective in mind—requires the Pensions Regulator to take a different approach to regulating the funding of open DB schemes, compared with those that are closed. It sets out several factors for the Secretary of State to take into account in regulations regarding scheme funding, which include distinguishing between open and closed schemes, balancing scheme liquidity and scheme maturity, and ensuring that affordability of contributions for employers and members is maintained.
Notwithstanding the Minister’s comments, I want to continue with our argument. A number of peers with considerable authority in the pensions world spoke in favour of the amendment. The Minister said he had spoken with some of them in recent days, including Baroness Altmann, who supported the amendment in the Lords. Baroness Altmann noted that the Pensions Regulator’s funding code seems
“to want to drive DB schemes on a path to so-called de-risking, aiming for a particular date of maturity. This concept is simply inappropriate for an open scheme.”—[Official Report, House of Lords, 30 June 2020; Vol. 804, c. 681.]
However, given that the Government do not wish to retain these provisions, Labour’s amendment 18, in the spirit of constructive engagement that we have maintained throughout this Bill, offers a compromise—as was noted by the hon. Member for Airdrie and Shotts—which aims to address the need for flexibility in the treatment of open schemes with the Government’s aim, which we share, to ensure that schemes plan appropriately for the long-term.
The Minister said that this was not an appropriate compromise, but allow me to lay out our arguments for proposing it. In drafting amendment 18, we sought to address some of the concerns that were raised about clause 123, as amended in the Lords. The present amendment has two core objectives. The first is to support the ability of trustees to decide the funding and investment strategy for schemes, taking into account current and future maturity and liquidity, consistent with the trustees’ duty to invest assets in the best interests of members and beneficiaries. That is intended to protect schemes from any inappropriately risky or risk-averse requirements that would significantly adversely affect the affordability of schemes for employers and members. The second is to recognise that schemes are usefully and beneficially open to new entrants and should be allowed to remain so. The amendment is aimed at avoiding requirements in funding investment strategies that are likely to accelerate the closure of relevant schemes.
Richard Thomson (Gordon) (SNP)
It is a pleasure to serve under your chairmanship once again, Mr Stringer. I am pleased to get the chance to delve further into some of the issues that were raised on Second Reading, of which this was one. I am happy to add my support, along with that of my hon. Friend the Member for Airdrie and Shotts, to amendment 18.
When I spoke on Second Reading I warned of the need to be aware of unintended consequences, one of which originated outside the Bill. One that merited clear guidance in the Bill to prevent it from ever coming to pass was the issue around defined-benefit schemes.
The Minister says he does not want good schemes to close and schemes to be forced into the de-risking process. That is fine and good as far as it goes, but Ministers come, Ministers go, Ministers change their mind, yet legislation endures. I have been very impressed with the Minister’s handling of the Bill today and I do not want to see him go anywhere—
Richard Thomson
I have got a bit to go. The Minister highlighted paragraphs in the Pensions Regulator’s recent consultation, but I draw his attention to paragraph 210, which states:
“We consider that trustees’ focus should be to ensure the security of members’ accrued benefits rather than to ensure the provision of future benefits.”
Taking all that together, it is at best inconsistent. It should be obvious why we all want to be assured that schemes are funded to meet their liabilities. Nevertheless, that is a deeply worrying statement for many people, including the scheme managers and trustees. There needs to be a difference in the investment strategy between DB schemes, which are open to new members, and those that are not.
As the Minister said, there are clear differences between open and closed schemes. A scheme that is closed to new members, for example, has to have a fixed end point, and their assets need to be readily available to pay pensions. That means investing in assets where the value is predictable, which inevitably leads to investing in asset classes that have lower returns.
In stark contrast, a scheme that is open to new members sees scheme leavers replaced with new members. It does not have to sell assets to pay pensions and can continue indefinitely. To deliver the required investment returns, it needs to be free to invest in a range of asset classes, which may be more speculative and less predictable, but which, nevertheless, over the longer term, might be expected to deliver better financial results and outcomes for the members.
Again, I hear what the Minister says about the actions he has personally taken to increase the range of asset classes in which pension schemes can invest. That is all well and good, which makes it seem all the stranger that we might end up inadvertently with the unintended consequence of choking that freedom off for DB schemes, for want of a lack of clear guidance in the Bill. That is assuredly what will happen.
If we insist on ensuring the security of accrued benefits, which are not at any serious risk, we effectively begin to mandate an investment policy suitable only for closed schemes. As soon as that happens, the potential returns are restricted. The liabilities of the schemes increase overnight, potentially anywhere between £120 billion and £160 billion. The cost of contributions to the employer, potentially the employee, or both is therefore increased. Inevitably, over time—potentially a very short time—the schemes are rendered unaffordable, and we see the closure to new members of what were otherwise perfectly good DB schemes.
Clause 123 provides for open schemes to be treated differently, given their unique characteristics. Retaining the amendment made to the clause would certainly be a stronger safeguard than amendment 18. However, amendment 18 is a genuine attempt to try to find a compromise position that captures the essence of clause 123, while at the same time managing to be far less prescriptive in what the Secretary of State is obliged to do.
Some 21% of DB scheme members belong to schemes that are still open to new members. They still perform a vital role in people’s pension retirement provision, often for lower and middle-income families who have few other savings, and the matter therefore warrants the most careful attention. Amendment 18 would provide the means by which we can ensure that those DB schemes can continue to thrive and deliver for all their members, present, past and future.
I agree with the Minister when he says that there needs to be a reasonable balance between those classes of member, but legislation can be used to usefully set the parameters to guide trustees, which is exactly what amendment 18 would do, given the mixed messages from the regulator. If it is not deemed to be an appropriate compromise, I invite the Minister to work cross-party to try to find a compromise that would offer reassurance to scheme members and managers and that can definitely guarantee the future of DB schemes. Leaving it out of the Bill will not offer reassurance and, given the current mixed messages coming out of the regulator, will lead us down the path of unintended consequences with adverse outcomes for many of those who can least bear the cost.
Guy Opperman
I loved the first part of the hon. Gentleman’s speech, and I am grateful for his tacit endorsement of our approach. I also loved the latter part, because I do want to work on a cross-party basis. If mixed messages have in any way been interpreted—I am not sure it is an intention in any way by the regulator; I assure him of that and I have spoken to the regulator—and if any clarification needs to be made, I cannot repeat any more that we are here to support DB in whatever shape or form. We have had a DB White Paper, and that consideration and the consultation has brought forward various things. The ongoing consultation by the regulator is exactly that—a consultation.
The request was made for more thought. There is a legitimate and relevant point, although I will resist the amendment, that this is a perfectly valid debate to have in this place. It will definitely influence the regulator’s approach and ensure that, if there is any doubt whatsoever, not all schemes will be treated the same. There is not a one-size-fits-all approach. If anyone is proposing that that is the case, it simply is not. Every scheme should be looked at on its own merits and in its own particular way, because, as all colleagues have rightly identified, schemes have different profiles, different amounts and different objectives. That is what the regulator is trying to do—to build on the current approach.
I make a couple of quick points. Most schemes will not need to change their approach, as they are already doing the right thing. The investment risk that is supportable for each scheme will continue to depend on scheme- specific factors, including scheme maturity and the strength of the employer covenant, as is currently the case. Maturing schemes, whether open or not, will be expected gradually to de-risk their investments as they move towards lower dependence on the employer. There will be no such requirement for schemes that remain significantly immature, with strong employer covenants, who have been pursing appropriate funding and investment strategies. Taking investment risks—however one wants to describe that—is utterly acceptable as long as it is supportable.
I repeat that I am the Minister who, at the same stage as I am trying to improve and support DB, has given the schemes the power under the illiquids consultation to invest in alternatives, whether that is in green infrastructure, social housing or venture capital, building on the Treasury’s work with the patient capital review and building on the work that the Department for Work and Pensions has done for some considerable time, to make it crystal clear that such investments can be pursued and that they can also produce a higher return.
Richard Thomson
Does the Minister accept that there is a difference between being given the opportunity to invest in those asset classes and having the freedom to invest in them, if there is a perception that people are being guided down a route of de-risking, and would not that be the benefit of setting it out loosely or flexibly in legislation, in terms of the guidance that could then be given to trustees on how those schemes ought to be managed?
Guy Opperman
The appropriate way forward, with respect, is a three-pronged approach, which would be a combination of primary legislation, regulation and the DB funding code to balance effectively employer affordability and member security. I think we all start with the fundamental principle—certainly as Minister I have to have it as the guiding principle—that the member is the most important person to be safeguarded, and I believe that the three-pronged approach is the appropriate way. There is an ongoing consultation and I genuinely believe that it should be allowed to run its course, with us all having the opportunity to make points to it.
I will just finish the point I was making: the scheme funding measures in the Bill, together with secondary legislation and the revised scheme funding code, seek to support trustees and employers to manage their scheme funding with a focus on longer-term planning. As is now the case, the scheme’s liquidity requirements and investment timelines and the amount of risk each scheme can support will depend on factors including its maturity and the strength of the employer covenant. Trustees can and do already invest in illiquid assets such as infra- structure, and our measures do not seek to discourage such investments where they are appropriate.
Seema Malhotra
I beg to move amendment 17, in clause 124, page 118, line 23, leave out “an occupational pension scheme” and insert—
“(a) an occupational pension scheme, or
(b) a contract-based workplace scheme”.
This amendment would add contract-based workplace schemes to obligations under this clause, as well as occupational pension schemes.
I will keep my remarks on the amendment brief. In a sense, it builds on the positive work in the Lords on climate change by extending the provisions in the clause to contract-based workplace schemes as well as occupational pension schemes. I hope the Minister will agree that it is a common-sense extension of the welcome measures already contained in the Bill, and that it would ensure effective governance of all relevant schemes with respect to the effects of climate change.
Guy Opperman
The clause introduces a variety of measures in respect of climate change risk. We believe the clause and the regulations that it allows the Government to make are a huge step forward in the UK’s fight against climate change and mark the first provisions of their kind globally.
We are proud that this Government are the first among the G7 to introduce a target for net zero by 2050. We are among the leaders in environmental, social and corporate governance with the pioneering way that we are transforming the pensions and asset managing processes of the City of London, and the pensions provision, on an ongoing basis. We have the green finance strategy that the Government have introduced. I respectfully suggest that the build-up to COP26, which is one year from today, gives us an opportunity to show the great work that we are doing in this country and to demonstrate how we can show leadership around the world.
I believe we all know and accept that climate change is a pressing and imminent threat not only to our planet, but to our investments and, therefore, to our pensions. Back in August, my right hon. Friend the Secretary of State for Work and Pensions launched the Government’s consultation on the measures they propose to introduce, which include powers to ensure that pensions are properly protected against the risk posed by climate change and can take full advantage of the investment opportunity it presents. I believe that there is an opportunity for this country to lead the way—an opportunity to be the first in the market as we create climate change-friendly investments and an investment strategy that genuinely transforms this country, helps us to get to net zero and provides sustainable long-term pensions.
Gareth Davies (Grantham and Stamford) (Con)
I warmly welcome clause 124, which affirms the Government’s commitment to tackle climate change using the power of finance and investment to move things forward. Does he agree that the issuance of a green gilt and asset purchase facility is a good next step forward in enabling more pension funds in our country to invest in our bond markets in a way that will help us to meet our climate change targets?
Guy Opperman
My hon. Friend is a specialist in this field thanks to his profession prior to being elected to the House. It seems to me that as we drive forward the ESG reforms and the changes under clause 124, and as we have climate-related financial disclosure, pension funds will wish to invest in a sustainable way that produces an appropriate return but is supportable from an ESG point of view.
Effectively, only three forms of capital can provide the infrastructure renewal and retrofitting that will be required for us to get to net zero: Government money though taxes, private sector money brought forward by individual companies, and pension fund investments. Creating a green gilt, as the French, the Germans the Poles and some parts of California have already done, would be a very good way forward. To their credit, the Chancellor and Ministers at the Treasury are looking into it, and I believe that such a move will happen in the fullness of time.
I utterly support the efforts of my hon. Friend to ensure that a green gilt is an alternative form of investment for pension funds as they seek to invest in a sustainable long-term way that also supports the objective of this country. I utterly support the campaign that he has been fighting, both in word and in the House, on that issue.
Seema Malhotra
It is a matter of cross-party pride that we are seeing the commitment to climate change risk come into pensions legislation, and that we are leading the way on this issue. Over the past few years, we have introduced flexibility for trustees to look at non-financial measures in relation to investment decisions, which is an important part of the journey. In the spirit of these legislative provisions, does the Minister agree that, to realise the potential of the Bill and the opportunity for trustees, it is important to continue dialogue and to seek international agreement? Some countries are making progress in the right direction, but others are not—for example, the legislation passed in Australia looks like it is going in the opposite direction.
Guy Opperman
The hon. Lady makes a number of good points, all of which I endorse. It was noted in the record of the conversation between the Prime Minister and his Australian counterpart only last week that our Prime Minister tried to make the case to Mr Morrison that Australia should be doing more on climate change. The flipside of that is that, clearly, we should be using our advocacy. It is to his great credit that the right hon. Member for Doncaster North (Edward Miliband), when he was the Secretary of State for Energy and Climate Change in the Labour Government, introduced the Climate Change Act 2008. That work has continued since under the coalition Government and the Conservative Governments. The direction of travel could not be clearer in this county, and I believe our legislation has made clear what we are trying to do.
The Chair
Order. I do not want to turn this into a full-blown debate on climate change. We are debating a proposed amendment to a clause, which takes into account climate change in a specific way. I would be grateful if the Minister focused his remarks on the amendment.
Guy Opperman
I entirely endorse everything you say, Mr Stringer, and I apologise. I was answering too fully what I would suggest is probably a legitimate question from the hon. Member for Feltham and Heston about a clause entitled “climate change”.
However, to return to amendment 17, I respectfully suggest that that is not necessary. There are two fundamental reasons why. First, action has already begun on that specific issue; I have provided the hon. Lady with the exchange of correspondence between myself and Chris Woolard, the interim chief executive of the Financial Conduct Authority, dated 30 September and 22 September 2020, which specifically addresses the point. The FCA is the appropriate regulator to make proposals for its regulated sectors. The FCA, as Chris Woolard makes clear, will be making proposals on climate change with respect to personal pension schemes, otherwise known as contract-based schemes. The letter has been in the House of Commons Library since Second Reading.
I can assure the Committee that the FCA plans to consult on corresponding climate-related financial disclosures for personal pension schemes in the early months of next year and to finalise the rules by the end of 2021. That will mean that by 2022, subject to consultation and cost-benefit analysis, pension schemes, no matter whether they are occupational or personal, will be subject to TCFD reporting requirements. The whole point of the exchange of correspondence is that the FCA has effectively accelerated the process it has been going through to catch up with what the DWP and regulators are doing in this space. Given that announcement, I urge hon. Members to withdraw amendment 17.
Seema Malhotra
I take on board the points the Minister has made. This is an area that may requires further dialogue, and we will reflect on what the Minister has said. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 124 ordered to stand part of the Bill.
Clause 125
Exercise of right to cash equivalent
Stephen Timms (East Ham) (Lab)
I beg to move amendment 21, in clause 125, page 121, line 11, at end insert—
“(e) the results of due diligence undertaken by the trustees or managers regarding the intended transfer or the receiving scheme.”
This amendment enables regulations under inserted subsection (6ZA) of section 95 of the Pension Schemes Act 1993 to prescribe conditions about the results of due diligence undertaken in relation to a transfer request such as to determine that the statutory right to a transfer is not established if specific “red flags” are identified in relation to the transfer or intended receiving pension scheme. Amendments 22, 23 and 24 are related.
The Chair
With this it will be convenient to discuss the following:
Amendment 22, in clause 125, page 122, line 4, at end insert—
“(e) the results of due diligence undertaken by the trustees or managers regarding the intended transfer or the receiving scheme.”
This amendment enables regulations under inserted subsection (5A) of section 101F of the Pension Schemes Act 1993 to prescribe conditions about the results of due diligence undertaken in relation to a transfer request such as to determine that the statutory right to a transfer is not established if specific “red flags” are identified in relation to the transfer or intended receiving pension scheme. Amendments 21, 23 and 24 are related.
Amendment 23, in schedule 11, page 193, line 20, at end insert—
“(e) the results of due diligence undertaken by the trustees or managers regarding the intended transfer or the receiving scheme.”
This amendment enables regulations under inserted subsection (6ZA) of section 91 of the Pension Schemes (Northern Ireland) Act 1993 to prescribe conditions about the results of due diligence undertaken in relation to a transfer request such as to determine that the statutory right to a transfer is not established if specific “red flags” are identified in relation to the transfer or intended receiving pension scheme. Amendments 21, 22 and 24 are related.
Amendment 24, in schedule 11, page 194, line 15, at end insert—
“(e) the results of due diligence undertaken by the trustees or managers regarding the intended transfer or the receiving scheme.”
This amendment enables regulations under inserted subsection (5A) of section 97F of the Pension Schemes (Northern Ireland) Act 1993 to prescribe conditions about the results of due diligence undertaken in relation to a transfer request such as to determine that the statutory right to a transfer is not established if specific “red flags” are identified in relation to the transfer or intended receiving pension scheme. Amendments 21, 22 and 23 are related.
New clause 10—Pensions Guidance—
“The Secretary of State must write to members or survivors of pension schemes five years prior to the age of becoming eligible to access their benefits, to state a scheduled date and time for a pensions guidance appointment, or the option to reschedule or defer this appointment; and write annually until a pensions guidance appointment has been taken, or the member’s desire to opt out has been confirmed.”
This new clause would ensure members or survivors of pension schemes receive an impartial pensions guidance appointment prior to the point when they become eligible to access their pension benefits, with an appointment booked each year until such time that the member has received impartial guidance.
Stephen Timms
I am pleased to be serving under your chairmanship this morning, Mr Stringer.
The Work and Pensions Committee, which I chair, discussed amendments 21 to 24, and I am grateful to Labour colleagues on the Committee, the Conservative Vice Chair of the Committee, the hon. Member for Amber Valley (Nigel Mills), and the right hon. Member for New Forest West (Sir Desmond Swayne) for putting their names to the amendments. I am grateful to the hon. Members for Airdrie and Shotts and for Gordon for doing so today as well. This is a tripartisan amendment, as all good pension policy should be.
Last weekend, I was in touch with a nurse who works at a health centre in my constituency. Her husband drives a black cab. Some years ago, a financial adviser they knew well and who had given them good advice previously called and told them about an opportunity to realise their pension savings early with no real downside. They took up his offer. The upshot is that all their savings have gone and they now face a massive tax bill of about £60,000 with no means to pay it. The financial adviser, I understand, is living on a yacht in Tenerife.
All of us can understand just how devastating is the impact on hard-working families of being robbed of their life savings in that way. People who have saved conscientiously, worked hard and done the right thing, and who are entitled to be able to look forward to secure retirement, suddenly find that their hopes have been destroyed. The Transparency Task Force, one of the groups that urged the Select Committee to undertake an inquiry on scams, reports cases of spouses who, sometimes for years, have not dared tell their partner what has happened, so awful are the consequences. People wake up every day in dread of the future. They are often ashamed and embarrassed to have fallen for such a barefaced lie. Scammers groom people; they become trusted family friends. They “warn” savers that schemes will advise them not to transfer their money, and claim that that is because the schemes want to hang on to it for their own benefit. If the saver does become aware that the receiving scheme has fallen foul of regulators, they will say that that was just because someone was late filling in some forms.
It seems absurd that, as the law stands, trustees are compelled to make a transfer if a member demands it, even if the trustees know that the money is being handed over to crooks. Even if the receiving scheme is on the warning list, published by the Financial Conduct Authority, of firms known to be suspect, the law requires trustees to go ahead with the transfer; and if they are slow about it, they can be fined.
The Select Committee on Work and Pensions has launched an inquiry on the impact of the pension freedoms five years after they were introduced in April 2015, and the first of three parts is looking at pension scams. It is striking how loud a call there has been, from many different places, for the Select Committee to look at this matter. It reflects widespread revulsion at some of the scandals we have seen and fear of the damage that they do—certainly to individuals, but also to the industry as a whole. There has been a particular worry that the pension freedoms plus the financial pressures of the pandemic could be creating what the Pensions Regulator has called a golden age for pension scams, so the inquiry is looking at the prevalence and impact of scams.
Margaret Snowdon, who leads the Pension Scams Industry Group, told the Select Committee at its meeting on 16 September that, based on a survey that the group carried out a couple of years ago, it estimates that some 5% of pension transfers in the last five years have been into scams. The amount may total £10 billion over that period and 40,000 people may have been affected; some will not yet know that they have been scammed. And this is carrying on. Responsibility for preventing and responding to scams cuts across many different bodies, and our witnesses reflect that. It is a tragedy that many victims see very little, if any, of their money ever returned.
The Bill was amended in the other place before the summer break—the amendment was, I am glad to say, accepted by the Government—so that if a defined-benefit transfer application raises one of the red flags on a prescribed list of features likely to indicate that there is a scam going on, the trustees must delay the transfer until the saver has taken financial advice.
These four amendments are based on work by the Pension Scams Industry Group. I pay tribute to Margaret Snowdon and her colleagues for their hard work. The amendments would empower trustees to refuse a transfer altogether if they had good grounds, based on the red flag analysis, for believing that a proposed transfer involved moving pension savings into a scam. It would say to the trustees, “You don’t have to do this.” The amendments provide for the making of regulations that prevent a transfer from taking place, depending on the results of that due diligence on the receiving scheme undertaken by the trustees or the scheme managers. That would allow a period of consultation and evidence gathering before regulations were drafted and implemented, to ensure that the detail was right.
I am grateful to the Minister for the helpful discussions we have had on this point since the summer. I know that he is as appalled as I am by the impact of scams, and that he has been looking very carefully, with his officials, at whether it is possible to achieve the effect of the amendments—without actually accepting them—by using powers already in the Bill. I am looking forward to what he will have to say to us today about that. From what I have seen, and thanks to the work of his officials, it does look as though it might well be possible to deliver the effect of the amendments with regulations under the Bill as it stands. I was sceptical about that to begin with, but thanks to the work that the Department has now done, I can see that that might well be the case.
I want to sound one note of caution. I understand that the Department would like to exempt from its proposed regulations certain categories of scheme. For example, it would want to guarantee that a transfer to an authorised master trust should not be blocked on the basis of a red flag assessment. Actually, I have no problem with exempting authorised master trusts, given their oversight by the Pensions Regulator, but it would be a serious mistake to exempt FCA-registered schemes, because a lot of scams are FCA registered.
I am told, for example, that it is perfectly possible for schemes to be both FCA registered and on the FCA warning list. Typically, those might involve an overseas adviser, probably not FCA registered, who would use the platform of a UK self-invested personal pension which is FCA registered to offer exotic investments overseas. That is precisely the form that many such scams take. When the regulations are drawn up, whether under my amendments, if they are accepted, or under the existing powers as the Minister intends, it is important not to create a large loophole to allow the bulk of the crimes to carry on. We certainly need to improve drastically the protection for savers. Implementation of the pension freedoms without safeguards has inflicted great harm. We must now put essential safeguards in place.
I come now to new clause 10. Last week, the Department published a document entitled, “Stronger nudge to pensions guidance: statement of policy intent”. That does not sound like a document that will set the world or fire, but I think its content is widely regarded as rather timid and disappointing. It does not deliver the default guidance approach that Members on all sides wanted when the Financial Guidance and Claims Act 2018 became law and was debated.
Consumer organisations are also calling for people to be directed to an appointment automatically, rather than expecting them to sort one out for themselves. We know how successful harnessing inertia to bring people into pension saving has been; we should harness inertia as well when people come to access their pension savings—auto-enrol in, but auto-enrol out, too. New clause 10 would auto-enrol pension savers into an appointment with Pension Wise these as they approach the point of accessing their pension. Put savers’ interests first and recognise the dangers in hasty, badly made decisions.
Pension Wise is delivered by Citizens Advice. It is immensely popular with the rather small number of people who use it. Nine out of 10 of those who use it report high or very high satisfaction. That is a pretty impressive level of satisfaction, yet the service is hidden away from most people. A significantly higher number of users than non-users say that they are very or fairly confident about avoiding pension scams having used Pension Wise. The default ought to be that people get an appointment.
Progress on take-up has been poor. Pension Wise reaches only a fraction of those who need it most—non-advised pension savers at the point when they choose to access their pension savings. The FCA estimates that between one in 10 and one in eight savers—a tiny proportion—first use Pension Wise when accessing a pension, and what should be the norm is instead the preserve of a minority. We should not be surprised about that. Pension planning is complicated, people do not know the ins and outs, and it very easily drops down a to-do list with all the other things going on, despite its importance.
In the statement of policy intent of last week, the Department said it will implement a guidance policy based on the “Stronger Nudge trials” of the Money and Pensions Service. Those trials did show a very limited increase in appointment bookings resulting from the nudges that were tested, but it is nowhere near enough. That is why the amendment is necessary.
Two nudges were tested. The first was that the pension provider offered to book a Pension Wise appointment for the consumer; the second was that the customer was transferred to the Money and Pensions Service, who then booked a Pension Wise appointment for them. The document sets out that, with both nudges, around 11% of pension holders attended a Pension Wise appointment, compared with 3% in the control group.
It is perfectly true that one in nine is a better level of take-up than one in 33, but we can surely agree that we must do far better than that. Auto-enrolment was needed for pension saving precisely because the nudges that we had all tried for years did not work. That is why we now have more than 10 million extra people saving into work- place pensions. Pension saving has become the norm, and impartial pensions guidance must become the norm as well. That is what the amendment would deliver.
Neil Gray
I do not have too much to add to the fantastic speech that has just been made by the right hon. Member for East Ham, the Chair of the Select Committee. I have to say that my heart breaks—I am sure others feel the same—for his constituent and the way that family has been treated and the situation they are now in. That case reinforces the need—if there ever was one—for stronger and more robust action, and that is why we support the amendments and new clause.
I especially concur with the right hon. Gentleman’s points about the actions of trustees where there are red flags and hope that the amendments or the Ministers response will satisfy our concerns that that will be addressed. We support these amendments on pension guidance and protecting against scams. We have been contacted by a number of organisations in this area, not least Just Group plc, who I am very grateful to for its briefing.
The Department appeared to pre-empt some of these discussions with its most recent statement of policy intent, which suggested a stronger nudge towards using Pension Wise. It is worth repeating the point made by the right hon. Member for East Ham that the cited MaPS stronger nudge trials showed only a very small increase in the number of people who actually went on to have a Pension Wise appointment. The DWP claimed that it
“significantly increased the take-up of Pension Wise guidance.”
But, again, this is pure spin.
The hon. Member for Delyn earlier in the Committee stage said that we should look at outcomes. We agree. The outcome of the stronger nudge trials was to get people to Pension Wise appointments in less than one in ten cases. It moved them from 3% to 11%. Eleven per cent. A stronger nudge is just not going to be enough, not by a long chalk. On that trajectory, the most the DWP could hope for, according to Just Group plc, is that between 20% to 25% at the upper end of the range of eligible pension savers would receive their Pension Wise session.
That was a huge concern of ours during the passage of the Financial Guidance and Claims Act 2018. We argued then for an opt-out guidance system, and now we are back to looking at this again. We still support this approach. The Government appear not to be willing to accept what colleagues across the House from all parties, Select Committees, and consumer groups and industry experts say is the best way forward. Instead, they are pushing stronger nudge.
The Government have not provided a timeframe for the DWP’s planned consultation on the new guidance rules for occupational defined-contribution schemes, nor the FCA’s rules for contract-based providers. In previous aspects of the Bill we have been asked to trust the Government to draft the necessary regulations. The same was said in consideration of the 2018 Act in this area, but we are still waiting. While I accept that the Chair of the Select Committee, has been having more intense discussions, I am sceptical. For those reasons and others outlined, we support the amendments and new clause.
Guy Opperman
I thank the right hon. Member for East Ham who leads the Select Committee for his kind words and heartfelt speech. I echo the comments in terms of his constituents, who clearly have had a terrible time. My thoughts are with them.
I will try to address the points raised. In respect of clause 125, the objective of the Government is quite clear. We wish to bring forward measures that will significantly and realistically prevent future scams. We believe that transfers will not go ahead if the conditions set out in the regulations are not met. These conditions can relate to both the destination of the transfers, meaning transfers can be prevented to schemes that do not have the right authorisation, and cases where the member has not supplied the evidence of, say, employment or residency. Importantly, those conditions can also include other red flags, such as who else is involved in a transfer. If those red flags are apparent, the regulations will enable the trustees to refuse to transfer. If the red flag is significant, it will direct the member to guidance or information that they must take prior to being allowed to transfer. Trustees will need to undertake due diligence to establish whether those conditions are met or not. Clause 125 puts trustees in the driving seat in relation to permitting transfers to proceed.
The right hon. Gentleman raised a number of specific issues, which I will try to address. The first relates to the scope of clause 125 in respect of DB and DC pension schemes. I take his point on master trusts, but I assure the Committee that the conditions to be met in relation to safe destinations, red flags and guidance before a transfer can proceed will be applicable to members of DB and DC schemes. Those conditions will be in addition to the current advice requirements for DB members seeking to transfer over £30,000 cash-equivalent value.
I have had discussions with the right hon. Gentleman, both in writing and in person, and with other colleagues on the Work and Pensions Committee, stakeholders, interested parties and other parliamentary colleagues. I have also engaged at great length, sadly by Zoom, with the all-party parliamentary group on pension scams, and then followed that up individually.
Colleagues who are concerned about the extent to which the PSIG requirements of red flags are being met should read the exchange of correspondence in the Library, following the right hon. Gentleman’s agreement that I could disclose it, in respect of the background of our meetings in September on two occasions, the letter that I wrote on 6 October, which included the Financial Conduct Authority’s approach of 5 October, and the follow-up letter of 22 October. If that second letter is not in the Library, which I am not totally sure it is, I will ensure that it is by close of business today. I wish also to put on record my thanks for the efforts of the PSIG, Margaret Snowdon and the various other parties who are all working for the common good to ensure that scams are prevented.
I will speak about guidance in a second, but first I will make two points. Clearly we wish to prevent, as far as possible, any scams or misdemeanours taking place, but that will have to be done through primary legislation and secondary regulations. It seems to me, as this process has been developing, that there is a degree of symmetry between the work that stakeholders—the PSIG and others—are doing, the work that this House is doing by passing primary legislation, and the specific drafting and codification of the regulations, which will be the nuts and bolts that will take this forward.
My objective is that we pass clause 125, which provides the statutory framework. My hope is that Royal Assent is received speedily and I suspect that my civil servants, who obviously have nothing else to do in these difficult times, will be able to progress the regulations very soon. I am hopeful that the Work and Pensions Committee report will have been published by then, and the ongoing dialogue that we have had with the Select Committee, cross-party, will continue, so that we frame the regulations that flow from clause 125 to accord with all our stated objectives.
I accept that the devil is always in the detail. We are all trying our hardest to be as precise as possible, without the regulations having been drafted already, but with regard to the four red flag objectives that are set out and that the right hon. Gentleman has rightly brought to my attention on Second Reading and in correspondence, I am confident that the answers that I have given to him in writing, and that the FCA has given, constitute a basis upon which we can regulate to prevent those matters.
The right hon. Gentleman is trying to tease out the extent of the amendments that he has tabled and the extent to which the Government can address them. We are able to address those matters within the confines of clause 125. I stress that we want to ensure that the powers can be applied quickly. I accept that time is of the essence in ensuring that the regulatory powers come forward as a matter of urgency.
Stephen Timms
I am grateful for the Minister’s perceptiveness in our discussions. May I check that he accepts the point that I made, that there should not be a carve-out for all FCA-registered schemes? FCA-registered schemes have been part of the problem in quite a lot of the scams that have arisen over the past few years.
Guy Opperman
The right hon. Gentleman flagged that to me. I will attempt to give an answer—he only flagged it to me this morning, but I have tried to devise a precise answer. We are considering how we can use the powers in the Bill to address those specific concerns about self-invested personal pensions. They are clearly an FCA-regulated personal pension scheme that permit investment in a broader range of investments than conventional personal pensions do.
I am asked to point that in 2018 the FCA wrote to SIPP operators to remind of the due diligence requirements to follow when accepting customers’ investments. The FCA considers—this is the instruction I have been given, but I will follow it up in more detail—that most SIPP operators adapted their due diligence procedure in line with the FCA’s expectations, or have voluntarily left the market as a result of the FCA’s scrutiny. I assure the right hon. Member for East Ham and the Committee that that is the extent to which I can give him an answer today.
I will go away and drill down in more detail before Report and Third Reading, because the right hon. Gentleman makes a legitimate point. Clearly, the regulator is a separate one that I do not control, but in the time I have I will come on to how it is that we are trying to get the regulators to work together—how Project Bloom is something that we are addressing on an ongoing basis. We will get back to him before Report. However, my understanding is that we are considering how to address that issue within the confines we have. The point is legitimately made.
Neil Gray
Forgive me, for I have not been privy to all the discussions that have been going on. I take Members at their word that the exchanges that have been going on have been constructive. I therefore do not want to break that consensus in any way, but I am looking for some guidance from the Minister, in particular on the red flag amendments. Given that he has accepted that time is of the essence, and accepts the premise and principle of the amendments that we support, why is he unwilling to see them in the Bill? Is there a particular reason? What is his reasoning why those amendments cannot be accepted to ensure that they are in primary legislation as an added protection?
Guy Opperman
The simple answer is that this is not something that could be in primary legislation and then enforced; primary legislation is the framework, and it is has to be in the subsequent specific regulations that follow. I can give the hon. Gentleman an assurance on that point, as I have given it to the Chair of the Select Committee.
We accept these matters and believe that clause 125 already addresses the points made by the amendments, but we still have to draft specific regulations to deal with the specific problems, and those will be much larger than clause 125 and way more comprehensive. The process of dealing with a transfer, what particular points apply, how it is a trustee operates due diligence and how it is that that process works, is genuinely a complex process. Detailed provisions have to be gone through, working with the various parties going forward. The point I am trying to make is that we agree with the principle of the amendment, but it should not be on the face of the Bill; we should accept that clause 125 provides the framework, and we then need to deal with the regulations going forward.
In the time remaining, I will try to address the points about guidance and see if I can assess that in a particular way. Briefly, it is entirely right that people should be supportive of the good work that Pension Wise has done. Demand for the service has grown year on year since we launched it in 2015. The service delivered 205,642 transactions in 2019-20, which was a combination of face to face, telephone and online—more than triple the sessions in the first year of operation—and has had 10 million visits to the website since 2015.
I would push back on the argument for new clause 10, which is that there is no previous engagement. The DWP’s work should also be seen in the context of the work that the FCA does. There is already a multitude of interventions at an earlier stage. Within two months of their 50th birthdays, members receive a single-page summary document that points to the pensions guidance, as required under the Financial Services and Markets Act 2000. Wake-up packs, which were developed in association with all of industry and the interested bodies and are a requirement of the 2000 Act, are received at the age of 55. They include the single page summary document and they point specifically to pensions guidance.
At a later stage, as the individual gets closer to accessing their pension savings and enters the drawdown phase in contract-based pensions, the FCA investment pathway requires that they be presented with four options as to how they want to use their drawdown pot, so it is not the case that there is no engagement prior to the drawdown. That is proposed by the FCA policy statement, which will come into force in 2021.
Although I fully accept that I should be pressed on DWP guidance, the FCA policy statement will come into force in 2021, and, between now and Report, detailed explanation of what that statement entails should be provided to the right hon. Member for East Ham. If it has not been provided to the Select Committee as part of its inquiries on scams, that is a lacunae that needs to be addressed, because it seeks to ensure that all arms of government are working together. The FCA policy statement, and the incoming changes, will definitely make a difference.
Briefly, on the stronger nudge towards guidance, which arose from the Financial Guidance and Claims Act 2018, it is fair to say that where there is transfer from one scheme to another to continue to accumulate and no risk is identified, the transfer can be acted on in accordance with the current requirements. Where a risk is identified, the member must be notified that they will be required to prove that they have taken information or guidance before the transfer can proceed. That is the appropriate effect of what we are legislating for in clause 125 and in the Bill.
Where there is transfer from one scheme to another to access pension freedom with no risk identified, there is the nudge towards guidance and the member is notified that they will need to prove that they have taken guidance or opted out. Where a risk is identified, the points that we have gone through on clause 125 and the prevention of scams come into play. The member must be notified that they are required to prove that they have taken information or guidance, and the amended requirements under clause 125 continue to apply.
There is a graded system depending on the identification of risk to the individual trustees as they proceed. In addition, work has been done to prevent pensions cold calling, and there has been a tightening of the rules to prevent fraud of registered pension schemes. I accept that more needs to be done to bring various departments together. I know that the Select Committee has looked at this area, assessing whether Project Bloom, the multi-agency partnership, and the ScamSmart campaign, are working sufficiently well, and that is something that I have undertaken to improve. The regulator’s evidence to the Select Committee on that exact point argued that a much more beefed-up effort was needed to bring all those particular parties together. Yes, the two arms of government need to work better together, and I hope I have explained how we are doing, but we also need much greater interdepartmental and interorganisational co-operation.
Finally, there has been criticism. I will not go into detail about whether the stronger nudge is a good behavioural insight trial. I support what has been done, but that is a matter of ongoing regulation as well. The appropriate approach would be that we work with the Select Committee on making that as effective as possible on an ongoing basis. I invite the right hon. Gentleman to withdraw his amendment.
Stephen Timms
I am grateful to the Minister and to everyone who has taken part in this debate. I welcome a lot of what he has said. On guidance, he told us that the FCA writes to everyone at age 50, but it seems to me that what it should do is say, “Your appointment with Pension Wise is at the following time and place”, taking advantage of that opportunity to increase significantly the likelihood of the guidance being taken. I am grateful to him, however, for saying that further information will come forward before Report and that the discussions and deliberations on the four amendments will also carry on between now and Report. At this stage, therefore, I do not propose to press any of the amendments to a vote.
Seema Malhotra
I want to make a few comments. I appreciate the exchange between the Minister and my right hon. Friend the Member for East Ham. I recognise the complexity of the different regulators that the Minister alluded to, and the need to join things up. From a consumer perspective, it is very important to join up different regulators, because it is difficult and confusing for individual consumers or citizens to deal with multiple regulators on different issues. Invariably, we end up with multi-year battles that are exhausting for them and their families. Therefore, ensuring that we have stronger remedies in place is critical to reduce some of the risk.
I support my right hon. Friend and appreciate Minister’s comments about not carving out FCA-regulated schemes that still pose a risk for those at risk of scams. The Minister has mentioned further regulations to come and that the exchange between him and my right hon. Friend the Chair of the Select Committee has been placed in the House of Commons Library—it will be important to review that—but the test will be the extent of the improvements to the system and of the tightening of protections. Those who are vulnerable to pension scammers are at serious risk, and gaps in regulation increase their vulnerability. It is not a harm-neutral situation. This is a uniquely difficult time, and it is a sad fact of the pensions world that there are people who seek to capitalise on that.
The hon. Member for Airdrie and Shotts also made some important comments. I want to lend our support, but we also need to keep this under review as we debate the regulations. We support the amendments, although my right hon. Friend the Member for East Ham has chosen not to proceed with them at this stage. They propose a sensible set of measures to counteract the risks that people, particularly those who are especially vulnerable, face right now.
Amendments 21 to 24 could play a part in future stages of the Bill. They would strengthen the protections to prevent individuals from transferring their pensions into scam schemes. We also welcome that the amendments have been tabled on a cross-party basis by members of the Work and Pensions Committee. It would be helpful to see how quickly those concerns move on to the Minister’s radar, and his imperative to act on them. We welcome both the ongoing dialogue with the Chair of the Select Committee and the proposed route map for addressing the issues under existing powers, which we hope will dramatically increase protection against scammers.
New clause 10 is intended to protect people from scams by auto-enrolling pension scheme members in pensions guidance appointments. That principle is extremely important, and the arguments for a much-needed source of information and impartial advice were well made. That would empower individuals to make good pensions decisions, and through that empowerment they would be more resistant to scammers.
We strongly support the intentions of new clause 10 and amendments 21 to 24, tabled by my right hon. Friend the Member for East Ham. I congratulate him on his Select Committee’s work on this crucial issue, which is a serious matter and could become more so for all our constituents. It is important to have the right protections to give savers greater confidence, particularly with continued pension scheme reform. I urge the Minister to act speedily to ensure that the arms of government that he talked about continue to work closely. I am sure that we can encourage and support him, on a cross-party basis, to move that along more quickly.
I would like to acknowledge the work of Pension Wise and Citizens Advice, and the services that they provide. There will, I hope, be ways—perhaps through what we can do here—to raise awareness of the services that those organisations offer, and, importantly, of pre-emptively encouraging people to get advice in what is a difficult area. We all fall prey to that: when something is incredibly confusing, as my right hon. Friend said, it gets put at the bottom of the pile, often until it is too late. These protections will go a long way to giving more people, particularly younger generations, the confidence to save and save early, which makes a difference.
Stephen Timms
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Ordered, That further consideration be now adjourned. —(James Morris.)
Pension Schemes Bill [ Lords ] (Fourth sitting)
Thursday 5th November 2020
(4 years ago)
Public Bill CommitteesRead Full debate Pension Schemes Act 2021 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 5 November 2020 - (5 Nov 2020)
The Committee divided: - Ayes: 6 / Noes: 9 - Question accordingly negatived.
The Committee divided: - Ayes: 6 / Noes: 9 - Question accordingly negatived.
The Chair
I will just remind Members about social distancing, and that Hansard colleagues would be grateful if Members emailed their speaking notes to hansardnotes@parliament.uk.
Clauses 125 to 129 ordered to stand part of the Bill.
Schedule 11 agreed to.
Clauses 130 and 131 ordered to stand part of the Bill.
Clause 132
Short title
Amendment made: 10, in clause 132, page 125, line 17, leave out subsection (2).—(Guy Opperman.)
This amendment would remove the privilege amendment inserted by the Lords.
Clause 132, as amended, ordered to stand part of the Bill.
The Chair
I understand that there is an agreement that all the remaining new clauses should be debated together. Is that correct? [Hon. Members: “Yes.”]
New Clause 1
Auto-enrolment
“(1) The Pensions Act 2008 is amended as follows—
(a) in section 3, in subsection (1)(a) leave out ‘22’ and insert ‘18’;
(b) in section 13, leave out subsection (1)(a).
(2) The Secretary of State shall, not later than two months after the day on which this Act is passed, lay before Parliament a statement containing a timetable for the implementation of these changes.”—(Neil Gray.)
This new clause would lower the age threshold for auto-enrolment from 22 to 18, and remove the lower limit of the “qualifying earnings” band, so that contributions are payable from the first pound earned. It would also require the Secretary of State to lay before Parliament a timetable for implementing these changes.
Brought up, and read the First time.
Neil Gray (Airdrie and Shotts) (SNP)
I beg to move, That the clause be read a Second time.
The Chair
With this it will be convenient to discuss the following:
New clause 2—Pensions Advisory Commission—
“(1) The Pensions Regulator shall establish a committee to be known as the Pensions Advisory Commission.
(2) The Commission shall consist of—
(a) members of the Regulator as provided under section 2(1) of the Pensions Act 2004, and
(b) five other persons appointed by Her Majesty on the recommendation of the Secretary of State.
(3) A person appointed under subsection (2)(b) shall exercise only functions in pursuance of the duties in subsections (5) and (6).
(4) The Commission shall be chaired by a person appointed under subsection (2)(b).
(5) It shall be the duty of the Pensions Advisory Commission to submit to the Secretary of State each calendar year, beginning with the year 2022, a report setting out the Commission‘s views on—
(a) the impact of provisions in Parts 1, 2 and 4 of this Act on—
(i) persons in different parts and regions of the United Kingdom,
(ii) equal treatment of men and women in access to pension provision, and
(iii) persons with a protected characteristic under section 4 of the Equality Act 2010; and
(b) the effectiveness of the powers in Parts 1 to 3 of this Act in enabling the Pensions Regulator to achieve its objectives under section 5 of the Pensions Act 2004.
(6) It shall also be the duty of the Commission to report to the Secretary of State by 31 October 2021 its views on when commercial operators should be able to enter the market for provision of a pensions dashboard service.
(7) The Secretary of State must lay before Parliament a copy of every report received from the Commission under this section.”
New clause 3—Employer debt: trustees’ discretion—
“The following changes are made to the Occupational Pension Schemes (Employer Debt) Regulations 2005 (SI 2005/678)—
‘(1) In regulation 2, in the definition of ‘scheme apportionment arrangement’—
(a) in sub-paragraph (f)(ii), after ‘apply’, insert ‘but not if the circumstances in paragraph (h) apply’;
(b) at end, insert—
‘(h) the consent of the remaining employer or employers shall not be required under (f)(ii) above where all of the following conditions apply—
(i) the departing employer’s debt was treated as becoming due prior to the coming into force of this provision; and
(ii) the departing employer’s debt was less than 0.5% of the scheme’s overall liabilities, as estimated by the trustees or managers on advice of the scheme actuary, as if the whole scheme had been winding-up at the time the debt was treated as becoming due, and
(iii) the employer in question was operating as an unincorporated business during his participation in the scheme, and
(iv) the trustees or managers consider that, in the context of the scheme overall, it would not be in the scheme’s interests to seek recovery of the employer’s liability share from the departing employer.’
(2) In regulation 9, after paragraph (14B), insert the following new paragraph—
‘(14C) Condition L is that a debt was treated as becoming due from him under section 75 of the 1995 Act but is excluded under this Condition because—
(a) the employer’s debt was treated as becoming due prior to this Condition coming into force; and
(b) the employer’s debt was less than 0.5% of the scheme’s overall liabilities, as estimated by the trustees or managers on advice of the scheme actuary, as if the whole scheme had been winding-up at the time the debt was treated as becoming due, and
(c) the employer in question was operating as an unincorporated business during his participation in the scheme, and
(d) at or before the applicable time, the trustees or managers have made a determination not to pursue the debt on the grounds that, in the context of the scheme overall, seeking recovery represented a disproportionate cost to the scheme.’”
This new clause is intended to enable pension scheme trustees to exercise discretion not to pursue employer debt (“section 75 debt”) following an employer’s exit from a pension scheme where such debt is below a de minimis threshold. This aims to support unincorporated employers who are now retired for business and for whom there are no easements within the current regulation.
New clause 4—Employer debt: deferred debt arrangement—
“The following changes are made to the Occupational Pension Schemes (Employer Debt) Regulations 2005 (SI 2005/678)—
(1) In regulation 6F—
(a) in paragraph (1), leave out ‘A’ and insert ‘Subject to the provisions of paragraph (8) below, a’;
(b) at end, insert—
‘(8) In relation to a frozen scheme, the trustees or managers of the scheme may agree to a deferred debt arrangement where the employment-cessation event occurred at a time prior to the scheme becoming a frozen scheme, providing the conditions of paragraph (3) are met at the time the deferred debt arrangement is entered into.’”
This new clause would permit employers in a pension scheme closed to future accrual to apply for a deferred debt arrangement, providing they meet the other statutory tests. This aims to support employers who are still trading but were not able to use the existing deferred debt easement.
New clause 5—Review of automatic enrolment—
“(1) The Secretary of State must, by regulations made by statutory instrument, make any amendment to, or repeal or revoke any provision of, this Act, the Pensions Act 2008 or any other primary or secondary legislation in order to implement the recommendations of the Automatic Enrolment Review 2017.
(2) Any regulations made under subsection (1) must be laid before Parliament within six months of the day on Royal Assent is given to this Act.
(3) No regulations shall be made under subsection (1) unless a draft of the regulations has been laid before, and approved by, a resolution of both Houses of Parliament.
(4) Before the end of a period of two years from the day on which Royal Assent is given to this Act, the Secretary of State must lay before Parliament the report of a further review of the operation of automatic enrolment.
(5) The report under subsection (4) must make a recommendation as to whether the Government should bring forward further legislation to implement the findings of the review.”
This new clause would require the Secretary of State to implement the recommendations of the Automatic Enrolment Review 2017 and require a further review of automatic enrolment within two years.
New clause 6—Occupational pension schemes: review of support—
“(1) The Secretary of State shall undertake a review of the level of support available under the Financial Assistance Scheme to any member of an occupational pension scheme which is a qualifying pension scheme under Regulation 9 of the Financial Assistance Scheme Regulations 2005 (S.I., 2005, No 1986), regardless of whether the employer in relation to that scheme was solvent or insolvent.
(2) The Secretary of State shall lay the review before Parliament no later than—
(a) the day which is six months from the day on which this Act receives Royal Assent, or
(b) if neither House of Parliament sits on the day specified in (a), the first day on which either House sits after that day.”
This new clause would require the Secretary of State to carry out a review of the support available to Financial Assistance Scheme qualifying members, including the former ASW steelworkers.
New clause 7—Regulation of pension superfunds—
“(1) The Secretary of State shall publish a statement on proposals for primary legislation in relation to a duty on the Pensions Regulator to regulate pension superfunds.
(2) For the purposes of this section, a pension superfund is a defined benefit pension scheme that allows for the severance of an employer’s liability towards a defined benefit scheme and one of the following conditions applies—
(a) the scheme employer is replaced by a special purpose vehicle (SPV) employer, or
(b) the liability of the employer to fund the scheme’s liabilities is replaced by an employer backed with a capital injection to a capital buffer.
(3) The statement under subsection (1) shall be laid before Parliament before the end of a period of six months from the day on which this Act receives Royal Assent.”
This new clause would require the Secretary of State to publish within six months of Royal Assent proposals for primary legislation to place a duty on the Pensions Regulator to regulate pension superfunds.
New clause 8—Trustees’ voting rights and engagement activities: publication of information—
“(1) Schedule 18 to the Pensions Act 2014 is amended as follows.
(2) After paragraph 2, insert—
‘2A The Secretary of State may by regulations make provision requiring the publication of information about—
(a) the exercise of the rights (including voting rights) attaching to the investments of the scheme, by or on behalf of, the trustees of the scheme; and
(b) engagement activities undertaken by or in respect of the investments, by or on behalf of, the trustees of the scheme’”
(3) In paragraph 3, omit “1 or 2” wherever it appears and insert in its place ‘1, 2 or 2A’.”
This new clause would give the Secretary of State the power to create regulations requiring pension schemes to publish information about how voting and other engagement activities have been carried out.
New clause 9—Duty to publish information on the statement of investment principles—
“(1) The Pensions Act 2004 is amended as follows.
(2) In section 244, at end insert—
‘(8) The most recent version of the scheme statement of investment principles must be made available to the Pensions Regulator for publication every three years.’”
This new clause is to ensure all scheme SIPs are made available to TPR.
New clause 11—Pension accounts—
“(1) A jobholder to whom section 3 of the Pensions Act 2008 applies may by notice require an employer to arrange for the jobholder to receive into a pension account any contribution which would otherwise be made by the employer into an automatic enrolment scheme.
(2) A contribution by a jobholder or by their employer into the jobholder’s pension account shall be invested in a pension scheme offered by an approved pension provider.
(3) The Secretary of State may by regulations make provision—
(a) about the form and content of a notice given under subsection (1), or
(b) about the arrangements that the employer is required to make.
(4) The Secretary of State may make regulations to set criteria by which a pension provider may be approved for the purposes of subsection (2).
(5) Regulations under this section shall be made by statutory instrument and may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament.”
New clause 12—Duty to state how non-financial factors are taken into account—
“(1) The Occupational Pension Schemes (Investment) Regulations 2005 are amended as follows.
(2) In sub-paragraph (3)(b) of regulation 2 (statement of investment principles), leave out sub-sub-paragraph (vii) and insert—
‘(vii) how non-financial factors are taken into account in the selection, retention and realisation of investments’.”
This new clause would create a duty in the OPSR 2005 for schemes to state how non-financial factors such as beneficiaries’ views are considered in the development of investment policies, replacing the existing duty to state “the extent (if at all) to which” such factors are taken into account.
Neil Gray
It is good to see you back in the Chair, Mr Robertson. I wish to speak to the remaining clauses that stand in the name of the Scottish National party, and to support those tabled by other Members as part of this group. My hon. Friend the Member for Gordon will speak to proposed new clauses 3 and 4.
As we have repeatedly said, we are fully supportive of automatic enrolment. We think it has been a big success in getting people saving for their retirement who otherwise would not have, and it does so earlier, which has a compound impact on those people’s ability to save for a dignified retirement. That said, there are issues, some unintended and others relating to the speed of roll-out, that we wish to see addressed. Our new clauses in this group build on the success of automatic enrolment by seeking to expand eligibility to those who were left out earlier and to address issues related to small or micro-sized pension pots.
This Bill is a clear opportunity to address inadequate lifetime savings and inequalities such as the gender pension gap by building on the successes of automatic enrolment. While we wholeheartedly support the premise, far too many have been left behind and still cannot benefit from this important measure, so we want to see the UK Government remove the lower earnings limit and the lower age limit well before the mid-2020s, so that contributions are payable from the first pound earned at the earliest opportunity for savers. We also want to see the Government have much greater ambition in raising contributions beyond 8%, but we understand, in deliberations with the excellent Clerks to the Committee, that that is not within the scope of this particular Bill.
Our amendment would lower the age threshold for auto-enrolment from 22 to 18 and remove the lower limit of the qualifying earnings band so that contributions are payable from the first pound earned. While we welcome the Pensions Minister’s commitment on Second Reading that the UK Government have set a mid-2020s timetable to implement these changes, our new clause would require the Secretary of State to lay this timetable before Parliament. Automatic enrolment should be available to those currently left out at the earliest opportunity. The UK Government need to be accountable to Parliament in implementing these changes to prevent further delays.
As women disproportionately populate low-income and part-time jobs, they would disproportionately benefit from the Government’s getting on with reaching more people with auto-enrolment. Similarly, by removing the qualifying earnings band, low-income workers, who otherwise have little prospect of having a decent private pension, will also benefit. We additionally support Labour’s new clause, which would require the Secretary of State to implement the recommendations of the automatic enrolment review and require a further review of automatic enrolment within two years. That would do a similar job to our new clause 1 and would keep the pressure on Ministers to be far more ambitious. Why wait? We know and have trumpeted the benefits of auto-enrolment as enthusiastically as the Minister himself. Why wait for women and low-income workers to benefit?
As I alluded to earlier in the Committee’s deliberations, we also recognise that an unintended consequence of auto-enrolment is the increasing number of people who move jobs frequently, such as agency workers, and therefore build up a number of small or micro-sized pension pots. Some of those pots might be small as £50 or £100, in which case hard-earned savings could be quickly wiped away by charges, fees and levies.
The Pensions Policy Institute reports that the number of deferred pension pots in the UK defined-contribution master trust market is likely to rise from 8 million in 2020 to around 27 million in 2035, but member charges often erode small deferred member pots over time and small pots can be uneconomic for providers to manage. Extra management charges and costs may eventually be passed on to members through increased charges, and financial instability in master trust schemes arising from too many small ports could, in extreme circumstances, result in trustees’ triggering an event to wind up the scheme.
Our new clause 11 proposes a solution to that by providing for individual pension accounts for people to invest in their own schemes with DC providers. Where someone has earned from more than one employer, rather than having multiple employers make contributions to different schemes on behalf of the worker, the worker could set up an account with a provider and request that their employer allocate their auto-enrolment contributions to that account. That would stop their multiple plots being eaten into by charges and give greater control to the person in whose name the investments are actually being made.
We hope that the Government review pushed for by the Select Committee on Work and Pensions will come up with an answer, not just to the problem of charges that we had an opportunity to address earlier in this Committee, but also with regard to micro-sized pots. This could be an answer, and we look forward to hearing the Minister’s considered perspective.
I briefly referred earlier to our new clause 2, which would see a commission established to cover the terms of this Bill. Hon. Members will know, as they have heard it long enough from SNP parliamentarians, that we support the establishment of an independent standing pensions and savings commission. At another time, when the Minister did not have a majority behind him, he may have looked at versions of some of our suggestions throughout the Bill. We are in a different place, and reasonable cross-party amendments put forward to support stakeholders across the market are being voted down. We reiterate our call for the establishment of an independent pensions and savings commission to look holistically at pension reform, focus on existing inequalities and pave the way for a fair universal pension system.
The entire pension landscape is in need of fundamental reform, particularly given the pressing need to review and enhance automatic enrolment. We ask that the commission start its work by reviewing parts 1, 2 and 4 of the Bill and their impact on different parts of the UK, equal treatment of men and women, and persons with protected characteristics—that is where our attention is focused in new clause 2—and when commercial dashboards should enter the market. That would be the responsible way to take these issues forward.
As I said earlier, time is the wisest counsellor of all, and by taking the time on commercial dashboards, the Minister could consult and take stock with independent experts to ensure that they work for all. We want to see the Money and Pensions Service dashboard as quickly as possible. The Minister seemed to suggest the other day, when we said he needed to take time, that we wanted him to slow down the MaPS dashboard, but that is just not true. The success of the MaPS dashboard is not dependent on commercial dashboards entering the market or arriving at the same time—quite the contrary, unless there has been a deal done or a quid pro quo whereby commercial providers are incentivised to provide their data for the MaPS dashboard in return for them being allowed to develop their own commercial dashboards independently and immediately.
New clause 2 would allow us to take the time to ensure that people are protected. That would ensure that we get it right, and would bring people in on a cross-party basis. That is how the best policy is developed.
Ms Karen Buck (Westminster North) (Lab)
It is a pleasure to conclude our consideration of the Bill under your chairmanship, Mr Robertson. As the Committee has agreed, I will make a short contribution on new clauses 5, 6, 7 and 8. New clause 5 is on the theme of auto-enrolment, and I will echo a number of the comments of the hon. Member for Airdrie and Shotts. The new clause would require the Secretary of State to implement the recommendation of the 2017 auto-enrolment review and conduct a further review three years on.
It is a source of great pride that the previous Labour Government introduced auto-enrolment, which transformed the pensions landscape and reversed a long-term decline in pension savings. We now have 10 million more people saving into a pension at work. The policy is widely agreed to have been a success and is praised on both sides of the House. It is a model of good policy making, rooted in consensus.
However, it is always essential to keep such schemes under constant review and develop them if they are to keep pace with changing patterns in the workplace. We are therefore concerned that, even after 10 years, there are an estimated 12 million people under-saving for retirement. To look at the reasons for that and potential solutions, it was welcome that the Government commissioned a review of the policy in 2017. The review found that:
“Current saving levels risk a significant proportion of the working-age population not meeting their retirement expectations. In addition the current structure of automatic enrolment means there are gaps in coverage, in particular for those in low paid part-time jobs and younger workers”.
The review made two recommendations: that the age threshold for auto-enrolment be lowered from 22 to 18, and that the lower limit of the qualifying earnings band be removed so that contributions are payable from the first pound earned by an employee. They are yet to be implemented, so I would welcome some indication from the Minister as to whether he has a timetable in mind for these significant changes.
There is also the question of contribution rates and whether it will ultimately be necessary for them to be increased to ensure that individuals have adequate savings for their retirement. The 2017 review noted that the contributions of 8% are unlikely to give individuals the retirement to which they aspire. As my hon. Friend the Member for Birmingham, Erdington (Jack Dromey) said,
“8% cannot be the summit of our ambition.”—[Official Report, 4 May 2020; Vol. 675, c. 471.]
I would welcome the Minister’s comments on what further work he hopes to do on contribution rates and when he will bring the matter forward to the House.
Richard Thomson (Gordon) (SNP)
It is good to see you back in the Chair, Mr Robertson.
I rise to speak to new clauses 3 and 4, which stand in my name and those of my hon. Friends the Members for Airdrie and Shotts, for Perth and North Perthshire (Pete Wishart), and for Kilmarnock and Loudoun (Alan Brown). I should make it clear to the Minister that it is our intention to make amendments of this nature on Report, so we will hear with interest what he has to say in response to the points we make today.
On Second Reading, I spoke about the impact that section 75 of the Pensions Act 1995, which deals with employer debt, could have on an individual employer within a multi-employer pension scheme. I cited the example of the Plumbing and Mechanical Services (UK) Industry Pension Scheme, but in reality the issue could apply to any scheme of a similar nature. I appreciate that not all of us go to sleep at night and dream of the implications of section 75 of the 1995 Act, so if members of the Committee will bear with me for a moment, I will run through them.
Section 75 sets out regulations that are intended to deal with deficiencies in assets in pension schemes; those regulations have evolved and been amended since they were first introduced in the 1995 Act. The key change came into force in September 2005: any employer who left a scheme or prompted a trigger event, such as retiring or moving from being a sole trader to a partnership or a limited company, was required to pay a section 75 debt. That debt is calculated on a buy-out basis, which assumes that the whole scheme is being bought out by an insurance company, so it is a very expensive way of valuing a pension scheme. Also, part of that buy-out debt comprises the orphan liabilities of past employers, who may have become insolvent or left the scheme before 2005 but did not pay their own section 75 debts, so not only is the scheme being valued generously, but those who remain in it are left to pick up the debt of others who have been able to leave it without that burden being placed upon them.
In the case that I raised, the scheme trustees for the Plumbing and Mechanical Services (UK) Industry Pension Scheme estimate that some 60% or £1.3 billion worth of the total scheme’s liabilities are, in fact, orphan. The trustees did not apply the section 75 debt when the provision was introduced in 2005, saying that, because of the nature of the scheme, it would have been impossible to do so. During that period, they lobbied Government to change the legislation, but the employers were unaware that the legislation was not being applied or indeed that any debts were even due until spring 2016, when they became aware of that situation.
I am given to understand that that has had some pretty serious consequences for the plumbers who have since retired and who have triggered the section 75 debt. It particularly affects a small group of around 30 retired plumbers aged between their late 60s and early 90s, who retired between 2005 and 2016. Some easements were introduced to the section 75 legislation over that period, but none of them apply to this small group, because the trustees did not advise them. I am told that they had a section 75 debt until 2018, and onwards.
The individual debts that I am talking about here have a wide range—up to £1.2 million, but with the majority being in the region of about £700,000. Such debts are totally unaffordable for this group, who were unincorporated sole traders for the most part. Naturally, they and their families are absolutely beside themselves with worry about this situation. If the debt is pursued, as legally it must be, it could lead to their bankruptcy and the repossession of their homes, all in pursuit of assets that, even if they are realised, would still fail to repay the outstanding debt.
As I say, there have been some easements. Deferred debt arrangements were introduced in April 2018 as a statutory easement, to allow an employer who had triggered the section 75 debt simply to defer debt but retain a liability to the scheme. That has allowed employers to continue to trade without facing possible insolvency, dependent on the size of the debt, and it allows employers to continue supporting the scheme. However, this scheme closed to benefit accrual in June 2019. Employers who triggered section 75 before the closure of the scheme, and who continue to trade, are not able to use that easement, as it is only available while a scheme is still open. That is one of the proposals in the new clauses.
The second proposal is to amend legislation to allow the application of a deferred debt arrangement in a closed scheme environment. New clause 3 gives flexibility to waive a debt in certain circumstances, as set out in the clause, where the debt is below a de minimis level; 0.5% for the fund value is suggested, bearing in mind that is a reasonable valuation of the fund and of buying it out on a commercial basis. However, new clause 4 would extend the availability of existing deferred debt arrangements for employers who are still trading, but who do not qualify to use the existing easement at present.
Hopefully we all understand the purpose of section 75, but the obligation to apply it in this case is causing untold misery to groups of small employers who have never sought to do anything other than the right thing by those in their employ. I struggle to believe anyone would have deliberately written that legislation or set up and operated the scheme in such a way to engender this kind of outcome. New clauses 3 and 4 would allow the Minister to resolve this issue mathematically, without undermining the important role that section 75 plays in safeguarding the funding of pension schemes. It is our intention to return to this issue on Report, but I would be grateful for the Minister’s observations on how we might tackle this. If we are not to tackle it in this way, in what way—if any—can the Minister envisage it being addressed in the future?
Stephen Timms (East Ham) (Lab)
It is a pleasure to serve under your chairmanship, Mr Robertson. I am very interested by the points raised so far; I am particularly interested—as many others are—in what the Minister has to say in response to the points raised by the hon. Member for Airdrie and Shotts and my hon. Friend the Member for Westminster North about auto-enrolment and where we are going on that.
I will speak to new clauses 9 and 12, and I am grateful for the briefing provided by the organisation ShareAction on the issues raised in these new clauses. One thing I did not need any briefing about was the fact that, 22 years ago, I became the Pensions Minister for the first of two terms in the role. My hon. Friend the Member for Wallasey was a Minister in the Department at the time, which was then called the Department of Social Security. I picked up some work on ethical investment in pension funds started the previous year by my predecessor in the job, John Denham. John made quite a groundbreaking speech on this in July 1998. He wanted a fair hearing for ethical investment to encourage open and honest debate on the issues it raises for the pensions world, and the legal framework within which all pension fund investment must be carried out. It prompted a big debate and much discussion.
One of the officials told me he was given the task of making John’s wish to support pension funds in adopting ethical—although the term was changed quickly to socially responsible—investment policies a reality. At the time, the conventional wisdom was that pension funds had a statutory obligation to maximise the returns on pensions savings and were not allowed by law to take any other considerations into account. The official told me he went around the City looking for ideas and drew a blank until he happened to speak to a senior member of staff at the central finance board of the Methodist Church, who explained how they had been applying ethical principles to their investment strategy for years. One weekend, I remember thinking about all of this, and the official put a copy of a speech—or rather, a sermon—delivered by John Wesley in my red box to help me to understand where all this was heading.
The Parliamentary Under-Secretary of State for Work and Pensions (Guy Opperman)
It is a pleasure to serve under your chairmanship, Mr Robertson. I am beginning to regret agreeing to address 11 separate new clauses at once—it seemed like a great idea before lunchtime. Given the multitude of speeches I have heard and the multitude of notes to which I have to refer, I am sure that the next 15 minutes will be entertaining. Here goes. I will try to address the new clauses in sequential order to assist colleagues in their understanding, and at least then my notes will prove relatively useful.
On new clauses 1 and 5, the former Secretary of State, David Gauke—he is much missed in this place—set out provisions for the automatic enrolment review to be enacted by this and future Governments. There is a cross-party approach, particularly on automatic enrolment, that was started by the Labour Government, continued by the coalition Government and brought forward on an ongoing basis by the Conservative Government. In my view, the DWP’s single biggest achievement on pensions in the last couple of years has been the double jump to 8% of automatic enrolment in 2019. Opt-outs were very low and the increase in savers has been massive, with well over 10 million people now saving. Savings by young people and women have increased from approximately 40% to well above 80%.
Our thanks are due to all the businesses who provide support on that. That goes to the heart of the issue: even though it is a defined-contribution system, contributions are not made purely by the individual concerned; a 3% contribution is made by businesses, with some assistance from the Chancellor and tax rebates.
We will unquestionably implement the automatic enrolment review, as previously stated, by the mid-2020s. As I said earlier, my view is that there will be a further pensions Act in this Parliament with a view to implementing that. It will, without a shadow of a doubt, require primary legislation both to institute the short points necessary for automatic enrolment and to give an indication of its direction. Primary legislation is also needed for superfunds. I was told that CDCs would need relatively little legislation until, after a lot of work, our 52 clauses were drafted, but I believe that automatic enrolment would require a relatively small Bill. However, there is no doubt that superfunds would need a large Bill, and I will come to that later. The mid-2020s remain our target.
Clearly, we have to balance the current fiscal situation and the fact that this Government, with the support of all Members of the House, have put additional burdens on business, whether by raising the living wage—the rate of which has been massively increased for low-income workers since the days of the minimum wage—or other costs. For certain larger businesses, there is the apprenticeship levy among other things. Unquestionably, the Chancellor, the Prime Minister and the Secretary of State for Work and Pensions have to look at the fiscal framework, and they will have to decide how to do that and whether there should be an increase above 8%.
To the question about whether we will reduce the lower earnings threshold and raise the age groups, the answer is yes, we will. I have made and continue to make that point repeatedly in Parliament.
Stephen Timms
I welcome the Minister’s commitment to legislate in this Parliament. Can he give us some indication of when in the next four years that Bill might be introduced? December 2024 would be rather late to legislate for something to take effect the following year. Will he reassure us that it will be done a little earlier than that?
Guy Opperman
I am always nervous about saying that the legislation will come in on this or that particular date because—as the right hon. Gentleman will understand, having held my current job—it is way above my pay grade. I have been trying to get this Bill into this House for a considerable time: well over a year, in fact. The election got in the way of the first attempt, and clearly other things are taking place—whether relating to covid or other legislation.
All I can say is that we will, I hope, have time for such legislation at some stage. It is a matter for the Prime Minister, the Chancellor and the Cabinet, and the usual write-around process that applies, to decide when there will be a further piece of pensions legislation. I cannot be any more specific. Frankly, if I gave a date, the Whip, my hon. Friend the Member for Halesowen and Rowley Regis, would wrestle me down and say that it is not for me to make Government policy and announce a specific date.
I can only say that our intention is that what we are discussing should take place in the mid-2020s. As we all know, summer can be a very long month when one is defining things in Parliament; I take the point that, if it is to happen in the mid-2020s, legislation has to be in order at some particular stage.
The great advantage of the Government’s review of automatic enrolment, “Maintaining the Momentum”, is that it sets out the procedures through which the Government are going to proceed in terms of the lower earnings rate and the change of age. Because of the way payroll works and the sophistication of payroll now that we have automatic enrolment up and running, I am advised that the changes are relatively easy to make. I accept that businesses will need some time, but it will not be like the original version of automatic enrolment, when we had to completely invent a system; this is an expansion of a pre-existing system. The right hon. Gentleman can remind me of that when things do not necessarily go like a Swiss watch, but that is my confidence on the matter. I hope that that provides assurances.
I will touch on one particular point: expansion of 8%. I endorse the comment that 8% is not sufficient—there is common belief about that. We are looking at international models, and Australia is the best example of the way forward. Clearly, I hope that in the longer term we would increase automatic enrolment, but there has to be a balance as to who is going to contribute to that. Will the employer have a larger role, paying more than the 3% that they do at present? Alternatively, will it be solely down to the individual? How can one offset that in respect of tax rebates and other such things?
Such policy work needs to be done on an ongoing basis and will take a little time. We have to be mindful of the fact we are in the middle of particularly difficult fiscal times because of covid. Imposing further burdens on businesses has to be balanced with the desire, which all of us have, to ensure that people have greater savings on an ongoing basis. This is a work in progress. I do not have any difficulty in being held to account for that: quite right, too—I would like to make progress as well. How we make progress is complicated.
The next amendment that the hon. Gentleman for Airdrie and Shotts brought forward was new clause 11, regarding automatic enrolment again. On the simple point about small pots, I should say that the matter is already a work in progress. I endorse so much of the broad thrust of what the amendments are saying. I totally endorse the principle the issue of small pots needs to be examined. The Work and Pensions Committee, to be fair to it, is beginning to look into that, as we discussed earlier. We have convened at the Department. I have asked all the industry sector and some of the third sector people, who clearly matter in this light, to come together and give me a report before the end of November, on a very provisional basis, about what they see as the key challenges and approaches going forward.
I would clearly be surprised if I were not summoned before the Work and Pensions Committee in due course to discuss these matters, in order to try to formulate policy. It seems to me that there is great scope, and a desire, to address a small problem on a long-term basis. In my view, that has to be wrapped up with a consideration of costs and charges as a whole. I would not want to deal with the issue in a bite-sized piece; if I can do it, I will attempt to do it in the round.
Stephen Timms
I want to press the Minister on the timescale. I take the point that a response will be published early next year, so when does he expect the arrangements to be in place so that people can see the statements online?
Guy Opperman
My note says early next year. I cannot elaborate further than that but I will write to the right hon. Gentleman before Report and set out in more detail the precise position in respect of the timetable and when we are expecting that to go.
Finally, I turn to new clause 12. I was not aware that it had been selected, so my response to it will be relatively limited. I know the organisation that is in favour of the proposal, but the best argument against it is that the Law Commission, which is definitely not Government and is an esteemed body, looked at this particular point on two occasions, and rejected it both times. There are reasons why. It takes the view that while it is entirely right and proper for the likes of ESG to influence investment, the individual decision-making processes of the trustees should not be influenced as is proposed by the proponents of this argument. I bow to the Law Commission on that, and it is certainly not DWP policy to take that way forward.
There is, however, a current requirement on trustees to disclose, via their statement of investment principles, how they take into account members’ views. Giving trustees the option not to follow those views, which may be from a subset of members, is appropriate and flexible. The regulations already allow trustees to consult members, ensuring that investment decisions are taken in the interest of the membership as a whole, and not driven in one direction by a small cohort of highly engaged individuals. I accept that there is a balance—the Law Commission took this view—between members being allowed to have their say and being involved in the process and a small cohort of particularly active members dictating a policy that would apply to the many. With respect, I rely upon the Law Commission in this, and invite colleagues to withdraw the new clause.
I think I have addressed all 11 new clauses and my voice is beginning to go. If I have not done so or have misspoken, because—as the Committee is aware—I am not able to take notes saying, “Minister please correct that for the record”, I will undertake to do that, as I will throughout this process. I therefore invite colleagues to withdraw the new clauses, except for those that they wish to put to a vote.
Neil Gray
I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
New Clause 5
Review of automatic enrolment
“(1) The Secretary of State must, by regulations made by statutory instrument, make any amendment to, or repeal or revoke any provision of, this Act, the Pensions Act 2008 or any other primary or secondary legislation in order to implement the recommendations of the Automatic Enrolment Review 2017.
(2) Any regulations made under subsection (1) must be laid before Parliament within six months of the day on Royal Assent is given to this Act.
(3) No regulations shall be made under subsection (1) unless a draft of the regulations has been laid before, and approved by, a resolution of both Houses of Parliament.
(4) Before the end of a period of two years from the day on which Royal Assent is given to this Act, the Secretary of State must lay before Parliament the report of a further review of the operation of automatic enrolment.
(5) The report under subsection (4) must make a recommendation as to whether the Government should bring forward further legislation to implement the findings of the review.”—(Seema Malhotra.)
This new clause would require the Secretary of State to implement the recommendations of the Automatic Enrolment Review 2017 and require a further review of automatic enrolment within two years.
Brought up, and read the First time.
Question put, That the clause be read a Second time.
Guy Opperman
I rise briefly, Mr Robertson, to thank you and your fellow Chair; thank the Clerks, who have worked with all colleagues to a massive degree, which is extraordinarily difficult in times of covid; and thank the Hansard team. I would normally thank the Doorkeepers, but they have not had to listen to us—lucky them. I particularly want to thank colleagues who have proceeded to pass a 132-clause, 200-page Bill in under a day and a half.
Guy Opperman
With proper parliamentary scrutiny where it particularly mattered, while working on a cross-party basis on other things. I also thank my team at the Department for Work and Pensions, who have put in Herculean efforts to produce this Bill, and it would not be inappropriate to thank the Whips for keeping us in due order throughout this wonderful process.
The Chair
I give my thanks to everybody for their good humour and co-operation, and to the Clerks for their help.
Question put and agreed to.
Bill, as amended, accordingly to be reported.
Pension Schemes Bill [Lords]
Monday 16th November 2020
(4 years ago)
Commons ChamberRead Full debate Pension Schemes Act 2021 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Consideration of Bill Amendments as at 16 November 2020 - (16 Nov 2020)
20:51 - The House divided: - Ayes: 262 / Noes: 351 - Question accordingly negatived.
21:04 - The House divided: - Ayes: 262 / Noes: 349 - Question accordingly negatived.
21:17 - The House divided: - Ayes: 257 / Noes: 356 - Question accordingly negatived.
21:30 - The House divided: - Ayes: 256 / Noes: 356 - Question accordingly negatived.
Stephen Timms (East Ham) (Lab)
I beg to move, That the clause be read a Second time.
Madam Deputy Speaker (Dame Rosie Winterton)
With this it will be convenient to discuss the following:
New clause 2—Pensions Advisory Commission—
“(1) The Pensions Regulator shall establish a committee to be known as the Pensions Advisory Commission.
(2) The Commission shall consist of—
(a) members of the Regulator as provided under section 2(1) of the Pensions Act 2004, and
(b) five other persons appointed by Her Majesty on the recommendation of the Secretary of State.
(3) A person appointed under subsection (2)(b) shall exercise only functions in pursuance of the duties in subsections (5) and (6).
(4) The Commission shall be chaired by a person appointed under subsection (2)(b).
(5) It shall be the duty of the Pensions Advisory Commission to submit to the Secretary of State each calendar year, beginning with the year 2022, a report setting out the Commission’s views on—
(a) the impact of provisions in Parts 1, 2 and 4 of this Act on—
(i) persons in different parts and regions of the United Kingdom,
(ii) equal treatment of men and women in access to pension provision, and
(iii) persons with a protected characteristic under section 4 of the Equality Act 2010; and
(b) the effectiveness of the powers in Parts 1 to 3 of this Act in enabling the Pensions Regulator to achieve its objectives under section 5 of the Pensions Act 2004.
(6) It shall also be the duty of the Commission to report to the Secretary of State by 31 October 2021 its views on when commercial operators should be able to enter the market for provision of a pensions dashboard service.
(7) The Secretary of State must lay before Parliament a copy of every report received from the Commission under this section.”
New clause 3—Pension accounts—
“(1) A jobholder to whom section 3 of the Pensions Act 2008 applies may by notice require an employer to arrange for the jobholder to receive into a pension account any contribution which would otherwise be made by the employer into an automatic enrolment scheme.
(2) A contribution by a jobholder or by their employer into the jobholder’s pension account shall be invested in a pension scheme offered by an approved pension provider.
(3) The Secretary of State may by regulations make provision—
(a) about the form and content of a notice given under subsection (1), or
(b) about the arrangements that the employer is required to make.
(4) The Secretary of State may make regulations to set criteria by which a pension provider may be approved for the purposes of subsection (2).
(5) Regulations under this section shall be made by statutory instrument and may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament.”
New clause 4—Employer debt: trustees’ discretion—
“(1) The following changes are made to the Occupational Pension Schemes (Employer Debt) Regulations 2005 (SI 2005/678).
(2) In regulation 2, in the definition of “scheme apportionment arrangement”—
(a) in sub-paragraph (f)(ii), after “apply”, insert “but not if the circumstances in paragraph (h) apply”;
(b) at end insert—
“(h) the consent of the remaining employer or employers shall not be required under (f)(ii) above where all of the following conditions apply—
(i) the departing employer’s debt was treated as becoming due prior to the coming into force of this provision; and
(ii) the departing employer’s debt was less than 0.5% of the scheme’s overall liabilities, as estimated by the trustees or managers on advice of the scheme actuary, as if the whole scheme had been winding-up at the time the debt was treated as becoming due; and
(iii) the employer in question was operating as an unincorporated business during his participation in the scheme; and
(iv) the trustees or managers consider that, in the context of the scheme overall, taking into account factors such as the scheme’s assets, liabilities and the trustees’ or managers’ most recent assessment of the overall employer covenant, there would be no material benefit to the scheme and its members in seeking recovery of the employer’s liability share from the departing employer.”
(3) In regulation 9, after paragraph (14B), insert the following new paragraph—
“(14C) Condition L is that a debt was treated as becoming due from him under section 75 of the 1995 Act but is excluded under this Condition because—
(a) the employer’s debt was treated as becoming due prior to this Condition coming into force; and
(b) the employer’s debt was less than 0.5% of the scheme’s overall liabilities, as estimated by the trustees or managers on advice of the scheme actuary, as if the whole scheme had been winding-up at the time the debt was treated as becoming due; and
(c) the employer in question was operating as an unincorporated business during his participation in the scheme; and
(d) at or before the applicable time, the trustees or managers have made a determination not to pursue the debt on the grounds that, in the context of the scheme overall, taking into account factors such as the scheme’s assets, liabilities and the trustees’ or managers’ most recent assessment of the overall employer covenant, seeking recovery represented a disproportionate cost to the scheme and would be of no material benefit to the scheme overall.””
This new clause would enable pension scheme trustees to exercise discretion not to pursue employer debt following an employer’s exit from a pension scheme where such debt is below a de minimis threshold. This aims to support unincorporated employers who are now retired for business and for whom the current regulation allows no easements.
New clause 5—Employer debt: deferred debt arrangement—
“(1) The following changes are made to the Occupational Pension Schemes (Employer Debt) Regulations 2005 (SI 2005/678).
(2) In regulation 6F—
(a) in paragraph (1), leave out “A” and insert “Subject to the provisions of paragraph (8) below, a”;
(b) at end insert—
“(8) In relation to a frozen scheme, the trustees or managers of the scheme may agree to a deferred debt arrangement where the employment-cessation event occurred at a time prior to the scheme becoming a frozen scheme, providing the conditions of paragraph (3) are met at the time the deferred debt arrangement is entered into.””
This new clause would permit employers in a pension scheme closed to future accrual to apply for a deferred debt arrangement, providing they meet the other statutory tests. This aims to support employers who are still trading but were not able to use the existing deferred debt easement.
New clause 6—Regulation of pension superfunds—
“(1) The Secretary of State shall publish a statement on proposals for primary legislation in relation to a duty on the Pensions Regulator to regulate pension superfunds.
(2) For the purposes of this section, a pension superfund is a defined benefit pension scheme that allows for the severance of an employer’s liability towards a defined benefit scheme and one of the following conditions applies—
(a) the scheme employer is replaced by a special purpose vehicle (SPV) employer, or
(b) the liability of the employer to fund the scheme’s liabilities is replaced by an employer backed with a capital injection to a capital buffer.
(3) The statement under subsection (1) shall be laid before Parliament before the end of a period of six months from the day on which this Act receives Royal Assent.”
This new clause would require the Secretary of State to publish within six months of Royal Assent proposals for primary legislation to place a duty on the Pensions Regulator to regulate pension superfunds.
Amendment 15, in clause 118, page 104, line 19, at end insert—
“(3) Requirements prescribed under subsection (2) must include a requirement that a pensions dashboard service may not include a facility for engaging in financial transaction activities.”
This amendment ensures that a pensions dashboard does not include a provision for financial transaction activities.
Amendment 9, page 105, line 20, at end insert—
“(6A) A requirement under subsection (6)(d) may require the provider of a pensions dashboard service to ensure that the needs of people in vulnerable circumstances, including but not exclusively—
(a) persons who suffer long-term sickness or disability,
(b) carers,
(c) persons on low incomes, and
(d) recipients of benefits,
are met and that resources are allocated in such a way as to allow specially trained advisers and guidance to be made available to them.”
This amendment would require that specially trained advisers and guidance are made available to people in vulnerable circumstances and would provide an indicative list of what vulnerable circumstances should include.
Amendment 10, page 105, line 20, at end insert—
“(6A) A requirement under subsection (6)(d) may require the provider of a pensions dashboard service to communicate to an individual using the dashboard the difference between—
(a) provision of information,
(b) provision of guidance, and
(c) provision of advice.”
This amendment would require the provider of a pensions dashboard service to ensure that users are made aware of the differences between “information”, “guidance” and “advice”.
Amendment 11, in clause 119, page 108, line 18, after “scheme,” insert—
“(iva) the total cost of charges incurred for the administration of the scheme”.
This amendment would add information about the total cost of charges incurred for the administration and management of occupational pension schemes to the list of information displayed on the dashboard.
Amendment 13, in clause 121, page 112, line 42, after “scheme,” insert—
“(iva) the total cost of charges incurred for the administration of the scheme”.
This amendment would add information about the total cost of charges incurred for the administration and management of personal and stakeholder pension schemes to the list of information displayed on the dashboard.
Amendment 8, in clause 122, page 116, line 37, at end insert—
“(2A) Before any other pension dashboard services can qualify under section 238A of the Pensions Act 2004 (qualifying pensions dashboard service)—
(a) the pensions dashboard service under subsection (1) must have been established for at least one year, and
(b) the Secretary of State must lay before Parliament a report on the operation and effectiveness of the pensions dashboard service under subsection (1) in its first year.”
Amendment 14, page 116, line 37, at end insert—
“(3) Before any other pension dashboard services can qualify under section238A of the Pensions Act 2004 (qualifying pensions dashboard service) the Secretary of State must lay before Parliament a report on the operation and effectiveness of the pensions dashboard service, including the adequacy of consumer protections.”
This amendment would require the Secretary of State to report on the operation and effectiveness of the public dashboard service (including consumer protections) before allowing commercial dashboards to operate.
Amendment 7, in clause 123, page 117, line 34, at end insert—
“(2) In exercising any powers to make regulations, or otherwise to prescribe any matter or principle, under Part 3 of the Pensions Act 2004 (scheme funding) as amended by Schedule 10, the objectives of the Secretary of State must include ensuring that schemes that are expected to remain open to new members, either indefinitely or for a significant period of time, can adopt funding and investment strategies which are suited to the characteristics of such schemes.”
Amendment 1, page 117, line 34, at end insert—
“(2) In exercising any powers to make regulations, or otherwise to prescribe any matter or principle, under Part 3 of the Pensions Act 2004 (scheme funding) as amended by Schedule 10, the Secretary of State must ensure that—
(a) schemes that are expected to remain open to new members, either indefinitely or for a significant period of time, are treated differently from schemes that are not;
(b) scheme liquidity is balanced with scheme maturity;
(c) there is a correlation between appropriate investment risk and scheme maturity;
(d) affordability of contributions to employers is maintained;
(e) affordability of contributions to members is maintained;
(f) the closure of schemes that are expected to remain open to new members, either indefinitely or for a significant period of time, is not accelerated; and
(g) trustees retain sufficient discretion to be able to comply with their duty to act in the best interests of their beneficiaries.”
This amendment seeks to ensure that open and active schemes which are receiving regular, significant cash contributions and closed schemes are treated differently, in accordance with their differing liquidity profile.
Amendment 6, page 117, line 34, at end insert—
“(2) The Secretary of State must, on or before 30 June 2021, lay before Parliament a comprehensive impact assessment of the effect on the charitable sector of changes to defined benefit schemes made under Schedule 10.”
This amendment would require the Government to produce an economic impact assessment of the changes to defined benefit schemes upon the charitable sector.
Amendment 16, in clause 124, page 118, line 45, leave out subsection (8) and insert—
“(8) In this section and in sections 41AA, 41B and 41C—
(a) “the Paris Agreement goal” means the objectives set out in Articles 2 and 4.1 of the agreement done at Paris on 12 December 2015; and
(b) “other climate change goal” means any climate change goal approved by the Secretary of State, but does not apply to a climate change goal which fails to meet the objectives of the Paris Agreement goal.
41AA Alignment with the Paris Agreement goal
(1) Trustees or managers of occupational pension schemes of a prescribed description must develop, set and implement, and from time to time review and if necessary revise, a strategy for ensuring that their investment policy, objectives and practices (including stewardship activities) are aligned with the Paris Agreement goal or other climate change goal.
(2) Such a strategy is to be known as a “Paris-alignment strategy”.
(3) The objective of a Paris-alignment strategy must be to achieve net-zero greenhouse gas emissions by 2050 or sooner, consistent with the Paris Agreement goal or other climate change goal.
(4) Provision may be made by regulations—
(a) requiring the trustees or managers of a scheme, in determining or revising a Paris-alignment strategy, to take into account prescribed matters and follow prescribed principles—
(i) as to the level of detail required in a Paris-alignment strategy; and
(ii) as to the period within which a Paris-alignment strategy must be developed, set and effected;
(b) requiring annual reporting on the implementation of the Paris-alignment strategy and progress against the objective set out in subsection (3); and
(c) requiring a Paris-alignment strategy to be reviewed, and if necessary revised, at such intervals and on such occasions as may be prescribed.”
This amendment enables regulations that would mandate occupational pension schemes to develop a strategy for ensuring that their investments and stewardship activities are aligning with the Paris agreement goals, and include an objective of achieving net-zero greenhouse gas emissions by 2050 or sooner.
Amendment 17, page 119, line 7, after “scheme” insert
“and alignment with achieving the objectives of the Paris Agreement goal or other climate change goal”.
This amendment is consequent on Amendment 16.
Amendment 18, page 119, line 8, leave out “section 41A” and insert “sections 41A and 41AA”.
This amendment is consequent on Amendment 16.
Amendment 19, page 119, line 19, after “41A”, insert “, 41AA”.
This amendment is consequent on Amendment 16.
Amendment 20, page 119, line 21, after “41A”, insert “, 41AA”.
This amendment is consequent on Amendment 16.
Amendment 21, page 119, line 22, at end insert—
“(za) provide for the Authority to undertake a review of, and report publicly on, the extent to which the activities under sections 41A and 41AA are achieving effective governance of climate change risk and alignment of pension schemes with the Paris Agreement goal;”.
This amendment enables the regulator to publicly assess the progress and development of schemes’ strategies to achieve alignment with Paris agreement goals.
Amendment 22, page 119, line 25, after “41A”, insert “, 41AA”.
This amendment is consequent on Amendment 16.
Amendment 23, page 119, line 30, after “41A”, insert “, 41AA”.
This amendment is consequent on Amendment 16.
Amendment 24, page 119, line 37, after “41A”, insert “, 41AA”.
This amendment is consequent on Amendment 16.
Amendment 2, in clause 125, page 120, line 32, at end insert—
“(e) the results of due diligence undertaken by the trustees or managers regarding the intended transfer or the receiving scheme.”
This amendment enables regulations under inserted subsection (6ZA) of section 95 of the Pension Schemes Act 1993 to prescribe conditions about the results of due diligence undertaken in relation to a transfer request such as to determine that the statutory right to a transfer is not established if specific “red flags” are identified in relation to the transfer or intended receiving pension scheme. Amendments 3, 4 and 5 are related.
Amendment 3, page 121, line 27, at end insert—
“(e) the results of due diligence undertaken by the trustees or managers regarding the intended transfer or the receiving scheme.”
This amendment enables regulations under inserted subsection (5A) of section 101F of the Pension Schemes Act 1993 to prescribe conditions about the results of due diligence undertaken in relation to a transfer request such as to determine that the statutory right to a transfer is not established if specific “red flags” are identified in relation to the transfer or intended receiving pension scheme. Amendments 2, 4 and 5 are related.
Amendment 12, in schedule 9, page 178, line 14, after “scheme,” insert—
(iva) the total cost of charges incurred for the administration of the scheme”.
This amendment would add information about the total cost of charges incurred for the administration and management of occupational pension schemes in Northern Ireland to the list of information displayed on the dashboard.
Amendment 4, in schedule 11, page 192, line 20, at end insert—
“(e) the results of due diligence undertaken by the trustees or managers regarding the intended transfer or the receiving scheme.”
This amendment enables regulations under inserted subsection (6ZA) of section 91 of the Pension Schemes (Northern Ireland) Act 1993 to prescribe conditions about the results of due diligence undertaken in relation to a transfer request such as to determine that the statutory right to a transfer is not established if specific “red flags” are identified in relation to the transfer or intended receiving pension scheme. Amendments 2, 3 and 5 are related.
Amendment 5, page 193, line 15, at end insert—
“(e) the results of due diligence undertaken by the trustees or managers regarding the intended transfer or the receiving scheme.”
This amendment enables regulations under inserted subsection (5A) of section 97F of the Pension Schemes (Northern Ireland) Act 1993 to prescribe conditions about the results of due diligence undertaken in relation to a transfer request such as to determine that the statutory right to a transfer is not established if specific “red flags” are identified in relation to the transfer or intended receiving pension scheme. Amendments 2, 3 and 4 are related.
Stephen Timms
I rise to speak to new clause 1, together with amendments 2 to 5, and I am grateful to those from my party, the Conservative party and the SNP who have added their names to them.
New clause 1 addresses a serious flaw in the implementation of the pension freedoms that George Osborne announced in his Budget speech in 2014 and that were implemented the following year. This is what George Osborne said in that Budget speech on 19 March 2014:
“Let me be clear: no one will have to buy an annuity. We are going to introduce a new guarantee, enforced by law, that everyone who retires on these defined contribution schemes will be offered free, impartial, face-to-face advice on how to get the most from the choices they will now have.”—[Official Report, 19 March 2014; Vol. 577, c. 793.]
That was a recognition that there could be pitfalls in allowing people to do whatever they wanted with their pension savings—for many people, the largest sum of money they would ever have access to—and that the Government would have to ensure that everybody had access to guidance to help them make the best decisions.
The outcome of George Osborne’s promise is the Pension Wise service operated by Citizens Advice, and it is an excellent service. It is free and it is impartial, as George Osborne promised, and it gets very high satisfaction ratings from those who use it. The problem is that hardly anyone does use it, and new clause 1 is intended to fix that. The latest figures show that about one in 33 of those eligible for Pension Wise actually use it. Last month, the Department for Work and Pensions published a document entitled “Stronger Nudge to Pensions Guidance: Statement of Policy Intent”. That proposed the adoption of new nudges, which, according to the trials, would increase the take-up from one in 33 to one in nine. Well, that is not enough.
Ms Angela Eagle (Wallasey) (Lab)
On that point, I thank my right hon. Friend for the way he is championing consumer advice in this very difficult space. Does he agree with me that we do not want a stronger nudge, but a great big shove into the arms of impartial, free advice?
Stephen Timms
My hon. Friend is absolutely right, and that is precisely what new clause 1 is intended to deliver.
Monthly data used to be published on the usage of Pension Wise. The Government committed to monthly publication in December 2015 in their response to the Work and Pensions Committee’s report “Pension freedom guidance and advice”, but monthly publication stopped in January 2019. Now the data is only published annually. I tabled a question about that, asking for monthly publication to be resumed. The Minister answered no, and said:
“The annual reporting allows for wider analysis and commentary against the figures rather than that previously published month by month.”
However, nothing is lost by publishing every month.
The Parliamentary Under-Secretary of State for Work and Pensions (Guy Opperman)
I am grateful to the right hon. Gentleman for our conversation in the Library beforehand, during which he flagged this point to me. Subject to the powers that I have, given that Pension Wise is an arm’s length body, I am very happy to review the annual publication, to go back to a monthly publication. I would simply make the point that the “Stronger Nudge” is happening as a result of the Work and Pensions Committee’s 2018 recommendation. We are enacting what the Committee asked us to do.
Stephen Timms
I am very grateful to the Minister for that assurance, and I look forward to monthly publication resuming.
To answer my hon. Friend the Member for Wallasey (Ms Eagle), who I am delighted to see in her place, at the Treasury Committee a couple of weeks ago the chair of the Financial Conduct Authority spoke about defined-contribution pension savers. He said:
“This issue about people making poor choices when exercising the freedoms…is probably the one that I worry about most of all.”
He went on to say that safeguards need to be
“as strong as they humanly can be”.
The FCA has had a go. As the Minister pointed out in Committee, last November the FCA introduced new rules requiring clearer signposting and promotion of pensions guidance. However, it has not worked. FCA data shows that just 14% of pension pots were accessed after guidance was taken in the six months from October 2019 to March 2020—exactly the same proportion as before the new rules.
It was not just George Osborne who had the ambition that everybody should benefit. The Treasury’s public financial guidance review, published for consultation in March 2016, said:
“Guidance is vital to ensure that individuals are fully aware of their options before they make a decision on what to do with their retirement savings”.
The then Economic Secretary, the hon. Member for West Worcestershire (Harriett Baldwin), said the following month that the Government were introducing
“a requirement that, in effect, ensures that consumers with a high-value annuity receive appropriate financial advice before making the decision to sell their annuity”.—[Official Report, 19 April 2016; Vol. 608, c. 876.]
Today, unfortunately, there is no such requirement. Two years later, in April 2018, her successor, the hon. Member for Salisbury (John Glen), who is the current Economic Secretary, said that, before proceeding with an access or transfer application,
“subject to any exceptions, schemes must ensure that individuals have either received Pension Wise guidance or have opted out.”—[Official Report, 24 April 2018; Vol. 639, c. 831.]
That aspiration has simply not been delivered. Today, the Government are taking steps that their own investigation says would make it true in 11% of cases. New clause 1 would finally deliver on the commitment that the Economic Secretary thought he was delivering on two years ago.
It was not just the Treasury. The noble Baroness Buscombe, who was a Minister in the Department for Work and Pensions at the same time as the current Minister, said in the other place on 1 May 2018:
“We all want people to make more informed decisions and to make it the norm to use Pension Wise before accessing their pension.”—[Official Report, House of Lords, 1 May 2018; Vol. 790, c. 1995.]
Everybody agreed that it should be the norm. Today, the Minister has set his ambition at 11% take-up. How can it be that ambition in his Department has shrunk so far? New clause 1 would resolve it using auto-enrolment to increase the take-up of guidance, just as it has been used so successfully to increase pension saving.
Mr Shailesh Vara (North West Cambridgeshire) (Con)
The right hon. Gentleman speaks with huge authority on this subject, having formerly been Pensions Minister. He will, however, appreciate that no matter how many times some people are written to, they simply will not respond, so there will be a proportion of people to whom letters are written who will not take up the option of an appointment and will not indicate that they wish to opt out. What does he propose for those people? I dare say there will be a significant number of them. For them, it will be maintenance of the status quo.
Stephen Timms
The proposal in new clause 1 is that people should be auto-enrolled into an appointment—that everyone should be given an appointment. That would have the effect, I believe and submit, of very significantly increasing the number of people who access Pension Wise. Pension Wise is a very good service. It is funded by an industry levy. Nine out of 10 of those who use it report high or very high satisfaction—that is a pretty impressive level of satisfaction—but it is hidden away from most people. Lots of people have never heard of it.
Mr Vara
I note that the right hon. Gentleman says people would be given an appointment, but if the notification were by email, the fact is that people simply ignore a lot of emails. People do not always look at all the letters that are sent to them, or they mean to refer back to a letter, thinking, “Oh, I’ve got an appointment; I’ll get back to that,” but they do not, for whatever reason. There are also people who move home address and so on, who will never be notified if the letter goes to the wrong address and there has been a time gap, and the pensions people have not registered the new address. I accept where the right hon. Gentleman is going and I have huge sympathy with what he seeks to achieve, but there will still be a substantial number of people who will ignore the appointment that will simply be sent to them as a fait accompli.
Stephen Timms
The great strength of the Pension Wise approach is in providing appointments that deliver guidance to a very large number of people. The issue that the hon. Gentleman talks about will need to be managed in the context of a national service that already exists—one that is helping a significant number already and ought to be helping a lot more. The default should be that people get an appointment.
The chair of the Money and Pensions Service told the Work and Pensions Committee in March that 72% of people change their mind about what they are going to do as a result of talking to Pension Wise. He pointed out that
“that tells you that the vast majority of people, left to their own devices, will probably make a poor decision.”
However, the Government’s current policy will leave eight out of nine savers in exactly that position.
Last week, the Minister received a four-page letter from Age UK and other organisations that said:
“The DWP should rightfully be proud of Pension Wise, but usage is still worryingly low, and it is a great concern that the ‘Stronger Nudge’ trials report published by the Money and Pensions Service shows that only a marginal improvement in take-up is likely to result from this approach.”
We have to do much better; they are quite right. The letter goes on to argue that non-advised savers should be opted in automatically, as proposed in new clause 1. It also provides detailed rebuttals to the arguments that the Minister used against this new clause in Committee, which are on the record.
Of course, Age UK is quite right: the Department’s plans are currently inadequate. The letter goes on to point out that the Minister’s suggestion in Committee that the FCA’s introduction next year of its investment pathways might deal with the problem is not going to work either. We cannot sit back while Pension Wise continues to be an excellent service taken up by a very small minority. The Government and regulators need to end their indifference on this. Aspiring to 11% take-up is not enough. We need auto-enrolment into a service that enables better outcomes from pension savings.
One of the reasons for the importance of Pension Wise is that it equips people to avoid being scammed. The Pension Scams Industry Group estimates that 40,000 savers have been scammed out of their savings in the five years since pension freedoms were introduced. Some of them do not yet know about it. A significantly higher number of Pension Wise users than non-users say that they are very or fairly confident about avoiding pension scams, having had an interview with Pension Wise. The default ought to be that people are given an appointment. I hope that the Minister will accept the new clause, but if he does not I hope that the House will have a chance to vote on it.
Amendments 2, 3, 4 and 5 address the scam problem. They are probing amendments, because the Minister has helpfully explained that he intends to introduce regulations under powers in the Bill that have the same effect as the regulations that would be introduced if the amendments were added to the Bill.
I was in touch—the Minister has heard me say this before—with a nurse who works in a health centre in my constituency. Her husband drives a black cab. Some years ago, a financial adviser whom they knew well and who had given them good advice previously called to tell them about an opportunity to realise their pension savings early with no real downside. They took up his offer, and the upshot is that all their savings have gone, and they face a massive tax bill of about £60,000 with no means to pay it. The financial adviser, I gather, is living on a yacht off Tenerife.
All of us can understand how devastating is the impact on hard-working families of being robbed of their life savings in that way. People who have worked hard, who have done the right thing and who are entitled to look forward to a secure retirement suddenly find that their hopes have been destroyed. The Transparency Task Force, one of the groups that urged the Select Committee to undertake its current inquiry on scams, reports cases of spouses who, sometimes for years, have not dared tell their partners what has happened, so awful are the consequences. People wake up every day in dread of the future, often ashamed and embarrassed to have fallen for such bare-faced lies. Scammers groom people and make themselves trusted family friends. They warn savers that schemes will advise them not to transfer their money, and they claim that that is because the schemes want to hang on to it for their own gain. If the saver becomes aware that the receiving scheme has fallen foul of regulators, they say that that was just because someone was late filling in some forms.
It seems absurd that, as the law stands, trustees are compelled to make a transfer if a member demands it, even if they know that the money is going to crooks. Even if the receiving scheme is on the warning list published by the Financial Conduct Authority of firms known to be suspect, the law requires trustees to go ahead with the transfer. If they are slow about it, they can be fined. The Select Committee has launched a three-part inquiry looking at scams. There have been lots of calls for the Committee to look at the issue, because there is widespread revulsion at the scandals that have occurred and fear of the damage to individuals and to the industry as a whole. There is a particular worry that pension freedoms, plus the financial pressures of the pandemic, could create what the Pensions Regulator has called a golden age for pension scams, as people are anxious to get hold of their money.
Guy Opperman
I am grateful to the right hon. Gentleman for giving way again. He knows that I have exchanged a series of letters with the Work and Pensions Committee and with him, having met him and the all-party parliamentary group on financial crime and scamming, and that I have placed in the House of Commons Library letters of 6 October and 22 October. Following his suggestion in Committee, I clarified an extra point in a letter dated 11 November, which I placed in the Library. We share his revulsion on these particular points, and believe that clause 125, with suitable regulation, can address these issues.
Stephen Timms
I am grateful for the assurances that the Minister has given. One of the problems is that the responsibility for responding to scams cuts across many different bodies. The court ruling last week that the fraud compensation fund could be used to compensate some pension scam victims is a significant development.
The Police Foundation published an important report in September called “Protecting people’s pensions: Understanding and preventing scans”, and that recommends a coherent set of principles for law enforcement and regulators, including: the facilitation of a more co-ordinated and consistent response across the various agencies; a specialist fraud victim support service; regulation for introducers, who are not regulated at the moment; and, new digital technology for the police to support and speed up analysis of the large volumes of evidence collected in investigations.
Nigel Mills (Amber Valley) (Con)
It is a pleasure to speak in the debate, to follow the right hon. Member for East Ham (Stephen Timms), the Chair of the Select Committee and to speak to the amendments that he has tabled and I have signed. I will start where he did, with the issue of mandatory guidance—or as near mandatory as we could make it, as I raised on Second Reading.
The right hon. Gentleman quoted the key statistics, which show that the take-up of this excellent, high-quality service—it attracts brilliantly good feedback from those who use it, and the people who provide that service accept that it changes the mind of 70-something per cent. of those who actually use it—is feebly low. Trials showed that the figure was somewhere around 3%, before the nudge was implemented. That is not what this Parliament envisaged when, five or so years ago, we introduced the pension freedoms. The safeguard we put in place at that time was to create the Pension Wise service: free guidance so that people would have the chance to check what they were doing was the right thing for them in exercising choices they did not used to have. Those choices are incredibly complicated. In many cases, they are a once-and-for-all: once they have done something, they cannot reverse out of it.
That is why, as a Parliament, we were so keen for people to have that chance of a warning and to understand how this all works. They save up all their money for 40 or so years at work and get to the very end point. In many cases, they do not understand all the options. They do not know what they are being sold and they buy the wrong thing. The data in the FCA’s own retirement outcomes review from about three years ago shows that a high proportion of people are just defaulting into a drawdown scheme with their existing pension provider. They are not shopping around and looking at the other options.
Ms Angela Eagle
Does the hon. Gentleman agree that at the moment the decumulation pension industry is unregulated, so there is no transparency on costs or on the kind of charges that may be applied to drawdown schemes? That is another area where people might be being scammed.
Nigel Mills
I am grateful to the hon. Lady. If only she was on the Select Committee, because that is an issue I have raised on a few occasions. Over the past decade or so, we have very effectively regulated the accumulation phase, but we have not yet got the decumulation phase in quite the same position, with charge caps. The default pathways are a great step forward that will help people, but there is a real danger even with that that people will end up on a default pathway with their default provider, rather than looking around to see whether there are any better options in the market.
We desperately need to find ways to get more people to access the free high-quality guidance. There is no reason for them not to do so. They do not have to pay a huge fee or wait a long time, and it is not a painful experience. It can be a relatively short phone call just to alert them to the situation and provide information. We need to get those numbers up. Last time we had a pensions Bill we had amendments calling for default guidance. We accepted a compromise that the FCA would do some work and find a way of increasing take-up so we would not need to legislate. The problem is that the FCA, I am afraid, took quite a long time to get round to starting the process. It did studies with some larger pension providers, showing that if they used the nudge with an extra reminder and gave them the information that Pension Wise exists, they could get take-up up to about 14%, or one in seven people.
I accept that we do not want or need 100% of people approaching retirement to take pension guidance. Some will be on such large pensions they will take advice that they pay for. In that situation, there is not much need for them to have simpler guidance. The irony is that the data shows a lot of people use pension guidance as a first step towards advice. They use guidance to work out what their options are and what they might need advice on, and then they go and get advice. That is a perfectly sensible use of guidance. I am not standing here saying let us have 100% of people, no matter if they have a tiny pension pot and there really is not much they can do with it, or if they have such huge ones they should be taking paid-for advice, but the right answer cannot be 14%. Even if we manage to roll out the nudge across every pension scheme in the country, we can only get to 14% of people. That cannot be the extent of our aspiration. That is why there have been various proposals on how we send people an appointment. If they do not take it, they can rearrange it, but until they have taken that appointment, or until they have signed to say that they understand they could have one but that they really, really do not want it, they cannot access their pension pot. I appreciate that some people will be rather angry when they pick up the phone to their pension scheme and are told they have to wait three weeks for a Pension Wise appointment before they can do that, but that, I think, is a price worth paying for them not to make a terrible mistake that they cannot reverse.
There is a real danger if people only get the nudge from their existing provider. We have all heard or taken part in those phone calls where we are told, “Now I’m going to have to switch the recorder on and read out some regulatory messages, but don’t worry, it’s all a bit of nonsense. It’s just one of those things we have to tell you. You don’t really need to listen. At the end just say yes.” Then they record the phone call and in that long spiel of “nonsense” there are the words, “and you have agreed to opt out of your Pension Wise appointment” and that is sufficient. That is the situation we are trying to avoid: people relying on one provider for their information.
I can accept that, as with all Back-Bench amendments, this proposal is not perfect. Is five years the right time? Are we going to end up spending far more than we need to? If, for some reason, the Minister will not accept this and has not come forward with alternative ways of doing this in law, I hope that he will at least accept that, even if we could roll out the nudge to all the providers that are as good as the ones the FCA used, a 14% aspiration is not sufficient. We could all work together, with the Select Committee and other key players, to work out what we think the right percentage take-up of Pension Wise would be, set that as a target for the FCA and if in two or three years it cannot get to that target, we can come back with legislation and put a default position in place. This would be a final warning to the FCA.
Guy Opperman
I am conscious of interrupting my hon. Friend’s flow, but that is clearly what the Government are seeking to do. Anyone who reads the 28 October report will see that it specifically states that there should be engagement with the Select Committee and various organisations. It also says that the product of the behavioural tests was limited, but there are many other ways that one can extend this as far as is practically possible.
Nigel Mills
I am grateful to the Minister. That document came out on my birthday, so it was a very happy present in some ways. When we read it, however, we have to remember that the process the FCA went through was with some of the largest, most reputable and most capable pension schemes, and even then it got only an 11% increase from the derisory 3% to a 14% take-up. It is not clear to me that, when trying to roll that out over the whole sector, we could even get that high if we were relying on smaller pension schemes or those that did not have the same resources. I hope the Minister will accept that we want to set a target that is much higher than 14%. Whether it needs to be 50% or some other figure is something that we could work on. Perhaps he could tell us in his closing remarks whether he agrees that the Government should set the FCA a much higher target. Would he at least accept the principle that, if we cannot get there by his preferred route of a nudge, we would have to look again at some kind of default system? Perhaps he will come back to that when he wraps up the debate.
One argument that is often used on this issue is that a lot more appointments would cost a lot more and that the levy would therefore go up. Yes, but I think that when we created this structure, we assumed there would be a lot more appointments and that the costs would be a lot higher. The benefits of a retiring person not making a catastrophic mistake with their 40 years’ lifetime savings outweigh the relatively small cost per person of providing the guidance. I know the Minister is very keen, as I would be, on the idea of a midlife MOT, but I do not think that that should replace this proposal. Giving someone a session in the middle of their working life, so that they know what their financial position is and what they can do about it, is not the same as giving someone help as they are about to start decumulating their pension so that they understand their options at that very important time. I am not sure that, if we told most people at the age of 45 what their options would be when they retired at 68, they would still have them in mind when they came to make those decisions. Pension Wise is not a substitute for a midlife MOT. We should have them both, and they should be as widely used as possible.
I personally would prefer a default guidance appointment, with someone having to sign in blood if they really did not want this free, excellent quality guidance before they could access their money. If the Government are not proposing that, I propose the compromise of setting a much higher target and if we cannot get there any other way, we will come back to this yet again.
The other amendments that I have signed cover scam prevention, which I think the Chair of the Select Committee and the Minister have dealt with pretty well. I accept there has to be a balance. If we have freedom of choice, people have to be free to do what they want with their own savings, and if some of the things they choose to do are ill advised or crazy, that is their choice. However, I want them to be able to make an informed choice so that they know the risks of what they are doing and will not be tricked by a heavy sell from a scam provider who is selling something totally unsuitable for someone of that level of means.
It must be right that when trustees have evidence or suspect that what they are being asked to do is clearly not in the best interests of the saver, they can refuse to make the transfer if those red flags appear. If there is other evidence that it just looks to be a rather stupid idea, they should at least be able to slow down the transaction, perhaps delaying it by a month. Perhaps they could refuse to do it unless the person took Pension Wise guidance, or at any rate find some way of slowing it down. One of the things that scammers need is momentum—they rush people into making a decision. The more we can build in delay, the more chance a person has to think again, take better advice, discuss it with a member of their family, take Pension Wise guidance and not want to go ahead with the aggressive step that has been proposed to them. The Minister has come up with a way forward that does not need primary legislation, so I am glad that we are bringing the amendments forward only as probing amendments.
Anna McMorrin (Cardiff North) (Lab)
Is the hon. Member saying that climate really is not very important because that is what I hear him saying on this? He is giving the trustees no confidence in having to make those decisions. How does he expect us to reach zero carbon by 2050 if that is the case?
Nigel Mills
I was coming on to say that there are better ways we could do this. I accept that we should encourage funds as strongly as we can to use the vast sums at their disposal to support investment in climate goals and other socially positive activities, but that should be done in part through member choice. There should be eco-friendly pension schemes and socially responsible ones, but they should allow their members to choose to opt into those schemes, and not have them as the default, if they are going to have a lower pension at the end of it.
Aaron Bell (Newcastle-under-Lyme) (Con)
Does my hon. Friend agree that an unintended effect of amendment 16 might be that pension funds feel they have to divest themselves from oil giants and so on? Those are the companies we need to address climate change—we cannot get to net zero without working with them—and divestment is not the right approach.
Nigel Mills
I agree, and I was coming on to that argument. I am not sure that achieving net zero can be pushed down to individual pension schemes and individual investment advisers. I suspect we will have to accept that between now and 2050, there will be some businesses out there that are bad for the environment but we are still going to need their products and services. We will need some of those even after 2050. We will achieve net zero by having other businesses that are more positive for the environment, with some still being bad for it. I am not sure that we can require every individual pension scheme to be a net zero investor. Otherwise, there will be a load of things that they just cannot invest in, as they cannot achieve that strategy.
I fully agree with the sentiment and agree that the industry needs to do more. I said on Second Reading that what we do not need are posh written documents that sit there with nice-sounding promises that never get implemented. We need pension schemes and their investment managers to be much more—
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
I will not address this in detail because I will have my own opportunity to do so, but I make it very clear that the amendment does not enforce or mandate pension funds to be net zero. It would ensure that they have an investment strategy, including a stewardship strategy, that is consistent with those objectives. It is drafted specifically to address those concerns and hon. Members have nothing to worry about in that regard.
Nigel Mills
I am grateful to the hon. Member, but I am not sure what the amendment would achieve then. If we say to a pension scheme, “You need to make sure that your overall investments are consistent with the nationwide net zero strategy”, they can just say, “Of course we are because there is a nationwide net zero strategy and we are just investing in legal businesses”, which we would presumably put taxes or carbon levies on to make sure we push this. It becomes a circle that would presumably mean only that the trustees have to produce a strategy and occasionally review it. It would not actually drive a great deal of different behaviour. I think I would want to see much more activist investment from pension schemes and their investment advisers to ensure that the businesses that they are investing in are sticking to their obligations and strategies on how they can reduce their impact on the environment, making sure that those promises are being kept on a management level rather than setting trustees an impossible target, which I am not sure would even mean what hon. Members seek to make it mean.
Guy Opperman
I endorse my hon. Friend’s comments, but surely the key point about clause 124 is that it does set out what we are trying to do on that issue, and it deals with the consultation that we issued in August specifically on the point that the hon. Member for Cardiff North (Anna McMorrin) raised, taking action on climate risk and improving governance and reporting by occupational pension schemes. That is the measure that we should be focusing on.
Nigel Mills
I am grateful to the Minister and I agree. The measures in the Bill are very sensible steps forward that will make a great difference. What is proposed in amendment 16 would just create a horrible mess for the pensions industry without really achieving anything further, so I will not support it if it is pushed to a vote.
Wendy Chamberlain (North East Fife) (LD)
I would like to speak to amendments 1 and 6, which have been tabled in my name and the names of other Liberal Democrat Members, and in favour of the cross-party amendment 7, tabled in the name of the hon. Member for Airdrie and Shotts (Neil Gray), as well as to his new clauses 4 and 5. I was very pleased to see new clauses 4 and 5 tabled and I pay tribute to the work of the all-party group on plumbers’ pensions—chaired by the hon. Member for Perth and North Perthshire (Pete Wishart)—of which I am a vice-chair.
I have a constituent who was a member of the plumbers’ pension scheme, and the trustees failed to notify him and others that, were they to leave the scheme, he would find himself liable under section 75. He had been a responsible small business employer, enabling all his employees to be part of a pension scheme and to save for their retirement. When he retired and wound up the business, he was not made aware of the consequences by the trustees from a pensions perspective of doing so. That means that through no fault of his own, he is now in a position where, because his business is no longer operating, he cannot apply for current easement schemes and, because his business was not incorporated, he is personally liable for the debt. He is now an elderly man and is being pursued by the trustees. They are threatening to repossess his house and his life savings are at risk. Were that to happen, the sums recovered from him would not even pay off half the outstanding debt.
My constituent told me:
“We are now in the third year of this, and it is taking a toll on my health, and also on the health of my wife.”
If passed, new clause 4 would turn my constituent’s life around. The safeguards are there. His total debt is only a tiny proportion of the total liabilities, and the trustees have determined that the majority of cessation events will be too costly or lengthy to seek recovery. That is one of the issues here: there is an injustice going on that has not received the attention it deserves because relatively few people have been affected by it, but that also presents the opportunity that something can be done and I hope that the Minister will comment accordingly on new clause 4 and look further at this plumbers’ pension issue. It is causing hardship and anxiety for, arguably, an increasingly vulnerable group of people.
I shall now address part 5 and schedule 10 and, in particular, clause 123 on defined-benefit schemes. My colleague in the Lords, Baroness Bowles, tabled the original amendment to clause 123 that would ensure that defined-benefit schemes are treated differently, depending on whether they are open or closed. I pay tribute to Baroness Bowles. Her amendment had cross-party support in the Lords, so it was disappointing that the Government removed it in Committee two weeks ago.
My amendment 1 would reinstate Baroness Bowles’s amendment, and amendment 7 in the name of the hon. Member for Airdrie and Shotts is a revised version of it, which I have also signed. I did not have the chance to sit on the Bill Committee, but I did follow proceedings and I was encouraged by the Minister’s comments during Committee on open defined-benefit schemes. He said:
“We acknowledge that if such schemes do continue to admit new entrants and do not mature then the scheme will not actually reach significant maturity. We are content that such a scheme retains the same flexibility in its funding and investment strategies that all immature schemes have.”––[Official Report, Pension Schemes Public Bill Committee, 5 November 2020; c. 81.]
I welcome those comments, which imply that open schemes should, and will, be treated differently from closed schemes, in accordance with different investment, liquidity and maturity, and I hope the Minister will be able to recommit to that statement on the Floor of the House today. I urge him to accept either amendment 1 or amendment 7, which would put that commitment on the face of the Bill and provide much needed reassurance for open schemes that have contacted me, and, I am sure, have contacted other Members, in advance of this debate.
We need that reassurance because there is real concern about the regulator’s consultation. Looking at the consultation document, there are places where it looks like the regulator is making the right noises on DB schemes.
Guy Opperman
I am grateful to the hon. Lady for those comments. I will not have the chance to answer in detail in closing, but I am very happy to endorse, and repeat as if I were to say the exact same words, the very detailed comments I made at Committee as to the way in which open schemes will be treated on an ongoing basis.
Wendy Chamberlain
I thank the Minister for that intervention, but I would ask him again to consider accepting either amendment 7 or amendment 1, which would put that commitment on the face of the Bill.
We need that reassurance because there is a real concern about the regulator’s consultation. In other places there appears to be a conflation, in that consultation document, of open and closed structures, with references to the same treatment and same risk profile between open and closed schemes. But it is just not possible to have the same risk profile between an open and a closed scheme.
Richard Graham (Gloucester) (Con)
This is an important point and the Minister will know that there are open schemes with considerable assets which could be deployed to the advantage of this nation in investing in means of growth for the future. Where they are funded, being open, it gives them a huge advantage and of course the current situation on bond yields makes it even less helpful for them purely to invest in gilts and so on. So I strongly support what the hon. Lady is saying. Does she agree that it would be helpful if the Minister could refer to this again in winding up?
Wendy Chamberlain
I thank the hon. Gentleman for his endorsement of my remarks. I hope the Minister will comment on this in winding up.
Open and closed schemes are on a continuum. A scheme opens, it matures, it becomes closed, it reaches the absolute end of the range of maturity, and the risk profile varies with that maturity. However, parts of the consultation document do not seem to recognise this, which is concerning. There is an understandable desire from employers and employees for this to be clarified. There is real concern that the regulator wants open schemes to be considered as if they were on the brink of forced closure, but that means effectively crystallising their investment structure into a closed structure and preventing them from acting as they need to, as the hon. Gentleman suggested. So I ask the Minister to recommit to the House that this will not happen, otherwise our concerns will remain, and Baroness Bowles and her colleagues in the Lords will continue to press the Government on this when amendments return to the other place.
There is a huge risk to getting this wrong. Members highlighted on Second Reading the issue of railway pensions. Their campaigning has been very important in raising the potential impact of this Bill on defined-benefit schemes. I also want to highlight the charitable sector and many large charities that rely on DB schemes: Oxfam, Age UK, Cancer Research, the National Trust and the Royal National Lifeboat Institution, to name but a few. My amendment 6 would require the Government to carry out an economic impact assessment on the effect of changes to DB schemes on that important sector. We have already heard that open schemes will end up with deficits of £120 billion to £160 billion if they are treated in the same way as closed schemes.
6.15 pm
We are in the midst of a pandemic and huge economic shocks, the impact of which we cannot fully predict at this time. Is now the time to saddle companies and charities with that extra debt, and for what purpose? What of individual savers themselves? Can we reasonably expect people potentially to double their personal contributions? Surely a more likely outcome from that requirement is that people will simply cease to contribute, and that will apply further pressure to the viability of that scheme.
There is a real danger that as a result of the deficits, charities—some of which I have mentioned—will go bust, and that is not a policy that any Government should be promoting, particularly given the support that the Government have put into the sector during the course of the pandemic. That would surely be a bad policy at any time. As I said earlier, I am encouraged by the Minister’s statements in Committee, and I thank him for recommitting to those in his intervention, but I hope he appreciates that we urgently need further reassurances. I do not see why such provision could not be made in the Bill, as indeed it was when it came from the other place. It would make sure that the regulator was acting in a sensible way. I look forward to hearing the Minister’s response.
My first contribution when taking on the role of DWP spokesperson for my party was on ensuring the triple lock for the state pension. In that debate, I highlighted the need to ensure a sustainable state pension, particularly given the intergenerational divide emerging for young people in this country. We should not, through this Bill, be potentially driving more people into reliance on the state pension by making personal pension provision unaffordable for individuals or institutions.
Gareth Davies (Grantham and Stamford) (Con)
It is a great pleasure to speak in this debate today, as it was on Second Reading and in Committee. I would like specifically to address amendment 16 to clause 124. Let me start by saying how great it is that we have cross-party support for policies that push forward our efforts on climate change. We should all be very proud of the fact that we are one of the first major countries to legislate to become a net zero country by 2050. I have long talked about the influence and power of financial services and financial markets to move things forward, but sadly I cannot support amendment 16. I will set out three reasons. The first is the unintended consequences, the second concerns divestment and the third relates to focus.
First, amendment 16 is well-meaning, but it would have unintended consequences. I fear fund managers would be limited in what they were able to invest in. I say that because of the limited environmental, social and corporate governance data in certain asset classes in certain markets around the world. If we look at emerging markets, private equity or in small-cap companies, ESG data is sporadic at best. It is getting better all the time, but at this point in time the market is not mature enough for the amendment to apply for managers. I fear that managers would be limited, and that would result in sub-optimal investments and mean that they could not fulfil their fiduciary responsibility.
Felicity Buchan (Kensington) (Con)
Is my hon. Friend aware that industry agrees with his position? For instance, the Pensions and Lifetime Savings Association has stated that on behalf of industry.
Gareth Davies
I am aware that the PLSA has stated that it is concerned about this amendment, for the reasons I have described. The second reason why I would agree with the association is my fear that the amendment will imply to trustees that they have to adopt a policy of divestment. As has been seen over decades, a divestment policy, as well-meaning as it is, does not actually change the things that people are seeking to change. Part of the reason is that a stock market is essentially a marketplace, so if someone wants to divest, somebody has to invest, and therefore there is a negligible impact on the underlying company. That is why for tobacco, for climate change and for guns in the United States, the divestment policies adopted by other pension funds just have not worked. I fear that such provision would cause confusion around divestment for pension trustees. It is very hard to draw a line where the policy ends. Some may claim, or desire, that they divest from oil and gas, but where does it end? There are other sectors that clearly contribute to climate change—whether it be haulage companies, taxi companies, car companies, or aviation companies—so where does it end? That causes some confusion for trustees. An investment policy should be put in place at a ground level.
Thirdly, when compared with engagement as an investment strategy, a divestment approach is just a very weak policy. I say that as somebody who comes from fund management and managing an ESG business. As owners of companies, we could call on chief executives and chief financial officers to engage on ESG issues such as climate change. We could vote at annual general meetings. We had those companies at the table to be able to influence them. If we divest, we lose that influence—we lose that ability to change and influence a company.
Guy Opperman
Does my hon. Friend agree that the campaign that he has waged to persuade the Treasury to have green gilts available for pension funds to invest in is exactly the point that we are seeking? It would mean businesses and pension funds working in a partnership with Government and regulators to solve the problems and the issues that we need to solve to get net zero. Without that partnership, we will actually go backwards, not forwards.
Gareth Davies
I am grateful to the Minister for his generous remarks and I thank him for his support of my campaign to bring about green gilts in this country. I agree that it is a way in which pension funds can contribute to the climate change effort in a meaningful way, moving billions of pounds of capital towards the goals that everybody across this House really wants to achieve, so I thank him for that intervention.
Finally, I fear that, although the amendment is well-intentioned, it is poorly focused. In my experience, trustees want to invest with purpose and according to their values. Likewise, fund managers have, over the past several years, moved great mountains, a lot of money and a lot of effort to incorporate ESG risk into most of their investment processes, and I do not believe that any asset manager in the future will be able to survive unless they integrate ESG climate risk as part of their investment process.
Richard Graham
As a trustee of the parliamentary pension fund, may I highlight that the changes on page 118 of the Bill on climate change risk are incredibly important and will help encourage trustees and pension funds in general to make investments that are pro-environment, pro-green and pro-climate change? I am absolutely in agreement with my hon. Friend that the proposed additional new clause 16, which would require pension funds to align with the Paris agreement goal, is a step too far. Does he agree that the Minister should focus on that in his summing up as well?
Gareth Davies
I am very grateful to my hon. Friend for his intervention. I agree that the Bill is sufficient in its current form to be able to achieve what we all want to achieve, which is to get pension funds to invest in a climate-aware way.
The last point that I will make in concluding is around this point on focus. In my experience, it is not the fund managers or the trustees whom we need to persuade or to make do anything, but the middle men and women—the gatekeepers, the investment consultants —who typically require a five-year track record and £100 million in assets held by fund managers and managed by fund managers. In my experience, that was always the issue. We were running money in a way that was really pushing things forward in terms of our climate targets. We knew that the pension clients really wanted to invest with us, but, because we could not meet the requirements of the investment consultants, we could not marry the two together. If we use the combined intellect, passion and energy of this House, from all parties, to come up with a solution to that, we could make great progress.
Madam Deputy Speaker (Dame Rosie Winterton)
Order. I am going to suspend the House for a short time—probably five or 10 minutes—to allow some extra cleaning to take place. Could Members leave the Chamber, so that the cleaning can take place? The bell will ring a minute before we are due to resume.
Pete Wishart (Perth and North Perthshire) (SNP)
On a point of order, Madam Deputy Speaker. I wonder if you could tell the House why there was the necessity for the further cleaning of the Chamber. I understand that this is the first time that this has ever happened. Is there anything in particular that the House needs to be informed about because of that arrangement?
Madam Deputy Speaker (Dame Rosie Winterton)
I thank the hon. Gentleman for that point of order. We were asked to suspend the House just to ensure that there was a little bit of extra cleaning. I do not have any further information other than that, but I am sure that it is precautionary, and if there is anything further that Members need to be informed of, I am sure that they will be.
Jim Shannon (Strangford) (DUP)
First, let me thank all those who have made contributions, which have been excellent. I thank the Minister for his response and the hon. Member for Grantham and Stamford (Gareth Davies) for the contribution he made just before me. It is a pleasure to speak on this issue. Although I know that this is not the purpose of this Bill, I cannot in all good conscience let the occasion go without raising the issue of the WASPI—Women Against State Pension Inequality Campaign—women, who still want their pension scheme. Once more, I look to the Minister for a response on that.
I want to speak to new clause 1 and some of the other amendments, ever mindful of the fact that the Bill provides for territorial extent, as set out in clause 117 and schedule 8, clause 120 and schedule 9, clauses 118, 119 and 129 and schedule 11. Pensions are a devolved matter in Northern Ireland, but this is an area where Northern Ireland has long maintained parity with Great Britain. There is, in effect, a single systems of pensions across the UK, with many pensions schemes, and indeed the regulator, the pensions ombudsman, the Pension Protection Fund and so on operating on a UK-wide basis.
Devolved government has now been restored in Northern Ireland, and we are pleased to have it in place. On 1 June, the Northern Ireland Assembly approved the legislative consent motion on the Bill, as introduced, and a further LCM will be necessary to cover amendments to the Bill, which the Northern Ireland Minister for Communities has agreed will be done and should extend this to Northern Ireland. So some things are positive on that.
I have been in contact with a number of pensions bodies that have expressed concern about the proposals in the Bill. We all know how essential a good pension is, and it is becoming more important with each month. I am sure that I am not the only one to have seen the losses in pensions in this year’s statement. I have a decent understanding of how my pension pays out, but I was listening to the girls in my office and it is clear that, although my staff members in their 40s and 50s have a grasp on their pension, the two staff members in their 20s and 30s do not and they do not seem to be able to understand just how it works. The older girls say, “I wouldn’t swap my pension but I like to see what is in it,” and they have already had a look at their pensions to know what they have. Many people are wise and astute enough to do that, but others are not and they have no understanding of what can be done. There is more to doing our best to secure our financial future than simply opening a letter—there has to be more than that.
The right hon. Member for East Ham (Stephen Timms) referred to new clause 1, which underlines the importance of an easily accessible, easy to navigate pensions dashboard that is easier to understand than an annual statement. The Association of British Insurers has said:
“Pensions Dashboards are a necessary addition to Automatic Enrolment. More than 10 million people have now been automatically enrolled into workplace pensions through inertia, and will need to find their pension pots and make decisions about them.”
We are all probably at that age, Minister, when we have to think about our pension pots, and if we are not doing so, there is something seriously wrong, because we should be. The ABI went on to say:
“Already 1 in 5 adults admit to having lost a pension pot and latest PPI research suggests that there is at least £19.4bn held in pots that consumers have lost track of.”
It is horrendous to hear that.
Guy Opperman
I welcome the hon. Gentleman back to the House, as this is the first opportunity I have had to do so. He is rightfully regarded as an institution in this place and long may that continue. I hope that he will understand that a combination of the pensions dashboard, as set out in clause 118, which will give people online access to their pensions, simpler statements, which the Department is taking forward in respect of written statements, and many other pieces of work we are doing to trace individual pensions will make tracking down past pensions an awful lot easier.
Jim Shannon
I thank the Minister for that response. The Department for Work and Pensions estimates that 50 million pension pots will be lost or dormant by 2050, and people are vulnerable. We hope that the intervention he made may allay some of the fears people have. The ABI continued:
“Pensions Dashboards will not only help to find lost pensions and reduce the cost of financial advice, but should also prompt people to engage more closely with and save more into their pension, aiding consumers to make informed retirement decisions.”
That is really what we have to be doing—the thrust of this debate should be to try to focus that attention. The ABI went on:
“Pensions Dashboards are now woven into nine different Government and regulatory policy strategies, including the Government’s UK Digital Strategy, the FCA’s Retirement Outcomes Review and the Cabinet Office’s Dormant Assets Commission.”
The ABI also tells us that 60% of 25 to 34-year-olds would be most comfortable viewing their pensions through their mobile banking app—because that is the nature of the future—compared with only 11% of those aged 65-plus, which is probably my generation and thereabouts; 20% of those aged 65-plus would be comfortable receiving their pension data via post, compared with only 4% of 18 to 24-year-olds; and 61% of those aged 55 to 64 would find it most convenient to view their savings through the pension provider’s website, compared with 30% of 18 to 24-year-olds. What does that tell us? It tells us that people have different ways to access their pension, to look at what it means to them and to get the answers that they need.
More people in Northern Ireland feel that they have low financial capability—indeed, Northern Ireland has the lowest proportion of all the regions of the United Kingdom of Great Britain and Northern Ireland. Fewer Northern Irish people describe themselves as “confident and savvy consumers”, with 43% saying so, versus the UK average of 52%—so we do fall behind—or as highly confident in managing their money, with 26% saying so, against the UK average of 37%. Fewer consider themselves to be highly knowledgeable in financial matters, with 10% saying so, against the UK average of 16%. We in Northern Ireland need the necessary advice so that we can decide, collectively, what our pension pots are worth.
The figures I have outlined suggest that pension savers in Northern Ireland may appreciate the benefit of a Pension Wise appointment even more than their counterparts elsewhere in the UK. Sadly, the DWP, FCA and Pension Wise data does not split user stats by location, so we do not know user stats for Northern Ireland; we know only the headline UK-wide stat that just 14% of pension pots were accessed after the Pension Wise service was used. The Northern Ireland proportion of current retirees whose main income is the state pension is the same as that for the UK as a whole; however, that proportion is predicted to fall back to 37% for those aged 45 and over and not retired.
I was reading through some of the briefings, and one of them said that the DWP had recently confirmed its intention to base new guidance and regulations on a “stronger nudge”. I am of a generation that can remember Monty Python and the story that went, “Elbow, elbow, wink, wink, nudge, nudge, say no more,” but in this instance we need to say a whole lot more. We look to the Minister for more than just a nudge when it comes to the key points. We hope that Pension Wise guidance sessions will be available, and I think it will be good for people to take them on. In a survey of some 1,000 defined -contribution pension savers aged 45 to 54, nearly eight in 10, or 77%, said that they wanted impartial guidance to help them to understand their pension access options, yet a larger proportion, 81%, did not know that they were entitled to receive free, impartial guidance from Pension Wise. Fewer than half said that they understood enough about pensions to make decisions and just 4%, or one in 25, said that they would opt out of a pre-booked guidance session. I welcome the Minister’s response to the intervention; I feel that that might just make the difference for a great many people.
In relation to the workplace—[Interruption.] My voice is starting to go; it is going to crack up shortly. It is significant that greater numbers of people will have defined-contribution pension savings as a result of being auto-enrolled into workplace schemes. For these people, achieving financial security and wellbeing in retirement will depend on making well-informed decisions. This is a much greater challenge for those who do not get impartial guidance or regulated financial advice. I can well remember when my mother took me down, as 16-year-old—that was not yesterday, by the way—to open my first bank account, and she had me in a pension scheme at 18. That is many, many years ago—
Jim Shannon
I am afraid it is. My mother was very wise—she still is: she is 89 years old now and is even wiser today than she was whenever I was 18. It is always good to have your mum to tell you what to do, even though you might be a lot older. But that is by the way.
It is clear that the way that we are doing these things is not as effective as it should be. New clause 1 is essential to underline the importance of people understanding their pension and taking control of it, with appropriate advice, rather than simply thinking, “This is for when I’m old.” Take it from me: that time comes quicker than one could possibly imagine.
I conclude with this: the issue is incredibly complex, and it needs a complex answer. I look to the Minister to outline how he believes that issue has been addressed in the Bill. I feel that we need both a robust dashboard and compulsory written statements, and I am not content that that has been provided for in the Bill. I respectfully ask the Minister for that advice and help. We have to get pensions right for everyone, whether they be 18 or 65. We will do it together.
Shaun Bailey (West Bromwich West) (Con)
It is a pleasure to follow the hon. Member for Strangford (Jim Shannon) and all the other speakers in this thoughtful and well considered debate. It was also a pleasure to serve on the Public Bill Committee; it is great to see so many of its members in the Chamber today. I pay tribute to the Clerks and staff on that Committee as well as to right hon. and hon. Members across the House for their work, diligence and patience in taking part in that Committee.
I am going to focus my comments predominantly on new clause 1, which was introduced by the right hon. Member for East Ham (Stephen Timms)—the Chair of the Work and Pensions Committee, on which I also serve. I pay tribute to the right hon. Gentleman for his fantastic work in chairing that Committee over the past six months. He has been an absolutely fantastic and very diligent, hard-working Chair.
To focus on the scams point for a minute, I should say that scams often come from the fact that people have not had advice, and those at not the bottom end but what would perhaps be classed as the normal end of the market are most exposed by not having access to advice. Given the comments in the Chamber so far, I think we can all agree with the principle that everyone needs access to advice. We need to ensure that people are informed as they make these life-changing decisions. From our casework and the evidence that the Select Committee has heard about people who have lost their savings—the money that they have accrued over years and years—we know the impact of not having the advice. We know the importance of ensuring that the advice is there.
I agree in principle with the underlying purpose of the new clause, but I question whether primary legislation is the right place for it. There could be a place for it within the secondary regulations that will be needed as part of the process to ensure that people have access to correct advice.
I absolutely agree with the comments about the Pension Wise service; we have heard how fantastic and well received that has been. People have genuinely been impacted by their exposure and access to the Pension Wise service. There is definitely a role for the service to play—there is no doubt about that at all. The fact that 72% of people who access the service change their decision shows clearly that advice has to be central to pension planning as we go forward.
The people most vulnerable to scams are those who most need the advice—they do not have humungous pension pots to fall back on or above-£30,000 pots they can transfer; these are ordinary working people who need the advice. I am thinking of the people in my constituency, in places such as Tipton, Wednesbury and Oldbury—people who have worked for 40 years at CLM Construction in Oldbury, for example. They have paid into a scheme and now want to draw from it; they are the ordinary working people who rely on the advice.
The Minister has given assurances that he will take a listening approach when considering the secondary regulations—I am sure that in summing up he will discuss what that means, not that I want to give him any more work to do in what will have to be an extensive summing up. I feel that it is there that the spirit of what the new clause is trying to achieve can really be brought to life. I agree with what many right hon. and hon. Members have said: there is a wider debate to have about how we ensure that those on the ordinary end of the scale, who do not have humungous pension pots but have worked hard for what they have got, get that advice.
The logistical challenges that my hon. Friend the Member for North West Cambridgeshire (Mr Vara) outlined in his intervention—he is not in his place now, because of social distancing—can be challenged effectively. This is an interesting proposition, and I do commend the right hon. Member for East Ham for the work he has done, because I do think there is a place for it. However, we need to have such debates on secondary regulations to really get into the nuts and bolts of how this operates and how this works, so that we can get this right.
We also have to remember—this has been picked up as well—that there is an existing regime with how the FCA operates. It sends out guidance when someone is two months from their 50th birthday and so on. That is not to say it is perfect; we know it is not perfect. It is not advice as would want to see it; it is a fact sheet that people are then left to interpret as they wish. It is not where we want to get to. I think we agree with where we want to get to—the destination—but it is just the mechanics of how we do that. From that perspective, I agree with the principle of new clause 1, but I think there is a better place for how we do this. I absolutely commend the principle behind it—at its core, it is fundamentally about ensuring that people have access to the right advice to make informed decisions to ensure they protect the money and what they have built up through hard work—because it is absolutely essential.
I am very conscious of time, but if I may, I will turn very quickly to amendment 16 which is to clause 124. My hon. Friend the Member for Grantham and Stamford (Gareth Davies)—I absolutely commend him, by the way, for the work he has done on green finance and the green gilt work he has done—covered this so well that he has taken most of the points I wished to add. However, I will just re-emphasise one point he made about the unintentional consequences particularly of divestment.
Many of the organisations that perhaps would be impacted by this are actually the organisations that we need to lead on these new green challenges. As part of my research, I looked at some of the organisations that we might think of as ones that may need to be divested from. We looked at the oil companies like Shell, BP, Texaco and so on, and the work they have done—for example, that of Shell on biofuels, or BP on renewable energy in homes. I claim no interest—people can google it, see it and find it—but I think we risk a real unintentional consequence here of actually going backwards and almost shooting ourselves a bit, because by divesting from those schemes we inhibit the work that we need to solve this climate crisis.
In concluding my remarks, I think the principle of new clause 1 is absolutely right, but I think there is more to be done on the mechanics, and the place for this is in the debate on the secondary regulations and making sure that we absolutely drill down into this. I am reassured by my hon. Friend the Minister’s reassurances on how he is going to approach that. On amendment 16, I think there are some real unintended consequences that, if we are not careful, could actually take us backwards, not forwards.
Ms Angela Eagle
It is a pleasure to follow the hon. Member for West Bromwich West (Shaun Bailey) in this reasonably consensual debate.
Madam Deputy Speaker, there is nothing like seeing men rushing into the Chamber in hazmat suits to ensure that we are as brief as we possibly can be, even though—and this is no criticism of the Chair—the grouping of these amendments means we have rather a lot of things to refer to in this gigantic group. One of the things I am going to do is to refer only in passing to new clause 1, because so much has already been said about it, and to concentrate a bit more of my remarks on the pensions dashboard and some of the amendments there, because that has not really received much attention in the comments we have had so far.
There are some themes that are really important to bear in mind in this whole group and in the Bill that we are discussing today. The first is strengthening consumer protections, which is what new clause 1 is about, and ensuring that when people are making a decision about probably some of the largest amount of funds they have laid aside for their entire lives in savings, and they are going to make decisions about what to do with that money that are irreparable, they do not get their heads turned by a slick advertising at one end and con artists at the other end, and that they get enough time, space and consideration to make the choice that is right for them.
Our pensions landscape is very complex, and it is getting more and more complex as it matures, changes and evolves. We are left trying to deal in legislation with DB schemes, DC schemes and CDC schemes, which we all welcome, but all these changes and innovations over time make the pensions landscape difficult for people to navigate. As we all know, consumer protections are quite weak, and the introduction of so-called pension freedoms in 2014 increased the chances for mis-selling and scams, so we have to be very careful. That is why I support new clause 1. I support any protections that will make it slightly more inconvenient for people to shift their money and that will reassure regulators, providers and customers of pensions that this decision is the right one for them, because, as we have heard, it is irreparable.
I do not agree with those who have said that we have enough protection against scams. The cost of losing a pension is huge and irreparable. The risks for scammers and con artists are quite low, but the minimum rewards are huge. Because our capacity to deal with fraud in this country has been eaten away, meaning that it is not nearly as good as it should be and needs to be improved massively, the chances of scammers being caught are quite low too. The potential for high rewards from conning people out of their life savings versus the risks taken means that we are a magnet for scammers.
What we have to do—and what the Bill begins to do—is try to close some of those loopholes. That is what amendments 2 to 5 are about. It is also about regulating superfunds, which is covered in new clause 6, and creating the new criminal offences that we all agreed with in Committee, to try to strengthen regulation, put up some real barriers and increase the risk that those who are trying to con people out of their pensions will be caught. I support amendments 2 to 5, as well as new clause 6, which is about regulating superfunds.
The introduction of the pensions dashboard is one of the things that will mark the Bill as an important piece of pensions legislation. I commend the Minister for all the work he has done to create the capacity for pensions dashboards to be introduced, so that information can be collected from disparate places and presented in a way that is meaningful to consumers. We are now trying to make the pensions dashboard more useful and important and to ensure that it is introduced in a way that does not throw the baby out with the bathwater.
Amendments 11, 13, 14 and 15 are about how the dashboard should work. While I commend the Minister for the huge amount of work he has done, he has unfortunately overturned some of the amendments made in the other place on the dashboard. One of those amendments would have ensured that the first dashboard introduced was the publicly provided objective one, which would have a year to bed in before other commercially offered dashboards were introduced. The other place decided that that would be a good thing to do. The Minister and his Government have decided—he gave us explanations in Committee—that it would not be, and that he wants multifarious dashboards to crop up all over the place, some of which are commercially offered, and some of which I think would just confuse the situation.
Guy Opperman
It is hard to hop from a sedentary position, but I will do my level best in future. I accept that the hon. Lady is a former Pensions Minister and speaks with great authority, but the Government feel that dashboards should be created in the circumstances where the customer is, rather than making the customer come to them. Even if one did not accept what the Government said, I specifically rely on the fact that the no. 1 consumer organisation in the country, Which?, specifically said that the Government’s view is the right one on this issue.
Ms Eagle
I thank the Minister for that point. We had this discussion in Committee, and we are having it again on the Floor of the House. I think it is worth exploring, but within the context that I think dashboards are a good idea.
With new amendments, the Opposition are trying to get more information in the dashboard, which the Minister is trying to keep a bit simpler. The information that our amendments would introduce into dashboards includes fees, charges, costs and price—information that I would say is quite important to consumers who are thinking about where to put their money or whether to switch their money around. In what other area where services were being bought would we try to hide the price of the service that is being offered in quite this way? People argue that it will just confuse consumers to know how much money is being taken out of their funds in charges or fees. I would say that the opposite is true. The more transparency we have in the dashboard, the better.
I know that others will speak about investment philosophies and amendments 16 to 24, which are also in this group, so I will leave that to them. Overall, the Bill is a good thing. The introduction of CDCs is an extremely good thing. Despite the fact that we are having this boxing match about scams and strengthening the rules against them, increased consumer protections and increased transparency, I think that everyone on both sides of the House will note that the Pension Schemes Bill, when it becomes law, will take forward some of the work that needs to be done to try to ensure that all our constituents, whether they are of a younger generation or a slightly older one, can look forward to a framework that will guarantee them some reasonable income in retirement. I do not think that anyone on either side of the House would argue with that.
Aaron Bell (Newcastle-under-Lyme) (Con)
It is a pleasure to follow the hon. Member for Wallasey (Ms Eagle). I welcome her constructive approach and her general support for the Bill. I have no formal interest to declare, but I should tell the House that my father was a consulting actuary for much of his career and went on to run a friendly society, so I was brought up on probabilities and portfolios. I did not just learn my timetables; I also learned my mortality tables.
This was my first Public Bill Committee, so I took the opportunity just to listen. It was a highly informative and very good-natured Bill Committee. I thank the Minister for that; I thank the Clerks, and I thank all Opposition Members and the Scottish National party Front Bench for the constructive comments that they made in Committee. Given that one of my predecessors in Newcastle-under-Lyme, Mr John Golding, once spoke for over 11 hours in Committee, I think the Committee should perhaps be grateful that I did not speak, and I note that this debate has to finish by 9 pm as well.
Ms Eagle
I knew John Golding, and he never spoke for one second longer than he needed to for a particular political purpose. I know that he spoke for that length of time because he was conducting some parliamentary manoeuvres that were extremely important for the progressive cause.
Aaron Bell
I thank the hon. Lady for that intervention. Yes, I think Mr Golding successfully pushed the Telecommunications Bill to the other side of the 1983 general election, but that election, as she may well remember, did not go well for her party.
This Bill makes pensions safer, better and greener. I will briefly turn to some amendments on each of those three topics. Amendments 2 to 5 are on scams. The right hon. Member for East Ham (Stephen Timms) acknowledged that those are probing amendments. I will not repeat the story that I told on Second Reading of my constituents who suffered from a pension scam—all hon. Members will have similar stories—but those scams are extremely destructive. As my hon. Friend the Member for West Bromwich West (Shaun Bailey) said, they often affect people who have no real experience of financial matters. At a vulnerable point in their lives, they can be taken advantage of, so I welcome the work that has been done, and I welcome the commitments that the Minister has made to work further in this area.
On the greener side of things, like my hon. Friend the Member for West Bromwich West, I cannot add much to the excellent speech by my hon. Friend the Member for Grantham and Stamford (Gareth Davies), who set out the reasons why the Government disagree with the amendment 16. It is an inappropriate use of the legislation. As my hon. Friend the Member for Amber Valley (Nigel Mills), on whom I intervened, said, the Government have other ways to make sure that companies meet those targets. We cannot ask pension trustees to make those fine decisions. I firmly believe that the Bill is a real step forward, but engagement, not divestment, is the way to proceed.
I turn principally to dashboards which, for me, are the most exciting part of the Bill, enabling the same sort of transparency, flexibility and, crucially, easy tracking of our pensions as we have all come to expect of our current accounts, credit cards and mortgages. We are in the information age, and we need to make that information accessible to people, particularly with all the stuff that we have heard in Committee and on Second Reading about the number of jobs and pension schemes that people have. Auto enrolment, in particular, enables people to bring their pensions into one place and perhaps to consolidate them, which is a real step forward, as it empowers people. As my hon. Friend the Member for Delyn (Rob Roberts), who cannot be here today, said in Committee, the key principle is informed choices. When we inform people about their choices, that can drive sensible decision making on, for example, consolidation.
The amendments that seem to circumscribe dashboards —for example, amendment 15, 8, 14 and others—are not necessary. More than that, they would be frustrated by the market. The Which? report that I quoted on Second Reading said:
“It is clear that even if the government was to decide that there should only be a single government-run dashboard, other private sector dashboards would continue to develop outside of the regulated market. These may rely on screen-scraping or other potentially unsecure forms of transmitting customer data.”
Alternative products are already springing up, and we cannot hold back the tide like Canute. We have to go where the customer is, as the Minister said when intervening on the hon. Member for Wallasey.
I do not think that we should try to buck the market in regulation. Instead, we should regulate effectively, and that is what the Bill does. I urge the House to reject the amendments, although I accept that they are well meaning. As many hon. Members have said, there is real agreement among us about how we should proceed, but I do not think that any of the amendments are necessary. I congratulate the Minister on the Bill, and I look forward to the safer, better and greener pensions that we all deserve.
Pete Wishart (Perth and North Perthshire) (SNP)
I support new clauses 4 and 5, which I tabled with my hon. Friends. It is a pleasure to follow the hon. Member for Newcastle-under-Lyme (Aaron Bell). This has been a good-natured debate. We all have particular issues we want to raise in relation to the Bill, but everything has been presented in a compelling, interesting and mainly consensual way.
The pernicious impact of section 75 of the Pensions Act 1995 on multi-employer pension schemes, particularly plumbers’ pensions, must rate as one of the biggest pension injustices of recent years. The litany of devastating stories of honest, hard-working men and women who face crippling debts and liabilities, sometimes of hundreds of thousands of pounds, is simply heartbreaking. We heard another example today from the hon. Member for North East Fife (Wendy Chamberlain), who is not in the Chamber. I have had plumbers, including some in their 60s or even 70s, who have been forced to continue to work because of the effects of the scheme. They have been in tears describing to me what that will do to them and the impact on their life and health. They are on all sorts of support to try and get through the real concerns and anxieties about possibly losing everything, from their home and bank balance to their livelihood and sense of self. It has been a dreadful experience for anyone who has been caught up in it. These are people who have worked all their lives, earnestly and honestly paying into their pension scheme, believing that their retirement was safe, secure and something to look forward to, only for it to become a living nightmare.
I have been trying to get justice for these plumbers for some five years now. I formed the all-party parliamentary group on plumbers’ pensions in an attempt to get this addressed and resolved. Over the years, we have met successive Pensions Ministers, including the current Minister, with colleagues from all parties, we have secured debates in Westminster Hall and on the Floor of the House, and we have brought in a private Member’s Bill from my hon. Friend the Member for Kilmarnock and Loudoun (Alan Brown). We have even facilitated brainstorming sessions involving officials from the DWP, the pension providers, SNIPEF—the Scottish and Northern Ireland Plumbing Employers Federation—and some of the trustees, all without being able to address the fundamental problems associated with section 75 of the 1995 Act. Here we are, years later, with this still unresolved, and some plumbers facing the possibility of ruin for doing exactly nothing wrong.
I appreciate that the Government have addressed this responsibly, and even helpfully. I congratulate and thank them for the easements that have been introduced in the course of the past few years. But there has been no resolution to the central issue, and today there are still plumbers in all our constituencies who will be facing crippling debts and their retirement being made an absolute misery. We know that this is difficult to resolve. We know that the best brains in pensions across the country have looked at it to try to find a solution. My plea to the Minister is that we cannot give up: we cannot simply desert these people who have done absolutely nothing wrong. If we have not found the solution yet, we must keep on looking for it. We will keep on trying to ensure that we do get justice for these people, We cannot leave a certain section of our constituents in such a hellish limbo in being faced with these demanding constraints and pressures.
If I could find a couple of words that would adequately describe section 75 of the Pensions Act 1995, they would be “unintended consequences”. There is nothing wrong with section 75. It is designed to meet a few demands and requirements, and it is actually quite a sensible and elegant inclusion in the Bill, but the unintended consequences for these multi-employer pension schemes have been absolutely and utterly devastating. Since 2005, any employer who has left the scheme or prompted a trigger event is required to pay the section 75 debt. That debt is calculated on a buy-out basis that assumes that the whole scheme has been bought out by an insurance company, but more than that, the accrual value that the insurance companies would put on to it is real testament to that value. They are then required to pay part of the orphan liabilities of past employers who may have become insolvent or left the scheme before 2005 and who did not pay their own section 75 debts. This means that those who remain in the scheme are required to pick up the debt of others who have been able to leave it without that burden being placed on them. Under no circumstances can this be thought to be right.
Some Pensions Ministers—I give credit to the Department, which has looked at this very seriously—have gone the extra mile to try to have this resolved, but I want to mention one of them who was getting to the heart of it—Richard Harrington. Richard did a huge amount of work on this. He worked diligently on it, putting energy, resource and commitment into trying to find a solution. I am pretty certain that if Richard was still in government he would be closer to finding some sort of resolution. I have only had one meeting on this with the current Minister, but I detected an enthusiasm from him to try to get this resolved. I will overlook some of the comments that he made in Committee in response to the excellent speech by my hon. Friend the Member for Gordon (Richard Thomson). I hope that the Minister may take a generous view of some of our amendments, because they are actually very modest amendments that would at least start to improve the situation of those who are facing the biggest liabilities. There are only about 30 of them.
Guy Opperman
The hon. Gentleman knows that we have looked at this repeatedly, and I have met many of the individual plumbers, from Perthshire to Angus, Lancashire and beyond. He refers to my esteemed colleague Richard Harrington, who is no longer in this place. He put forward the Green Paper that looked specifically at this point and applied the full force of Government, and all the consultations on section 75. There were 853 responses, including 70 specific responses to the question regarding legislative changes on employer debt. Regrettably, as the hon. Gentleman knows, the vast majority sought no change to the employer debt position. That is the reason we are in the situation we are in.
Pete Wishart
I am grateful to the Minister for reminding the House of the work that has been done. I am fully aware of what was discussed in that Green Paper, and I am aware of the responses. I want to come on to some of the longer-term issues, because those were not really addressed in how this was looked at, but that was a decent attempt by the previous Minister to get to the heart of this and pull it together. I encourage the current Minister not to give up and to look again at our amendments—I am going to try to convince him of this; we will see how we get on—because they are modest amendments that would help people who are caught in this nightmare. They are not a total solution, but our new clauses would considerably help those who have been caught up in all this.
New clause 5 would simply permit employers in a pension scheme closed to future accrual to apply for a deferred debt arrangement provided that they meet all the other tests. It would support those who are still trading prior to section 75 being triggered to use the easements before the closure of the scheme to be included. New clause 4 would allow the flexibility to waive a debt in certain circumstances to allow an employer to exit from a pension scheme where the debt is below a de minimis threshold, which the new clause would set at 0.5% of the fund value.
Those are sensible and modest proposals that would not cost the world to enact and would leave the integrity of these pension schemes intact. We know that the Minister is likely to oppose them, but I hope that he has a think about it, and perhaps there are things that he can do in subsequent legislation based on what is proposed. I know that he recognises the difficulty in all this, but he will offer no further easements beyond those already provided for in legislation. He also says that the
“current employer debt system is intended to be equitable to all employers”––[Official Report, Pension Schemes Public Bill Committee, 5 November 2020; c. 122.]
and insists that schemes must be fully funded, but setting a de minimis write-off at 0.5% will have a negligible impact on any of these arrangements.
There are other multi-employer schemes where there may be issues. It is staggering that there have been so few issues with these multi-employer schemes outside the plumbers’ pension, but I say to the Minister that this is more of a ticking time-bomb than a sleeping lion. There are consequences to come. Government failure to get this resolved when they had the opportunity with plumbers’ pensions will come back to haunt them at some point in the future. Introducing easements and partial solutions is all very well, but if the central issue remains unaddressed, there will be consequences for everyone involved in these schemes.
I will never forget the meeting when I was first made aware of this issue. I was utterly horrified that this level of debt was stalking plumbers like some sort of malicious apparition. I said to them then that I would do everything possible to ensure that this was addressed. Five years later, we have not been able to do that. It is now all down to the Minister. He can do something to lessen this burden on honest, hard-working men and women, or we can come back here in a few years with this misery still in place and this injustice still not put right. I still hope that he will consider the amendments that we have tabled this evening.
Stephen Doughty (Cardiff South and Penarth) (Lab/Co-op)
I rise to address a number of issues. First, let me say that I fully support the amendments tabled by my hon. Friends—amendment 16 and others—on climate change. With respect to some of the comments that were made earlier, we need much more radical thinking on this if we are to see the types of fundamental shifts that we need in our economy, not just in this country but globally—recognising, of course, that pensions are invested globally—to achieve the kind of action that is needed to deal with the scale of the climate emergency. That will affect the generations to come, just as, if we do not get pensions right, the generations to come will not have the resources they thought they would receive.
I want to focus my remarks on new clause 1 and amendment 14, which show the importance of improved guidance and consumer protections, and the clauses in the Bill that relate to the valuations of pensions schemes. These issues all matter and the protections—many introduced on a cross-party basis—are so crucial because of the scandals and scams that many right hon. and hon. Members from across the House have referred to. A range of measures are needed to clear up the weaknesses in our pensions systems and pensions regulation, which have led to huge injustices.
I want to talk briefly about two injustices that have affected people in my constituency over many years: the Allied Steel and Wire pensioners and the Roadchef employees. I thank my hon. Friend the Member for Neath (Christina Rees), and my hon. Friends the Members for Birmingham, Erdington (Jack Dromey), for Oxford East (Anneliese Dodds) and for Stalybridge and Hyde (Jonathan Reynolds) on the Front Bench, for their work to support action on these issues, in particular the meeting that we had recently with Allied Steel and Wire pensioners from my constituency. I also thank the Minister, who has been in conversations about this case with my hon. Friend the Member for Birmingham, Erdington. I am grateful to him for agreeing to meet us to discuss it further. I hope we can find the time for that in the weeks to come, because it needs to be looked at. It is a historic injustice that has affected many, many people who have waited many years for it to be resolved. The Secretary of State said on Second Reading that we need to tackle all those who try to plunder the pension pots of hard-working employees, which was very much what happened in both cases.
The campaigners and members of the Pensions Action Group, which include many former Allied Steel and Wire employees, have explained clearly—I am sure it has been spoken of many times in this House—how they lost the pensions they put into and expected to receive in retirement. This has affected workers from across the country: not only former workers at the Allied Steel and Wire plant in my constituency, but in locations such as Sheerness in Kent and in other businesses, such as the shelving giant Dexion, which were also hit. Those workers were helped and supported by the financial assistance scheme set up by the Labour Government in the early 2000s. That was followed by the establishment of the Pension Protection Fund, which still exists today to step in to ensure workers’ accrued defined benefit pensions are safeguarded when employers collapse. A fundamental issue, however, is that under the terms of the protection scheme, pension income based on service prior to 1997 is not eligible to be increased in line with inflation, unlike post-1997 service. The pension income of 140,000 workers who built their pension pre-1997 has not been protected from rising consumer prices.
I want to name the individuals who have campaigned resolutely on this issue for many years: John Benson, Phil Jones and many others. Alongside other Members, I have been with them to Downing Street and elsewhere to take their case. Essentially, they have devoted their lives to making steel, making this country great and supporting our infrastructure projects, yet they have been denied dignity in their retirement. Tragically, many are sadly passing away without having received what they were entitled to. They point out, quite rightly, that the type of restrictive legislation that has existed around their circumstances does not apply to, for example, the pensions of Members of Parliament who were elected prior to 1997, many of whom have moved on to the other place. We need to think about justice and equity in all these matters, particularly as we enjoy very generous pension settlements.
Many financial assistance scheme members currently receive only 90% of their restricted pension. That was what was achieved by the scheme and the agreement under the previous Labour Government. Unfortunately, because of the lack of indexation many are seeing their actual income drop below the 50% redress required under Hampshire v. PPF in September 2018. I recently spoke to a number of them and asked them to explain how the situation had affected them and their families. We have heard today of many other such instances, which not only have financial implications but cause emotional and family strain. I want to quote some of their own words, because they bear strong witness to the reality. One worker, who left school in 1961, aged 15, and started working at the steel company, told me, “For some years, the company paid into the pension scheme. I myself in those early years did not contribute, but then the ASW pension scheme was formed.” The workforce were called to the canteen on a number of occasions for meetings with the company’s directors and told of the plan regarding the new pension scheme, which they were told had the backing of the UK Government. The workforce were given all sorts of assurances that “it would secure a comfortable retirement for themselves and their families, and everyone to my knowledge agreed this was the right thing to do.”
We then fast-forward to 2002 when shift teams were called to the conference room and told by one of the receivers that the company would close and they would lose their jobs. One colleague had tears rolling down their face. The receiver told them, “The pensions we had saved and worked for were safe as they were not touching those funds”. One worker said, “I went home after my shift had finished and told my wife I had lost my job but the pension was safe, only to find out days later that there was a shortfall and that we could lose in the region of 85% of the pension. It put me on the verge of a nervous breakdown, and at one point I thought I would go over the edge. After all those years working in heavy industry with noise, dust, fumes and unsociable hours, I have nothing to look forward to.”
Unfortunately, I could recount case after case from Allied Steel and Wire pensioners. It is only a matter of natural justice that, as well as ensuring that such scandals never happen again, as measures in the Bill seek to do —and as much reform since that time has attempted to do, to ensure guidance and protections—we must remember those who did not and will not benefit from these changes. I look forward to discussing that case with the Minister.
Many Members across the House have signed early-day motion 802 on the Roadchef scandal, which has been going on for nearly 30 years and has involved 4,000 low-paid workers who saw millions illegally transferred from their funds and then £10 million taken in taxes. I express my sadness at the recent death of my constituent Tim Warwick, who was the company secretary who exposed the Roadchef shares scandal perpetrated by the former chief executive. I pay tribute to the former Member of Parliament for Monmouth, Huw Edwards, and the GMB trade union—I declare an interest as a member of the GMB—who have campaigned on this issue for many years. Sadly—and as we saw with the Allied Steel and Wire pension scandal—Tim Warwick and others died waiting for clarity from HMRC about what tax they or the trust should be liable for, despite Parliament’s clear intention that such employee benefit schemes should be tax free. Will the Minister therefore give us an update—either in his wind-up, or perhaps he could write to me—on the latest position of the DWP and HMRC on this matter, which has been of great concern to Members across the House? That is one of the injustices that led us to the point of needing to make the types of changes outlined in the Bill and the many amendments to it.
Many of the amendments and proposals put forward are about increasing the transparency, safety and security of our pensions, which we all want to see, as well as tackling scams and injustices in the pensions system. I add my support to the amendments tabled by my colleagues on the Front Bench and by my right hon. Friend the Member for East Ham (Stephen Timms), the Chair of the Work and Pensions Committee. In that spirit of tackling injustice, we need to recognise the damage done by robbing people of their life savings and of their and their family’s future. They paid in, they expected to get something out, and they have not. I mentioned two examples, but there are still far too many injustices for many pensioners. I hope that, in a spirit of cross-party working, the Minister and others will continue to try to find justice for all those affected, and particularly those affected by the ASW and Roadchef scandals.
Madam Deputy Speaker (Dame Eleanor Laing)
I hope that we can manage the rest of the debate without a formal time limit, because the debate flows better without one. I note that the Minister has been asked to deal with a variety of subjects at the end of the debate. If Members would like the Minister to have time to address their concerns, I implore them to speak for no more than seven or eight minutes. If that is the case, we will manage without a time limit and there will be time for the Minister to respond to the debate.
Duncan Baker (North Norfolk) (Con)
Thank you, Madam Deputy Speaker. I will cut my speech down from the hour or so that I was planning.
It is a privilege to follow the hon. Member for Cardiff South and Penarth (Stephen Doughty) and his powerful and moving speech. It has been a privilege to speak on Second Reading, in the Public Bill Committee and now on Report. It is the first time, as a new MP, that I have seen a Bill through all its stages.
Anna McMorrin
I rise primarily to speak in support of amendments 16 to 24.
The climate crisis remains one of the greatest challenges, if not the greatest challenge, that we face. We are rightly focused at the moment on dealing with the pandemic and the pressures that that entails, but we cannot afford to lose sight of the growing threat of climate breakdown and the risks it continues to pose.
We stand now at the crossroads between complacency and inaction, which locks us potentially into a future of climate chaos, and bold action that combines expertise and resource and can minimise climate risk, help build resilience and jobs for the future, and allow our society to emerge stronger and more equal. We need climate action to be embedded across all sectors of society, but particularly in finance.
No one is immune to the shifting seasons or the increasing severity and frequency of extreme weathers. Droughts or flooding that impact either one community or one continent will inevitably reverberate throughout the rest of the world, presenting issues of food insecurity and water shortages, and conflict or displacement. It is imperative that legislation going through this House is responsive to that climate crisis, and it must meet our international obligations, including those of the Paris climate agreement and our commitment to limit the global temperatures increase to 1.5° C.
It is crucial, therefore, that the £3 trillion locked into UK pensions today is mobilised to build that green recovery and meet that climate challenge, and to protect the future health of our people and planet and the prosperity that we all want to see and pass on to the next generation.
Guy Opperman
I am listening to the hon. Lady’s speech with great interest, and I am just wondering whether she is aware that the ESG—environmental, social and governance—regulations came into force only eight weeks ago and clause 124 specifically addresses the matters that she is outlining, and more particularly that we published in August specific action on tackling climate risk and improving the governance of occupational pension schemes. That is exactly what the consultation is all about.
Anna McMorrin
I thank the Minister for his intervention, but, frankly, it does not go far enough, which is why I am speaking to these amendments.
The previous speaker, the hon. Member for North Norfolk (Duncan Baker), is a member of the Environmental Audit Committee. I was a member of that Committee in the last Parliament, and there was an inquiry into greening finance, chaired by Mary Creagh. We found that the UK’s financial investment chain was structurally incentivised to prioritise short-term profits rather than long-term issues including the climate crisis. That needs to change. Long-term sustainability must be factored into financial decision making, and our report recommended mandatory climate risk reporting and a clarification in law that pension trustees have a duty to consider long-term sustainability, not just short-term returns.
We also emphasised in that report that enforcing those recommendations would push climate change further up boardroom agendas, where it is seriously lacking at the moment. We found through our inquiry that less than half of the 25 largest pension providers discussed climate risk at board level. Their pension schemes, including those of Aviva, Lloyds Bank and HBOS, were all considered to be less engaged than peers among the top 25, so I am particularly pleased to see that Aviva has been instrumental in supporting this amendment.
Disclosure is vital in driving awareness that pensions may be invested in fossil fuel projects, fast fashion, deforestation and extraction. Driving that awareness out there about where their money is going means that people can take control of their pension decisions and make informed choices. Pension funds risk seeing assets become worthless unless they wake up to the climate crisis. The former Governor of the Bank of England and current UN special envoy for climate action, Mark Carney, has said that we must
“align finance with society’s values…This will help deliver the world that our citizens demand and that future generations deserve.”
He said it could be
“the greatest commercial opportunity of our time.”
It is critical that the changes come into effect as early as possible, rather than just 2050 or sooner, if they are to correct the catastrophic trajectory of our climate. We must go further. Amendment 16 would make provision for current and future Governments to significantly strengthen the Bill through secondary legislation. We stand at the brink of climate chaos the likes of which we have yet to experience, but which unfortunately may become all too familiar. If we do not take the necessary action now, I am afraid that we will not get the future our children deserve to see.
Robbie Moore (Keighley) (Con)
It is a pleasure to follow the hon. Member for Cardiff North (Anna McMorrin), and it is good to see so many great contributions from hon. and right hon. Members from across the House. Pensions are a life asset—something that we build up over decades—and getting the policies right and working across parties is vital, so it is fantastic to see such unity and cross-party working on many of the issues contained within the Bill.
As my hon. Friend the Minister has said, the Bill makes our pensions safer, better and greener. I will focus my contribution today on that final point: pension policy becoming greener. Tackling climate change and getting to net zero is undoubtedly one of the country’s biggest challenges, and it is a top priority for me. The clock is ticking, and we all need to take action, from big corporates right down to the actions we take as individuals.
In September, I was delighted to welcome the Pensions Minister to Haworth in my constituency to visit Airedale Springs, a fantastic local manufacturing business in the Worth valley. It supplies mechanical springs to UK manufacturers such as Brompton Bikes. Crucially, it is innovative, and a green business, too. The roof of its factory has more than 100 solar panels, helping to supply its energy needs and power the business, and I want to see firms across our country adopting those kinds of innovative practices.
Our pension funds have trillions of pounds invested in assets under management, and that pension power can help us work towards achieving net zero, because when someone saves money into pensions, the pension provider takes the money and invests it in order to secure a long-term return for retirement. When those savings are in sustainable and ethical investments, such as businesses adopting similar practices to Airedale Springs, the pension can play its part by helping not only with retirement but with climate change.
The changes legislated for through the Bill open up a world of possibilities for our pensions to be invested in new and innovative technologies for the future, such as wind power, hydrogen and carbon capture and storage—technologies that help create jobs and aid the transition towards net zero. The Bill means that for the first time, pension schemes will be able to be required to take the Government’s net zero targets into account, as well as the goals of the Paris climate agreement.
I want to take a moment to address some of the amendments before the House. On amendments 16 to 24, the reality is that the Government are already taking powers that will require trustees to set targets for their management of climate risk. So surely an approach whereby we nudge pensions towards investing in a sustainable and ethical way is the right approach, and that is the one that the Government are taking. Mandatory targets would, in my view, undermine the duty that pension trustees have to invest in the best interests of the people whose pensions they are investing.
Alan Brown (Kilmarnock and Loudoun) (SNP)
It is a pleasure to follow the hon. Member for Keighley (Robbie Moore). I noticed that he mentioned cross-party working, so on that basis I look forward to him voting with the SNP tonight when we press some of the amendments to a vote. I very much appreciated that early commitment.
I rise to speak to new clauses 4 and 5, tabled by my hon. Friend the Member for Airdrie and Shotts (Neil Gray)—I have also put my name to them. In January 2018, I introduced a private Member’s Bill on multi-employer pension schemes, including provision for the protection of unincorporated businesses. The Bill was intended to correct what I saw as the unintended consequences of the section 75 amendments, which were legislated in 2005. Like many private Member’s Bills, it did not go anywhere, so tonight I am keeping a promise to the plumbers of my local Scottish and Northern Ireland Plumbing Employers’ Federation branch. I promised that I would do all I can to try to get legislative changes for a solution to the section 75 debt issue, which has adversely affected the plumbing and mechanical services industry pension scheme.
It is disappointing that nearly three years down the line since I introduced my Bill the reality is that we are no further forward. It is also just over four years since my hon. Friend the Member for Perth and North Perthshire (Pete Wishart) first raised the matter in a Westminster Hall debate. As he pointed out earlier, the then Minister pledged to find a solution to the problem. We are still waiting, despite the argument that there has been some progress over the years. I put on the record my thanks to SNIPEF and the Plumbing Employers Action Group for their assistance in tweaking the amendments to try to reflect ministerial comments that were made in Committee.
From 1995 until further changes in 2005, the plumbing pension fund was assessed on a minimum funding basis. When it was valued like that, the scheme was deemed fully funded and therefore any employer leaving the scheme did so without detriment to the overall scheme. As we now know, the 2005 changes led to the scheme being assessed on an insurance buy-out basis, which has caused the current issues. Those issues have been exacerbated, because those who left in compliance with the then rules on the old assessment did not accrue or owe any debts, but on the new basis, they have now created liabilities that the remaining employers have to pick up. Even now, the scheme is close to being fully funded if it was still assessed on an ongoing basis, which shows that changes should be possible. Given that the UK Government will not allow a change to the buy-out assessment process, surely we need to look at the modest changes proposed in new clauses 4 and 5.
Nobody is arguing against the principle of ensuring that a pension pot is sustainable. We understand the need to minimise risk to the taxpayer in terms of the Pension Protection Fund having to pick up any slack. However, the stark reality is that unless some amendments to legislation are made, many individuals will be made bankrupt. Surely we have a duty, as legislators, to prevent that. This is individual employers who were doing the right thing for their employees at the time, to ensure that their employees had a healthy pension in their retirement.
Over the years, Ministers have often referred to “easements”. However, statutory easements do not cover all situations—in particular, where an employer has retired or ceased trading or has triggered a section 75 debt prior to the closure of the pension scheme to future accrual. As my hon. Friend the Member for Perth and North Perthshire said, there is a small group of some 30 retired unincorporated ex-employers for whom no easements have ever applied. They are unable to use a deferred debt arrangement as that is only available for limited companies, and in any event, the scheme closed for future service in June 2019, meaning that the deferred debt arrangements cannot be used by a closed scheme. In addition, having been unincorporated businesses that have now ceased trading, they cannot apportion their debt to another business or person, so they have no easements or recourse available to them at this moment in time.
Due to a failure of notification, this group did not even know that they had debts until it was too late for them. The average debt that this group faces is some £500,000, with the highest being £1.2 million. Nobody benefits if these people are made bankrupt. The reality is that, if they are made bankrupt, the total debts will not be recovered. Critically, the pension fund will not be materially financially stronger even if these individuals are pursued and they lose their homes and are made bankrupt. Such punitive action is in no one’s interest. That is why we want these modest changes to be made.
In Committee, the Minister stated:
“The new clause would be unfair to those employers previously connected with the scheme who have already paid their section 75 debt”.––[Official Report, Pension Schemes Public Bill Committee, 5 November 2020; c. 123.]
He also stated that
“the new clause would weaken the protections contained in the current deferred debt arrangement system. We need to balance the needs of the affected employers with the risks to scheme members and other employers.”––[Official Report, Pension Schemes Public Bill Committee, 5 November 2020; c. 122.]
On the face of it, those are reasonable sentiments, but the issue is that so much of this debt—up to 60% of it—is orphan liabilities. There is an inherent unfairness in the way that the debts have been assessed, accumulated and attributed. We need to find solutions, rather than argue about ifs and buts as a way out of doing so. Otherwise, financially strong businesses can still be stuck with a huge, often unpayable debt, which takes a grave personal toll on the individuals involved.
While there are some options for managing or delaying section 75 liabilities available to those currently trading, there is little help available to those who have already retired. Our new clauses try to strike the right balance. The adjustments proposed in the revised new clause 4 are designed to narrow the focus of the amendments proposed in Committee to make it clearer what factors pension scheme trustees or managers should take into account when considering the application of de minimis discretion, and to make it clear that de minimis discretion should not be to the detriment of the pension scheme overall. That hopefully addresses some of the Minister’s concerns about fairness.
The Minister said that 0.5% in itself might be a small threshold, but there is concern about the cumulative effect of a number of 0.5% disregards. We need to stop finding reasons not to do something. The additional stipulations in new clause 4 should give added comfort in that regard, particularly the non-detriment aspect of the overall scheme.
New clause 5 would permit employers in a pension scheme closed to future accrual to apply for a deferred debt arrangement providing that they meet the other statutory tests. This would allow a deferred debt arrangement to be put in place where an employer triggered section 75 before scheme closure but did not have a DDA in place. Although the trigger for the deferred debt arrangement happened pre-closure, the employer must still meet the statutory test for a DDA; in other words, an employer must still be trading and have an ongoing contractual commitment to the scheme. This is needed to support employers who are still trading and otherwise trapped and forced to continue trading, unable to sell on or transfer ownership of the company.
I say to the Minister that we need to remember that some people are literally working themselves to death, unable to retire. I have constituents who are unable to stop working because of the section 75 debt and liability that hangs over them. A couple of years ago, a medium-sized company in my constituency stopped trading, but it is a safe bet that the individual who is the owner of that company still has a section 75 debt issue remaining. Action is required. As my hon. Friend the Member for Perth and North Perthshire said, it would be great if we could just make some progress tonight and if the Government supported these modest amendments. Just think of the relief that this could bring to many individuals. If the Government are not willing to do that, I look forward to hearing what their solution is instead.
Ruth Jones (Newport West) (Lab)
I am grateful to be called and to have the opportunity to speak briefly in this important debate, and it is a pleasure to follow the hon. Member for Kilmarnock and Loudoun (Alan Brown), who made several important points.
The Bill seeks to introduce a number of measures aimed at protecting savings and providing simpler oversight of pension savings. This includes the introduction of pension dashboards, collective defined contribution schemes and new powers for the Pensions Regulator to tackle irresponsible management of private pension schemes. These are important steps forward and they are long overdue. In particular, I welcome the strengthening of consumer protections against scams, as I know many examples of residents in Newport West who have been victims of these scams and have not only lost so much money, but been deeply affected by the scams for years after the event.
I am delighted that many of my noble Friends in the other place were able to secure some important amendments to the Bill—in particular, the amendments that require trustees and managers to take into account the Paris agreement and key domestic climate targets in their overall governance and disclosure of climate change risk and opportunities. This is the first time that climate change has featured in domestic pensions legislation and that is to be welcomed.
I urge Ministers and Government Back Benchers to support Labour’s efforts to mobilise billions of pounds towards the vital and timely effort to tackle climate change through pension funds. Given that Ministers refuse to support the amendment in the name of the shadow Minister, my hon. Friend the Member for Stalybridge and Hyde (Jonathan Reynolds), on asking pension funds to develop strategies to help to meet our obligations under the Paris agreement, I hope that we will receive an explanation of how they expect to achieve their goal of net zero carbon emissions by 2050 or sooner.
The other place also forced the Government to amend the Bill to guarantee a publicly owned pensions dashboard free at the point of use and available to everyone. I have called for that before, as has the shadow Minister, and it is a demand that many residents from across Newport West have raised with me in recent weeks and months. The changes contained in the amendment would ensure that consumers are protected and that they do not make poorly informed or hasty decisions when they see their pension information for the first time. I hope that the Minister will welcome that amendment.
Finally, I pay tribute to my right hon. Friend the Member for East Ham (Stephen Timms), who spoke earlier. He has worked hard on these issues and is a man of wisdom and experience. I support his new clause 1, which would set up opt-out appointments with Pension Wise for pension scheme members five years prior to their retirement date, because this is a point at which scheme members are so vulnerable to transfer advice that is not in their best interest or to tax scams. This is so important for the people who need sound guidance and advice before they take their pensions.
The Bill is to be broadly welcomed and I urge Ministers to accept all efforts to make it stronger, more effective and long-lasting.
Richard Thomson (Gordon) (SNP)
I rise to support amendments 7 and 8 and new clauses 4 and 5 in my name and those of others. A recurring theme throughout the debates on Second Reading, in Committee and this evening has been the need to try to avoid unintended consequences. That is a particularly important mindset to approach this with given that the consequences of all that we are putting into legislation this evening will potentially last for decades, and the decisions that we take will affect people’s quality of life and financial opportunities in retirement. It is worth bearing that in mind when approaching the Bill, and when we consider any well-meaning assurances that we might get from the Government Front Bench in lieu of the actual substantive changes that have been asked for in the amendments and new clauses.
Neil Gray (Airdrie and Shotts) (SNP)
It is a pleasure to follow my hon. Friend the Member for Gordon (Richard Thomson), whose helpful, informed and persuasive speech matched the characteristics he brought to the Committee stage in support of the work we did there—I thank him for his efforts.
As I said on Second Reading, we broadly support the Bill, but it could do with some sprucing up in certain areas. Sadly, we did not get far in Committee; in fact, the Bill took a step backwards from some of the good work that had been done in the other place, particularly on a lead-in for commercial dashboards and dashboard financial transactions—that was taken away—as well as on the measures providing reassurances to those involved in open DB schemes.
I will turn to those shortly, but first let me deal with new clause 1, which stands in the name of the Chair of the Select Committee, the right hon. Member for East Ham (Stephen Timms), and has been signed by Members on both sides of the House, including me. I concur with what he said in setting out the reasons why this is so important. I also agree with much of what was said by the hon. Member for Amber Valley (Nigel Mills) in supporting the new clause. I am particularly concerned about this area, not least following my work on the Financial Guidance and Claims Act 2018, which brought MaPS into existence. We held serious concerns that the guidance elements that were supposed to be partnering pension freedoms were not strong enough then and we still hold those now.
I touched on this in Committee, but it is worth repeating for colleagues who may be havering on which way to vote that the Government’s opposition to this new clause appears to be based on the work the Financial Conduct Authority is doing and the idea of providing a stronger nudge—we have heard about that—to people getting guidance as they near retirement age. Unfortunately, I am yet to be convinced that any of that does what new clause 1 would do, which would see the DWP writing to pension scheme members, or their survivors five years prior to their reaching the age of eligibility with a scheduled time and date for a pensions guidance appointment. Ministers would then have to write annually to that person until that appointment was taken up, or their desire to opt out was confirmed. That is far more robust than what exists at present and seems to deliver a much stronger possibility of someone taking the appointment than the stronger nudge trials have evidenced. It is worth repeating the point made by the right hon. Member for East Ham in his strong speech, which cited the MaPS stronger nudge trials and showed that there was only a very small increase in the number of people who went on to have that Pension Wise appointment. The DWP claimed that it significantly increased the uptake of Pension Wise guidance but, as I said in Committee, that is pure spin. The outcome of the stronger nudge trials—
Guy Opperman
I just want to correct one point, which I was going to try to deal with in more detail later. The claim has repeatedly been made that this is “spin”, but if one studies the stronger nudge behavioural trial, one sees that more than a quarter of the people who contacted their provider in the trial had already received pension advice or guidance in the last year and therefore were excluded from the sample. So this cannot be seen in the context of a simple figure that keeps being restated, as the hon. Gentleman has just done.
Neil Gray
The fact remains, and the Minister has not rebuked the point I made in Committee, that the stronger nudge managed to get successful appointments to move from 3% to 11% of cases. That is not a significant improvement. A stronger nudge is just not going to be enough, which is why we argued during the passage of the 2018 Act for an opt-out guidance system. Now we are back to looking at this again. We still support that approach and new clause 1 would deliver it.
Colleagues, including my hon. Friends the Members for Perth and North Perthshire (Pete Wishart), for Kilmarnock and Loudoun (Alan Brown) and for Gordon and the hon. Member for North East Fife (Wendy Chamberlain), have passionately and eruditely explained why we have given such a focus to the so-called plumbers’ pension amendments in new clauses 4 and 5. I look forward to hearing the Minister’s response to the compelling arguments that my colleagues have made, but he should be reminded that these new clauses were arrived at with the support of campaigners who feel that the current legislation does not protect them. After hearing what my hon. Friends have said about the impact this has had over many years on their constituents—and presumably after some lobbying from across the House, because at least 30 colleagues have constituents who are impacted, including, according to the campaigners, the hon. Members for Berwickshire, Roxburgh and Selkirk (John Lamont) and for Moray (Douglas Ross) and the Secretary of State for Scotland—the Minister must surely be eager to do something.
Before the Minister speaks, I wish to point him to the correspondence he should have received last week from the director of Plumbing Employers Action Group Ltd., which should allay his fears about new clause 4 setting a precedent, or about passing on liabilities to other employers, as has already been outlined by my hon. Friend the Member for Gordon. It is worth remembering, through all this, that these plumbers have found themselves in this situation through no fault of their own, but because of a lack of information from trustees regarding their potential section 75 obligations. I hope that new clauses 4 and 5 can be accepted to ensure that nobody falls into bankruptcy and poverty through no fault of their own.
Our new clause 2 would help the UK Government in three areas. It would establish an independent advisory commission to look at the terms of this legislation. The Minister knows that it has been a long-term SNP policy to see an independent pensions and savings commission established. The scope of the Bill does not allow us to go that far, but this advisory commission could eventually become the standing commission we wish to see and a sounding board for long-term pensions and savings policy. It would ensure, for instance, that we never saw a repeat of the WASPI scandal.
In the meantime, new clause 2 would also allow the UK Government out of the bind that they find themselves in over commercial dashboards and financial transactions. We believe, as do many stakeholders in the industry, that the rush to see commercial dashboards with financial transactions could be extremely damaging. The hon. Member for Amber Valley has highlighted that risk.
The Minister has previously suggested that commercial dashboards are necessary to allow the independent public dashboard—the MaPS dashboard—to work, but that can only be the case if a deal has been done with the sector to allow commercial dashboards with transactional ability in exchange for the data that the providers have for the public dashboard. The Government could quite easily mandate that data to be provided without the incentive of early commercial dashboards and the risks of financial transactions. Time is the wisest counsellor of all, which is why I do not understand the Government’s determination to plough on without taking stock, without analysing the risks and without ensuring that savers do not suffer detriment from shifting so quickly to commercial dashboards and financial transactions.
We want to see the MaPS dashboard established quickly to provide impartial and reliable information for savers, and that is why we have brought back amendment 8 to reinsert the wording from the Lords that was removed in Committee. This has cross-party backing and backing from stakeholders. The public dashboard has the ability and the potential to be as revolutionary for pensions and savings as auto-enrolment has been, but that can only be the case if the Government get behind it and give it the space to develop. Also, the commission could help with what Members on all sides repeatedly turned to in Committee—namely, finding cross-party consensus on long-term pensions policy. This could be a safe space for those discussions and ensure that pensions policy stood the test of time, because there would be buy-in from all sides.
Our amendment 7 deals with open DB schemes. We have worked extensively with other parties to try to find a form of words to give the scheme providers comfort that they were not going to be forced into making investment decisions that were inappropriate for them. The importance of this has already been highlighted by the hon. Members for North East Fife and for Gloucester (Richard Graham) , as well as by my hon. Friend the Member for Gordon. There is a major concern that open DB schemes will need to de-risk, and there are potentially serious implications for them of doing so. In Committee, the Minister stated in response to one of my lines of questioning:
“I want to make it clear again—I have said it once, but I will say it again—that the Government are not proposing to introduce a one-size-fits-all funding standard”.––[Official Report, Pension Schemes Public Bill Committee, 5 November 2020; c. 81.]
However, the CBI has contradicted him by saying:
“The regulator’s proposals risk moving back to one-size-fits-all regulation…Businesses and trustees need to be confident that the new code will allow them to make decisions that benefit savers and the long-term health of companies.”
The Minister protested strongly about the Government’s intentions; it may not be their intention to introduce one-size-fits-all regulation, but the Minister is reckoning without the law of unintended consequences. In order to be sure, why not allow a safeguard to be on the face of the Bill to protect against the unintended consequences, identified by the CBI and others, which could otherwise see perfectly healthy DB schemes close down?
Richard Graham
The hon. Gentleman is making a point that a number of us made earlier. I notice that in the Committee, on which the hon. Gentleman served, the Minister responded pretty clearly by saying:
“Open schemes with a strong sponsoring employer that are immature and have managed their risk appropriately should not be forced into an inappropriate de-risking journey.”––[Official Report, Pension Schemes Bill [Lords] Public Bill Committee, 5 November 2020; c. 80.]
I found that quite reassuring; what does the hon. Gentleman think?
Neil Gray
I was—I have it right here. We took some comfort from that statement from the Minister, but I have to emphasise the word “inappropriate” in respect of that de-risking journey. For the avoidance of doubt, will the Minister confirm that unless schemes started to move towards significant maturity, there would not be any appropriate de-risking journey? Will the Minister further confirm that he has no intention of insisting that all open schemes progressively de-risk their investments if any remain sufficiently far from significant maturity, and that he will ensure that the regulations do not have that effect? If so, how will they ensure that? We also ask the Minister to accept amendment 7, but if that does not happen, we will support the Liberal Democrat amendment 1.
On amendments 9 and 10, we return to the treatment of vulnerable customers and the need to better define the difference between guidance, advice and information. We touched on this in Committee and the Minister accepted the principle of where we were coming from with our amendments but could not accept them into the Bill. I ask him to look at that again. The SNP have tabled amendments to require that specially trained advisers and guidance are made available to people in vulnerable circumstances, including but not limited to persons who suffer long-term sickness or disability, carers, persons on low incomes and recipients of benefits. Circumstances of those types can have a significant impact on people’s finances and long-term savings plans. It is also the case that people in difficult financial circumstances may be more likely to utilise new pension freedoms, but at a cost to their long-term savings.
It is clear that the UK Government had not put in place adequate safeguards to ensure that older people who opt to free up their funds would not end up in a desperate financial situation later. Those with less money are more vulnerable to economic shocks in their personal finances, as well as being potentially more vulnerable to scammers who give misleading or false advice for free. That is why we have re-tabled amendment 10 to ensure that customers who use the pensions dashboard are made more aware of the difference between information, guidance and advice, which are very different things. People who expect advice as to what route they may be able to take may be disappointed to receive only various pieces of information. Likewise, there may be issues with exactly what the body is allowed to advise and to what extent it is able to advise on the options available. It is a simple amendment but would be extremely helpful in taking the issue forward.
As on all these issues, we have tabled amendments in good faith to try to improve the legislation. We look forward to hearing what the Minister has to say in his response to the debate.
Jonathan Reynolds
I place on record my thanks to all Members who participated today and in Committee. In particular, I thank my shadow Work and Pensions team for their diligence and hard work. I also place on record our thanks to the Minister and our colleagues from the SNP for the open dialogue that has been maintained throughout the Bill’s passage.
The Opposition did not vote against the Bill on Second Reading, and it is not our intention to vote against Third Reading later. We agree with the broad aims of the Bill and believe that it adds a series of worthwhile improvements to our pension system. However, we have continually sought, as is the role of the Opposition, to improve the Bill further to make it the best legislation that it can possibly be. On Second Reading, I laid out how we wanted to achieve this, with additional measures to protect pensions, people and the planet. Although there was thoughtful debate in Committee, it is disappointing that the Government removed some critical parts of the improvements that were made in the Lords. That is why we have brought back two groups of amendments today, as well as seeking a new amendment, which is an opportunity to make a historic step forward in tackling climate change. I will address each in turn.
First, on protecting pensions, a well-regulated pensions system is vital to give people confidence that it will be there for them in their retirement. Pension funds are not just any financial product. They are usually the sole means of looking after someone in old age, and are responsible for their financial security for an entire phase of their life. Today’s retirement landscape is challenging. The Labour party does not oppose the pensions industry in finding new ways to meet those challenges, but we strongly believe that any innovation must be well regulated, which is why we have introduced new clause 6. We introduced that provision in Committee, to ask the Government to introduce proper regulation of so-called pensions superfunds, which are profit-making consolidation vehicles for defined-benefit pension schemes. At present, they are subject only to an interim regulatory regime announced by the Pensions Regulator in the summer.
That is a substantial change, as these funds currently advertise high rates of return to pension investors. We believe that, as a minimum, those products need a proper and robust regulatory regime, underpinned by legislation, that is on a level playing field with the rest of the industry. We are not a lone voice on that. The Governor of the Bank of England has written to the Secretary of State to raise concerns about the potential risk to financial stability and to scheme members. The Opposition would like to hear a commitment today from the Minister that legislation for a full regulatory regime will be forthcoming before the market begins to develop seriously.
Moving on to other matters, the adequate funding of defined-benefit schemes is critical to their future. We were disappointed by the removal in Committee of clause 123, which related to the funding requirements of open and closed defined-benefit schemes. That point has just been made, and I shall not quote the Minister directly again. However, we understand that he has relied frequently on the regulator’s bespoke option in the draft defined-benefit funding code to provide reassurance for open schemes that they will not be required to follow the funding and investment strategies of closed schemes. However, there is a long list of people who have expressed doubt about that option, and who believe that it risks the premature closure of otherwise healthy schemes, including the Pensions and Lifetime Savings Association, the Institute and Faculty of Actuaries, Lane Clark & Peacock, the Trades Union Congress, the Confederation of British Industry, and even one of the Minister’s predecessors as pensions Minister, Baroness Altmann. I recognise that there is no disagreement between the Minister and Opposition parties on the desired outcome, but we still believe that there is virtue in reintroducing the clause. If amendment 7 or amendment 1 is pressed to a vote, that will be done with our support.
Protecting people in schemes is vital, which is why we have introduced three changes, to try to strengthen the consumer protections in the Bill, with amendments 11 to 15. We all agree that the pensions dashboard, when it arrives, will be an incredible opportunity for people to see all their pensions information in one place for the first time, but safeguards must be built in to prevent hasty decision making and consumer exploitation. The last thing we want is for people to make bad choices, prompted, for example, by market disruptions or unscrupulous operators, until they are more accustomed to that level of access. We believe that we can tackle both those things by giving the public dashboard a protected head start and keeping commercial transactions off the dashboard until further legislation is introduced in line with our amendments.
We also believe that there must be accessible and transparent fee information on the dashboard. For too long, it has been possible to rely on the opacity and complexity of pensions to obscure the real lifetime cost of transactions. Greater transparency would surely be welcome.
I spoke on Second Reading about the scourge of pension scams. People can become particularly vulnerable to scams in the years immediately before retirement. We have heard throughout the debates on the Bill terrible stories, such as the one articulated by my right hon. Friend the Member for East Ham (Stephen Timms), about people falling victim to fraudsters who rely on confusion about pension freedoms, and not only take people’s lifetime savings but leave them with a huge tax liability. No punishment is severe enough for those who commit those crimes. We all agree that further action is needed, so we support the amendments tabled by my right hon. Friend, who chairs the Work and Pensions Committee, as they would create an opt-out system for speaking with Pension Wise in the five years before retirement.
Finally, I have spoken about protecting pensions and protecting people, and now I want to talk about protecting the planet. Our colleagues in the Lords worked hard with the Government to bring in requirements in the Bill on the assessment and disclosure of climate risk in pension investments. This is a historic step: the first time it has ever been included in UK pensions legislation, and we all should and do celebrate that fact. However, we know that, with the climate emergency getting even more serious, it is possible to go even further. Amendment 16 would allow regulators to mandate occupational schemes to develop a clear investment strategy that is aligned with net zero greenhouse gas emissions at the pace the science demands.
The Paris agreement of 2016, which committed to efforts to limit global warming to 1.5° was a groundbreaking and critical step forward in global co-operation to beat climate change, but I believe we do not do enough to explain to the public and our constituents that the changes we need will only be delivered by starting to influence how vast amounts of private capital are allocated, alongside direct Government decisions on, for instance, decarbonising power and transport. I have to say that I would have thought that argument would garner more sympathy with Conservative Members of Parliament.
UK pension funds represent trillions of pounds, and steering more of that towards our climate goals, yes, would be radical, but this amendment is not just about where capital is allocated. It is about the stewardship that we need to see from all asset managers over the companies they have investments in. This is not a divestment amendment, nor does it limit the choices available to fund managers. The hon. Member for Grantham and Stamford (Gareth Davies) said that the ESG data is patchy, and he is right, but he will appreciate that asset managers demanding better data have been a fundamentally important driver in making that better, and the E—environmental—is actually the most robust part of ESG data. It does not make sense to me to say that the data exists for the Government to issue a green bond, but not for a pension fund to formulate a Paris investment strategy.
We, as the Opposition, ask the Government to deliver a green economic recovery from the pandemic by investing to support the creation of at least 400,000 new jobs, but achieving progress on climate change demands change in every part of our economy, and despite what we have heard from Government Members today, the industry is already showing us what is possible. Aviva, one of the UK’s biggest pension providers—it supports this amendment —has recently announced that its auto-enrolment default funds will aim to achieve net zero by 2050. That is £32 billion of capital, which is actually going beyond the scope of this amendment. In October this year, the BT Pension Scheme set a goal of net zero by 2035 for its entire portfolio, worth £55 billion. There is also a great deal of good practice in public sector DB schemes, such as the Local Government Pension Scheme.
What is more, today’s amendment was developed and backed by a whole host of organisations across the public and private sectors, with dozens reiterating their support in a letter to the Prime Minister last week. These include ClientEarth, Make My Money Matter, ShareAction, E3G, Christian Aid, West Yorkshire Pension Fund, Good Energy, Ecotricity, the Aldersgate Group, the Climate Coalition, the Carbon Tracker Initiative, Friends of the Earth, Greenpeace, Business in the Community and the TUC. I would like to thank all those organisations for the work they have done in getting us to this point. However, I will also say to the Minister that this is not a top-down initiative. The evidence shows that Members themselves want their funds to start taking this seriously.
In addition, the investment case makes this simply the right thing to do. The Department for Work and Pensions has itself acknowledged that considering the financial impacts of climate change is consistent with fiduciary duty. Pension funds are long-term stewards of capital. What could be more long term than the sustainability of our environment and our economy? These two objectives simply do not conflict. As is said in an excellent comment piece in The Daily Telegraph today—that in itself is a sign of the times—it
“now looks irrefutable that environmental and social factors are a clear guide to company quality and future investment returns.”
I reiterate that this is not about the Government dictating to pension funds about when and who to invest their money in, and we are not seeking to compromise trustee independence. It is simply about putting a strategy in place that considers their role in meeting our climate objectives. Trustees can maintain their total discretion over what strategy they choose to achieve that goal. Furthermore, this proposal is designed to allow the Government the flexibility to guide schemes via regulations to ensure that trustees have a strategic plan to become Paris aligned over a period of time. Any measures resulting from this amendment would be subject to extensive consultation with market participants, so that their design could take into account what works best for schemes of different types and sizes. This is written to be as accommodating as possible. The Chancellor of the Exchequer came to the House last week and outlined his ambitions to make the UK a leader in green finance. It is true that we have been lagging behind our European counterparts for many years when it comes to green bonds. As the shadow Economic Secretary in the last Parliament, I made that point frequently, and I was often given reasons why we could not do that similar to those we have heard today against amendment 16. I am tempted to say that if we wait until the end of this Parliament, even this amendment may well become Government policy.
With the new US Administration poised to rejoin the Paris agreement in 2021 under the new leadership of President-elect Joe Biden, I put it to the House that we can make this an even more historic week for tackling climate change by passing amendment 16 today. That is why we seek to include it in the Bill.
Guy Opperman
This is a hugely important piece of legislation. It is a landmark Bill. It will impact the lives of millions of people across this country and it will make our pensions safer, better and greener. I genuinely believe that the work we are doing on CDCs and the pensions dashboard, the fact that we are giving real powers to the regulator and taking the opportunity to crack down on the callous crooks who take our constituents’ pensions, the work we are doing on scams, and the fact that we have for the first time put climate change at the heart of pensions means that this will be groundbreaking legislation that we should all be proud of. I welcome the cross-party support that we have heard.
I may not be able to address all 30 amendments or the 17 separate requests for clarification, so I refer all colleagues—and those in the other place, when they consider this matter—to the two days of debate in Committee, where I expanded in great detail on many of these issues. I will happily write to individuals who asked me to address particular points. I will of course meet the ASW, as the hon. Member for Cardiff South and Penarth (Stephen Doughty) requested, and write on the Roadchef issue, but I cannot promise anything more than previous Ministers have done.
Regretfully, I will not engage with the WASPI debate, as the hon. Member for Strangford (Jim Shannon) made clear that he would. I continue to defend this Government’s position, as I defend the Government of the two former Labour Pensions Ministers sitting on the Back Benches, who supported the exact same policy during the Labour Government. I very much take forward all the work that is done on a cross-party basis. I put on the record my thanks to the Clerks, to all colleagues who have spoken in this debate and to colleagues from across the House for their work in Committee, which was of great assistance to the House.
I turn first to clause 123 and the various amendments on open DB that were raised by a variety of colleagues. We have made it entirely clear that we do not want to see good schemes close. We support DB and we are not proposing a one-size-fits-all regime that forces immature schemes with strong sponsors into an inappropriate de-risking journey. We have also made it clear that we will use secondary legislation to ensure that the requirement for all schemes to have a funding and investment strategy works appropriately for open schemes and ensures that immature open schemes are not prevented from taking appropriate investment risks where that is supportable.
As we have explained, it would be wrong for all schemes that are expected to stay open to be treated differently from other schemes. Not all open schemes in this category share the same characteristics. Some will be maturing just like closed schemes, and it would be wrong to treat such schemes for all purposes as if they were the same as immature schemes.
We hope that we have provided reassurance that open schemes will be able to adopt funding and investment strategies that are appropriate to their individual circumstances. The regime will remain scheme specific and will continue to apply flexibly to the individual circumstances of each scheme, including those that remain open to new members.
We have made it entirely clear that we will frame our secondary legislation in such a way that schemes that are and are expected to remain immature, and have a strong employer covenant, continue to be able to invest in a substantial proportion of return-seeking assets, which will help to keep costs down. I have engaged with a range of parties—I met a number of them in detail on 2 October, and I have subsequently had discussions with a number of organisations—and we are trying to reassure them of the way ahead.
The Pensions Regulator is a regulator, not a legislator. It must regulate in accordance with the legislation made by Parliament, but we believe that the right way forward is a combination of primary legislation, regulations and the defined-benefit funding code, whereby we will seek to effectively balance employer affordability and member security, taking into account the circumstances of different types of schemes as is appropriate.
Neil Gray
Nothing that the Minister has said contradicts anything in our amendment 7 or, for that matter, our amendment 1. It would not be the first time if the regulations did not necessarily live up to the promises made in the passage of the primary legislation, so why not just accept amendment 7 or, indeed, amendment 1 so that the commitment is in the Bill?
Guy Opperman
I assure the House that no Minister in my position could accept amendment 1, which was proposed by the House of Lords and has been tabled by the hon. Member for North East Fife (Wendy Chamberlain).
No Government could commit to ensuring that contributions remained affordable or that scheme closures were not accelerated. We cannot be bound to ensure that all schemes that are expected to remain open are treated differently from other schemes, as open schemes in that category do not all share the same characteristics. As I have made clear, some such schemes will be maturing, just like closed schemes; the potential for abuse would open up. A closed scheme could reopen to very small numbers of new members, circumvent safeguards and pursue a riskier investment strategy that would otherwise be inappropriate. We do not want good schemes to close unnecessarily or to introduce a one-size-fits-all regime. I refer briefly to the Pensions Regulator’s comments in paragraph 475 of the consultation:
“We acknowledge that if such schemes do continue to admit new entrants and do not mature then the scheme will not actually reach significant maturity. We are content that such a scheme retains the same flexibility in its funding and investment strategies that all immature schemes have.”
Similar comments are made later, and I refer hon. Members to the statements I made at great length in Committee.
I turn now to amendments 2 to 5. I dealt briefly with the points made by the right hon. Gentleman the Chair of the Select Committee about clause 125 and the work we have done. Let me be clear that that clause will ensure that transfers will not go ahead if the conditions set out in the regulations are not met. Those conditions can relate to the destination of a transfer, so that transfers can be prevented to schemes that do not have the right authorisations or if a member has not supplied the evidence of employment or residency, for example.
Importantly, those conditions can also include other red flags, such as who else is involved in the transfer. If those red flags are apparent, the regulations will enable trustees to refuse to transfer if the red flag is significant or to direct the member to guidance or information that they must take prior to being allowed to transfer. Trustees will also need to undertake due diligence to establish whether those conditions are met.
Clause 125 puts trustees in the driving seat in relation to permitting transfers to proceed. I make it clear that we will continue to work with the Work and Pensions Committee, the Treasury Committee, the various advisory groups and the all-party parliamentary group on pension scams, with whose members I have had detailed meetings in the past month, to ensure how we can have the best possible regulations to determine circumstances in which different conditions for transfers might apply.
I now move on to the dashboard amendments. I welcome the support in the House for the dashboard; I am particularly grateful to the various contributions that made it clear that this part of the legislation is absolutely transformational, bringing pensions information into the 21st century. I accept entirely what was made clear by the hon. Member for Wallasey: this is a huge project, involving tens of thousands of schemes that will need to be brought forward. The first dashboard will have a “find and view” capability only. At an appropriate time in the future, dashboards may act as a safe space for supporting and safeguarding financial transactions. That will be fully considered and informed by user testing and safeguards, and protections would continue to apply.
However, I resist the amendments in respect of transactions. We have discussed at great length the likelihood of the need for individuals to have a greater say on their pensions. Why would we seek to exclude consolidation going forward? Transactions are not clearly defined in the amendments; they could prevent dashboards from providing useful modelling tools that could inform people of the potential benefits of increasing their contributions. As I made clear to colleagues making the case for the amendments, the consumer association Which? has come out comprehensively against them. It states in its submission on Second Reading:
“we do not agree that the introduction of commercial dashboards should be delayed, or that the transactions should be banned.”
It then goes into more detail:
“there is a need to protect consumers from the risk of commercial dashboards…However, this must be done via the introduction of consumer protections and regulatory oversight rather than a blanket ban.”
The point is also made strongly that the Opposition amendments risk us being left with a dashboard that does not do as much as initially anticipated, resulting in consumers not being as engaged. That could represent a huge missed opportunity. It is crucial that dashboards are both safe and fully functioning to give consumers the most choice and the most exposure to innovation. Therefore, with respect, I will resist the dashboard amendments.
Clause 118 of the Bill, and the FCA regulated activity, will enable the creation of both regulations and FCA rules, which could include signposting to MaPS guidance. The pensions dashboards programme usability working group will explore how best to help users understand the information presented to them and where they can get more help.
In respect of costs and charges, I raised that in great detail in Committee, but colleagues will be aware that the Government intend, and have legislated, that costs and charges should be part of dashboards in the future, just like they will be in the simpler statement. That is legislated for in clause 119(2), and it is appropriate that we proceed with that only once the dashboard delivery group has consulted in a proper way.
As to the restrictions on multiple dashboards for one year, I made the point in Committee that in creating dashboards we need to go where the consumer is rather than forcing the consumer to come to us. That surely is the essence of this issue: it will increase engagement with pensions, and we should reach people where they are. We should not seek to constrain options available but ensure that all opportunities are properly regulated, safe to use and secure.
I turn to the amendments to clause 124—the climate change clause—tabled by the Labour Front Benchers. I am afraid the reality is that Labour’s proposals would direct investment, breach fiduciary duties and lead to divestment and negative outcomes. We want the transformation of the United Kingdom economy and the retrofitting of the country to happen in a partnership with business, legislators, pension schemes and citizens, but I am afraid the amendment would negatively affect that. It would be entirely the wrong way forward.
Labour’s proposal is roundly criticised by the PLSA in a letter in which it strongly endorsed and advocated the Government’s proposals to ensure that the appropriate governance frameworks are in place to support schemes investing in a climate-aware way. It expressed deep concern about the Opposition amendment. With the PLSA’s permission, I will put its letter of 12 November in the House of Commons Library. Likewise, I will put in the Library a letter dated 13 November 2020 from the independent Association of Pension Lawyers, which also massively opposes that proposal. The reality is, the Government are already taking powers to require trustees to set targets in relation to their management of climate risk. We consulted on the use of those powers in August. Our consultation, “Taking action on climate risk”—I note, interestingly, that Labour Front Benchers did not respond to the consultation; I question whether they have even read it—sets them out in great detail.
This is the factual reality: we are already doing what is in the key parts of the amendment in clause 124 as introduced in the House of Lords. In the space of two years, the DWP has made regulations on environmental, social and governance criteria, on stewardship investment and now, in clause 124, on mandatory climate change governance and reporting. We need to allow our proposed policy measures to take effect before reviewing their impact and contemplating further measures. Of the 50 large pension schemes I wrote to last year, 70% are going well beyond the minimum legal requirements. Many have gone considerably further in the past 12 months, as nudged and persuaded by the Government. Fiduciaries do not need such a blunt measure in order to act, so we strongly reject the amendment.
I will turn now to the new clauses, and I will address them in some detail to the best of my ability. I will, if I may, deal with the relatively easy ones. I entirely endorse the view that this Government must bring forward legislation in respect of superfunds in the fullness of time. The hon. Member for Stalybridge and Hyde (Jonathan Reynolds) will understand that that would be a substantial piece of legislation—certainly a 50-clause Bill and possibly more. I entirely accept that further work must be done in this Parliament on automatic enrolment, but I cannot accept new clause 3 or new clause 6.
Alan Brown
One of the issues is that trustees have a legal duty in terms of the trust. At least this amendment would make it much easier for the trustees to implement not chasing up the debt. If somebody has a debt of £1.2 million, who defines what is too costly for the trustees to decide to chase that debt? That is part of the issue.
Guy Opperman
With no disrespect, that is a matter for the trustees. The hon. Gentleman can make the case to the trustees as to whether it would be too costly or too lengthy to receive a recovery.
In respect of new clause 5, the deferred debt arrangements were introduced as an easement to help employers struggling to manage their section 75 debts in an open non-associated multi-employer scheme. The new clause, I am afraid, offers only a temporary respite at best. The debt would still exist and would have to be paid in the future. The employer would have to pay potentially a larger section 75 debt in future if the scheme’s funding position declined further. The employer would also remain liable for deficit repair contributions. The amendment would not, I suggest, help sole traders who want to retire, or who have retired, and want to completely end their liability of the scheme.
In respect of new clause 2 and the Pensions Commission, I am afraid, as I have repeatedly made clear to the hon. Member for Airdrie and Shotts (Neil Gray), that this is not something that the Government can support.
I finally turn to new clause 1, which was proposed by the right hon. Member for East Ham (Stephen Timms) and the Chair of the Select Committee. It is quite clear that there is a common intent across the House to improve guidance to individuals. I cannot support his amendment, not least because it would potentially apply, so I am advised, to defined benefit as well as defined contribution. It is something that would massively enhance the workload of Pension Wise by at least 10 times. He will be aware that there are more than 4.4 million individuals with unaccessed DC pension wealth aged 45 to 54 in the UK. In 2019-20, Pension Wise processed 200,000 transactions. I respectfully suggest—
Stephen Timms
On his point about the shared intent, I quoted in my speech what Baroness Buscombe said in the other place on 1 May 2018. She was speaking, I think, for him. She said:
“We all want people…to make it the norm to use Pension Wise before accessing their pension.”—[Official Report, House of Lords, 1 May 2018; Vol. 790, c. 1995.]
Does that remain the Government’s intention?
Guy Opperman
I stand by section 19 of the Financial Guidance and Claims Act 2018, which specifically sets out that where a scheme member makes an application to transfer pensions rights or start receiving flexible benefits, they have to be referred to appropriate pensions guidance and provided with an explanation of the nature and purpose of the guidance. Before proceeding with an application,
“the trustees or managers must ensure that the beneficiary has either received appropriate pensions guidance or has opted out of receiving such guidance.”
What we are proposing as a result of section 19 and the stronger nudge proposals is what the Work and Pensions Committee asked us to do. I mean no disrespect to the right hon. Gentleman, but our esteemed colleague who sadly is not with us anymore, Mr Frank Field, the former Member for Birkenhead, made the case very robustly in documents I am happy to disclose to the House—documents that the right hon. Gentleman will have as Chair of the Committee—that what the Government are doing is the right way forward. Because of that, we changed the previous Bill to do exactly what we are proposing to do now.
However, I am very keen to work with colleagues across the House and with the Work and Pensions Committee to take forward the proposals to enhance and improve the guidance that is available. I hope that the right hon. Gentleman will work with me and the Government to ensure that that takes place. I may not have responded to some colleagues, for which I apologise, but I thank all colleagues for their support of his groundbreaking Bill.
Stephen Timms
I welcome the debate we have had on this set of new clauses and amendments, and I welcome many of the things that the Minister said. On new clause 1, I am not sure whether he does still stand by what his noble Friend said on his behalf two years ago about the use of Pension Wise becoming “the norm”. If that is still his intention, I have not heard anything this evening to make me think that there is a plan to deliver on that intention. New clause 1 would deliver on that intention. I think it is widely agreed across the House that we should make access to that guidance the norm, so I would like to press new clause 1 to a vote.
Question put, That the clause be read a Second time.
Guy Opperman
I beg to move, That the Bill be now read the Third time.
This is a hugely—
Felicity Buchan
My hon. Friend is aware of my constituent Mr John Walker’s landmark case in the Supreme Court, where he secured equal pension rights for single-sex married couples. Will my hon. Friend assure me that although that currently is the law in the UK, he will find a way to enshrine it in statute?
Guy Opperman
I congratulate my hon. Friend on making her point so eloquently and intervening speedily in this short Third Reading speech. I can confirm that the law stays as per the Supreme Court decision, even after we leave the EU. I stand by what I wrote to her in the detailed letter that I drafted to her in October, a copy of which I will place in the House of Commons Library to set the matter firmly on the record.
Before I was so generously interrupted, I was saying that this is a hugely important piece of legislation with cross-party support, for which I thank colleagues from all parties, including the hon. Member for Birmingham, Erdington (Jack Dromey), who cannot be with us tonight. The Bill will affect the lives of millions of our constituents throughout the country; make pensions safer, better and greener; stop scams; introduce CDCs; create pension dashboards; and crack down on callous crooks who take away our constituents’ pensions. It also legislates for a new type of pension scheme, establishing the dashboard and making pensions fundamentally greener. I commend the Bill to the House.
Jonathan Reynolds
I thank all colleagues for their participation in today’s proceedings and throughout the passage of the Bill. In particular, I thank the Minister; my hon. Friends the Members for Feltham and Heston (Seema Malhotra) and for Westminster North (Ms Buck), who led for the Opposition in Committee; and Sophia Morrell and Lily Lewis from our staff teams. I pay tribute to the shadow Pensions Minister, my hon. Friend the Member for Birmingham, Erdington (Jack Dromey). He is a peerless source of knowledge, wisdom and advice, and he has played a significant role in this legislation. Unfortunately, he could not participate in Committee or today’s proceedings because the House does not have in place the measures required to allow all MPs to participate safely on an equal basis during the pandemic. This is clearly not a satisfactory situation, and I know that many Government Members concur with that. I welcome the moves today to finally get this resolved.
On the whole, this has been a positive experience. Perhaps the most significant change made in the Bill is the introduction of the new collective defined-contribution schemes, which we will have to monitor carefully, as well as more substantive measures of benefit to our constituents. This legislation deserves to pass its Third Reading, and it will do so with the support of the Opposition.
Neil Gray
Like others, I wish to put on record my thanks to the Clerks, Huw Yardley and Kenneth Fox, and to Djuna Thurley in the Library, for their support. I also thank our SNP researchers Zoe Carre and Linda Nagy for their fantastic assistance, as well as my hon. Friend the Member for Gordon (Richard Thomson) for his considerable and informed support in Committee.
This Bill takes matters forward in the pensions world. It could have gone further, and I regret that it does not, but we thank the Minister and the other parties for working together constructively on such an important piece of legislation. We look with interest to its further stages in the other place.
Stephen Timms
I echo the thanks that have been expressed by all three Front-Bench spokespeople. I welcome the content of the Bill and the progress made on collective defined-contribution schemes and the pensions dashboard. I was looking back at a report of the Work and Pensions Committee published before I became the Chair, which said:
“A pensions dashboard is long overdue”—
then I looked at the date of the report, and it was 2015. It will still be another three years before we get that dashboard, but the Bill is undoubtedly a very important step forward in that journey.
I welcome the commitments that the Minister made on scams and addressing the changes that are needed. I was disappointed that when I intervened on him on Report, he was not able to reaffirm the commitment that the Department appeared to have, and which was expressed on his behalf in the other place on 1 May 2018, that Pension Wise should become “the norm”.
Stephen Timms
That is welcome. We agree, then, that taking up Pension Wise guidance should be the norm, and I look forward to working with him on making that a reality from the very distant place we are in at the moment. I welcome the progress that the Bill represents, and I look forward to it being firmly on the statute book.
Wendy Chamberlain
There is nothing more for me to say, other than to add my thanks to Members of this House and the other place for their work on the Bill. There is much to recommend the Bill, and I look forward to seeing how it progresses.
Jim Shannon
I thank Members and the Minister for their contributions on Third Reading. I look forward to bringing to the Minister’s door issues on behalf of my constituents, which he has been very generous in responding to in the past. I know that he will not be averse to me calling at his door, and that as always, he will respond in a positive fashion. That is the sign of a good Minister.
Question put and agreed to.
Bill accordingly read the Third time and passed, with amendments.
Pension Schemes Bill [HL]
Tuesday 19th January 2021
(3 years, 10 months ago)
Lords ChamberRead Full debate Pension Schemes Act 2021 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 152-I Marshalled list for Consideration of Commons amendments - (15 Jan 2021)
Baroness Stedman-Scott
That this House do agree with the Commons in their Amendment 1.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Stedman-Scott) (Con)
My Lords, before turning to the Commons amendments, I will take a moment to remind the House of what the Bill does, as a lot has happened since it was last here.
If enacted, the Bill will affect the lives of millions of people throughout the country. It will make pensions better by creating a new style of pension scheme that has the potential to increase future returns for millions of working people, and by delivering pensions dashboards that will help individuals to make informed decisions about their financial futures. It will make them safer by helping to prevent scams and by clamping down on those who recklessly try to plunder the pension pots of hard-working employees. It will make them greener by requiring pension schemes to take the Government’s net-zero climate targets into account in managing their own climate risk. I know that your Lordships agree that this is a worthwhile and important piece of legislation, and it has received cross-party support in both Houses. I hope that we are now at the final stage of its passage, and that we can agree and allow it to move on for Royal Assent.
I turn to Amendment 1. We welcome the strong interest shown in both Houses on ensuring that CDC schemes treat their members fairly and, in particular, operate in a way that is intergenerationally fair. As we explained in both Houses, requiring trustees to assess fairness is likely to generate confusion, as the concept means different things to different people, and there would be uncertainty about what was required. That is why we have intentionally avoided referencing fairness in such a way within any of the CDC provisions. Instead, following consultation, we intend to use these regulations to set out clear principles and processes that schemes must follow to ensure that different types of members are treated the same where appropriate—for example, when accruing and calculating benefits and making adjustments to benefits. These requirements will form part of the authorisation process for CDC schemes overseen by the Pensions Regulator.
For example, we intend that regulations under Clause 18 will require CDC scheme rules to ensure that there is no difference in treatment when calculating and adjusting benefits between different cohorts or age groups of scheme members, or between members who are active, deferred or receiving a pension. This is a clear and effective approach to delivering fairness in practice that is not only easy to understand, but also easy for members and trustees to apply, because it avoids a subjective interpretation of what is fair. We are all pleased that Royal Mail agrees with our approach, and it is for these reasons that we do not consider the amendment to the Bill necessary.
I will move on to Commons Amendments 2 and 3. Pension dashboards will help to revolutionise the pensions industry and bring it into the 21st century. This innovative programme will help to reconnect consumers with their otherwise lost pension pots and engage millions of UK citizens with their pension savings in a safe, secure and convenient way. These amendments on delaying the introduction of dashboards from other providers and preventing transactions through dashboards were overturned in the other place. This was in recognition of the approach taken to ensure that consumers were protected as part of the development of dashboard services. In respect of multiple dashboards, it has always been the Government’s belief that individuals should be able to access information about their pension savings from a service of their choosing. I am delighted that, following the changes that we made in this House, consumers will be able to access a dashboard service that is publicly owned, provided by the Money and Pensions Service. I restate the commitment that was made by my noble friend Lord Howe in this House on 30 June last year that
“the Government wholeheartedly agree that such a dashboard should be available to all users from day one, alongside dashboards offered by other organisations.”—[Official Report, 30/6/20; col. 668.]
We will not allow any qualifying dashboard to be launched before that of the Money and Pensions Service. However, we remain firmly of the belief that allowing other properly regulated dashboard providers to operate is the best way to drive engagement, reaching out to consumers where they may already interact with digital services, and unlocking innovative potential. I have said before that dashboards will launch with a simple find-and-view capability; this remains the case. However, enabling transactions through dashboards can provide an innovative way of safely giving people more effective control of their pension savings. Functionality on dashboards will be increased only as a result of user testing, after careful review and with the right level of consumer protections in place. It is important that we maintain the ability to meet the needs of the user by not prohibiting functionality that can put individuals in control. The ability to have this type of functionality in the future could bring real and significant benefits for consumers—for example, when consolidating small pots of pensions savings.
Dashboards are a hugely exciting innovation that will benefit and empower millions of citizens. We should support the development of dashboards so that they reach their potential and change the way that people interact with their pensions savings by placing them in control of all their pensions.
Finally, Commons Amendment 5 removed the privilege amendment made in the Lords, as is the norm in these cases. I beg to move.
Lord Vaux of Harrowden (CB) [V]
My Lords, as there are no counterproposals to these Commons amendments, I shall try to brief, but there are a couple of points I would like to make in relation to Commons Amendments 1, 2 and 3.
Throughout the passage of the Bill, we have had lengthy discussions around the risk of unfairness, intergenerational or otherwise, that is inherent to collective money purchase schemes, or CDCs as they seem still to be called. I regret that the Government chose not to accept the amendment which required trustees to make an assessment of the extent to which a scheme is operating in a manner fair to all members; it has been removed by Commons Amendment 1. That seemed a fairly uncontroversial concept. However, the Minister has been very clear that the Government acknowledge the risk of unfairness, that they intend to learn from experiences in other countries, such as the Netherlands, and that they intend to deal with this issue in the regulations that they will publish in relation to Clause 18.
Commons Amendments 2 and 3 remove the amendments your Lordships agreed to in relation to pensions dashboards which required that there should be a period during which pensions dashboards are initially restricted to the MaPS dashboard and that they should not become transactional platforms without primary legislation. On the second point, I remain quite uncomfortable with the idea of a pensions dashboard becoming a transactional platform without very serious thought and experience. However, these matters will also be dealt with by regulations and I am confident that the Minister has heard the concerns that have been raised, even if she does not agree with the proposed method of dealing with them.
The Minister has been very generous with her time and commendably willing to meet to listen to and discuss concerns throughout the passage of the Bill. As a result of changes made to the Bill as it passed through your Lordships’ House, most of the regulations that will follow will be subject to the affirmative procedure. However, even under the affirmative procedure, it will not be possible to amend regulations. I therefore urge the Minister to continue her constructive and collaborative approach in relation to the regulations that will now follow by consulting across the House before draft regulations become set in stone. That way she will be able to take advantage of the very deep pensions knowledge and experience in this House and the regulations will be all the better for it.
Baroness Janke (LD) [V]
My Lords, I thank the Minister for her clear presentation and her response to the issues raised during the passage of the Bill, as expressed in these amendments, which were based on concerns about protecting members of the public from criminal scams and malpractice and about minimising potential risks and threats to the value of pension schemes.
The amendments sent to the other place for consideration related, first, to the wish to ensure fairness, particularly to younger and newer members of the new CMP schemes; and, secondly, to the protection of pension scheme members from scams and exploitation in the operation of the dashboard by preventing financial transactions on it and by allowing the operation of the public dashboard for one year before allowing private sector models.
I understand from the Minister’s opening remarks that the concerns of the movers of those amendments have been at least partially addressed by Ministers. However, I support the proposal from the noble Lord, Lord Vaux, about consultation across the House before the regulations are drafted for consideration. Once the Bill is passed into law and these measures come into operation, we expect that they will be closely monitored and that if further concerns arise they may be reconsidered during the passage of regulations at a later stage. In view of this, we are not proposing to pursue these amendments further.
The fourth amendment concerns the need for different treatment of open and closed schemes and is the subject of further amendments today. My noble friend Lady Bowles will address the important issues raised when this amendment is considered in the next group.
Baroness Sherlock (Lab) [V]
My Lords, I, too, am grateful to the Minister for explaining why the Government asked the Commons to reject the amendments passed in this House. We have come a long way since the Bill had its First Reading in this House on 7 January—more than a year ago, although it seems more like a lifetime. The Bill now makes some important changes, creates CDC schemes, legislates for the pensions dashboard and strengthens the regulatory environment on pensions.
During the Bill’s passage through this House, the Government have made some welcome concessions. For example, we ran an amendment to require a public dashboard from the outset. The Government brought forward amendments requiring that, and I am grateful for the confirmation that the Minister has given today. We ran amendments saying that the FCA should regulate the provision of dashboard services, and the Minister has confirmed that that will happen. We ran an amendment to say that using the dashboard to see your own data must be free, and the Minister has confirmed that it will remain free.
The Bill initially made no reference to climate change, but my noble friend Lady Jones of Whitchurch, the noble Baroness, Lady Hayman, and Members from across the House worked together to persuade the Government to amend the Bill to require trustees and managers to take the Paris Agreement and domestic climate change targets into account in their overall governance and their disclosure of climate change risks and opportunities. This is the first time that the words “climate change” have featured in domestic pensions legislation.
This is a better Bill than it was when it started, and I am grateful to all noble Lords who have worked so hard on it, especially my noble friend Lady Drake and Dan Harris in our Opposition Whips team. I am also grateful to the Minister for engaging with our concerns and to the Bill team and all the officials who have engaged with us.
That said, the Government have rejected the amendments which this House voted for. On CDC schemes, I hope they will review the intergenerational impact of any schemes as they are developed and will keep an eye on that. I am particularly disappointed that our amendments on the pensions dashboard system were rejected. They would have put in place two essential safeguards: that the MaPS public dashboard should be in operation for a year and that the Secretary of State should lay a report before Parliament on its operation and effectiveness before commercial dashboards enter the market, and that the delegated powers in the Bill could not be used to authorise commercial dashboards to engage in transactions.
Like the noble Lord, Lord Vaux, I remain deeply concerned about the risks to consumers. Those amendments were especially important given the sheer breadth of the delegated powers the Bill grants and how little we know at the moment about how the dashboards will work. We still do not know how many dashboards there will be, who will run them, what information they will have, how it will be displayed or how consumers will respond. We do not know where liability will lie for each link in the chain or how consumers will be compensated if they lose out. We do not know what the charging model will be or how data security, identity verification or third-party access will be managed.
Given all those things that we do not know, I have sought to persuade the Government to come to Parliament to allow us to debate the proposals they make before the regulations are published. I regret that I have not succeeded in that. Given that this remains a very high-risk programme and that parliamentary scrutiny would surely be an advantage not an impediment, I hope that in her reply the Minister can give us some assurance of our continued involvement in debate on this process. I look forward to hearing her reply.
Baroness Stedman-Scott (Con)
First, I thank the noble Lord, Lord Vaux, and the noble Baronesses, Lady Janke and Lady Sherlock, for their contributions. I think it is right to say that we have listened, we have engaged and we have valued and appreciated all noble Lords’ contributions, and I assure noble Lords that that will continue.
I reassure the House that the Government are fully committed to continue transparency and engagement through the development, delivery and operation of pensions dashboards. We greatly value the insight and input from colleagues from across the House in shaping, testing and ensuring the proposals and want that to continue throughout the more detailed stages of development. The pension dashboards programme is committed to publishing six-monthly progress updates, the most recent of which, in October 2020, outlined the work undertaken to define the data standards and the work towards finalising the requirements for the digital architecture and the identity service. It also set out an indicative plan for delivery.
Future updates, in advance of the launch of dashboards, will provide greater detail, engagement opportunity and assurance on key areas of specific interest. These will include the digital architecture and identity service; user consents and permissions, including delegated or third-party access; the consumer protection regime, including the liability model; and further work on how data will be presented to consumers, based on a growing body of user research and a greater understanding of user needs.
I facilitated a meeting between noble Lords and the pensions dashboards programme team just before Christmas. As promised at that meeting, I will ensure that these regular meetings continue. They will provide your Lordships with the opportunity to have meaningful discussions directly with the programme team at the publication of each progress update report and a chance to scrutinise this work at an early stage of development. I will ensure that copies of these reports are placed in the House Library on their publication.
I recognise the concerns that many have expressed about the broad nature of the delegated powers within this area of the Bill. There is a statutory duty on the Secretary of State to consult before making regulations for pensions dashboards. Consultation will cover proposals across the range of areas which are critical to the safe, secure and effective delivery of dashboards, and give all those interested the opportunity to influence the detail before the regulations are laid in draft in this House under the affirmative procedure.
I know that some of your Lordships have asked whether we can go even further, requiring the Government to lay a report before Parliament for debate in advance of draft regulations being laid. I do not believe this to be the right way forward, as the consultation on the Government’s proposals for regulations will already have taken place.
I have listened further to the noble Baroness, Lady Sherlock, and, although we have not always been in agreement, we are together on Peers having ongoing future involvement, and we are prepared to engage, engage and engage. Therefore, in addition to updating the House in the usual manner, I am prepared to commit to the Government tabling Written Ministerial Statements during the consultation phases, prior to the debate on the proposed dashboard regulations.
I reassure the noble Baroness that I will continue to work with her collaboratively in the way we have done throughout the Bill’s progress. On the matter of facilitating further debate on the issue, I am sure that the Chief Whip has heard our debate today, and, when the Written Ministerial Statements are laid, I will draw them to his attention for him to consider further discussion in the usual channels.
Some concerns have been expressed about governance of the dashboard service going forward. The Money and Pensions Service has responsibility for delivery of the dashboard architecture and ongoing oversight and control, and it is clear that our focus for the foreseeable future must be on the development and implementation of the service. Meeting the demands of the scale and complexity of this challenge comes first. Reaching a live and steady state of operation will take a number of years, as set out in the pensions dashboards programme activity plan. As such, I confirm that the Government have no plan to move ownership of dashboards architecture away from the Money and Pensions Service.
My department has clear governance arrangements in place to ensure the delivery of dashboards. As well as the regular published updates that I mentioned earlier, there is an existing legislative requirement, in the Financial Guidance and Claims Act 2018, for MaPS to report to the Secretary of State annually on the exercise of its functions, which includes its responsibilities for pensions dashboards. This report is laid before Parliament.
Chris Curry, the senior responsible officer for the pensions dashboard programme, and Sir Hector Sants, chair of the Money and Pensions Service, regularly report progress to Ministers. The department also undertakes formal quarterly accountability reviews with the Money and Pensions Service. We recognise the importance of effective evaluation, including monitoring of consumer behaviours and outcomes. My department is responsible for overall evaluation of the policy and is working with the pensions dashboards programme and regulators to develop a comprehensive evaluation plan.
Research will also be undertaken with providers and users alike throughout the project life cycle. This will include user testing to understand likely reactions and behaviours, and research to understand the impact that dashboards will have on the market. My department is developing a joint set of critical success factors to complement delivery and measure the success of policy objectives. These are relevant to all stages of the programme and will give insights on, among other things, usage of the service, delivery and compliance. Review of the critical success factors will also play a part in evaluation and service developments.
I finish by repeating the commitment that I made in my opening remarks. We will not allow any dashboard to which schemes are required to supply data to be launched before that of the Money and Pensions Service. On the point raised by the noble Baroness, Lady Sherlock, about a review of intergenerational impact and fairness, we will of course review how CD schemes operate and will monitor how different groups are treated.
I hope that my comments reassure noble Lords that the Government are acting diligently and responsibly in the delivery of dashboards.
Baroness Stedman-Scott
That this House do agree with the Commons in their Amendments 2 and 3.
Baroness Stedman-Scott
That this House do agree with the Commons in their Amendment 4.
Baroness Stedman-Scott (Con)
My Lords, this amendment was overturned in the House of Commons because, as the Minister for Pensions and Financial Inclusion explained in Committee in the Commons, no Government can commit to ensuring that all defined benefit pension schemes that are expected to remain open are treated differently from other schemes. Although, of course, the extent to which a scheme is open, and how that affects whether and how it will mature, must be considered, open schemes do not all share the same characteristics, and it would be wrong to treat them all in a similar way. Each scheme must be treated taking account of its own particular circumstances.
The original amendment touched on a number of important factors to be taken into account in the scheme funding arrangements. They are some, but by no means all, of the factors that we think trustees or managers should have to consider when setting a scheme’s funding and investment strategy. These are complex and inter- dependent metrics and most appropriate to be considered in secondary legislation rather than being put on the face of the Bill. The Bill provides for this through delegated powers that will enable secondary legislation to set out in some detail what the new funding and investment strategy will need to include.
Addressing those matters in regulations will give interested parties a chance to contribute to the consultation on draft regulations. It will also allow flexibility to ensure that the arrangements can be adapted as economic conditions change, so that the scheme funding system can continue to operate effectively over time. But we absolutely do not want to see good schemes close unnecessarily. We have made a clear commitment to ensuring that regulations work in a way that does not prevent appropriate open schemes investing in riskier investments where there are potentially higher returns, provided the risks taken can be supported and that members’ benefits and the Pension Protection Fund are effectively protected. With that explanation, I beg to move.
Motion 4A (as an amendment to the Motion on Amendment 4)
Baroness Bowles of Berkhamsted
At end insert “, and do propose Amendment 4B in lieu of the words so left out of the Bill—
“( ) In exercising any powers to make regulations or otherwise to prescribe any matter or principle under Part 3 of the Pensions Act 2004 (scheme funding) as amended by Schedule 10, the objectives of the Secretary of State must include supporting the ability of the scheme trustees to decide the specific funding, investment risk management and diversification strategy that is appropriate for the long-term time horizon, liquidity and employer covenant of the scheme.””
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, we have come a long way since the probing discussions in Committee, when the noble Baroness, Lady Altmann, first raised concern about whether there were steps afoot to cause de-risking of open DB schemes and the effect that that might have of shifting investment to gilts. I was among several noble Lords who agreed with that concern, and I followed up on Report with an amendment, kindly signed by the noble Baroness, Lady Altmann, and the noble Lords, Lord Young of Cookham and Lord Vaux of Harrowden, which was passed.
Baroness Sherlock (Lab) [V]
My Lords, I thank the Minister for her introduction and the noble Baroness, Lady Bowles, for her contribution. I hope that the debates in both Houses have caused the Government to reflect further on whether their DB funding requirements are fit for purpose. I acknowledge the work done by the noble Baroness, Lady Bowles, and other Members in this regard.
I wish that the Government had supported the Labour amendment to the Bill in the other place. The essence of it is captured in my Amendment 4D here. It is regrettable that so many DB pension schemes outside the public sector are closed to new members and to future accrual of benefits for existing members. It is also important to recognise that there are DB schemes which remain meaningfully open to new members, which are sustainable, and which have strong employer covenants.
I support the Pensions Regulator in wanting to ensure that DB schemes are well run and properly funded, thereby increasing the likelihood that members will receive their accrued benefits in full when they become due. We have seen enough examples of poor corporate behaviour and the decline or collapse of companies providing the covenant to DB schemes to know the consequences of having a weak funding regime.
Today’s debate does not challenge this principle. It is concerned with how the principle is applied and specifically whether the approach to scheme funding by the Government and the regulator sufficiently recognises the difference between the funding regime for a sustainable, meaningfully open DB scheme and that for an increasingly mature and closed DB scheme. There is real concern that, unless the difference is recognised, the Pensions Regulator and any regulations from the Secretary of State could perversely pose a threat to the continuation of open, relatively immature, sustainable schemes. This would thereby deny the opportunity for millions of workers to benefit from a DB pension. Many sections of the Railway Pensions Scheme are an example of such an open DB scheme.
A closed DB scheme will, of course, see contributions decline and the remaining scheme members progressively age. As more and more of the assets will be needed to pay the pensions, they will need to be lower risk and provide liquidity to ensure that members receive their benefits when they become due. A sustainable, meaningfully open scheme has an ongoing flow of new contributions, including from future members. These can be invested for the long term, providing higher returns. Their investment profile does not need to be as risk-averse as that required for a declining DB scheme. If sustainable, open DB schemes are unnecessarily pushed into the same investment and derisking strategies required for declining closed schemes, there is the risk that the regulator will push up the ongoing contributions of members and employers to such a level that, perversely, they encourage open, sustainable DB schemes to close. This cannot be right. It does not benefit employees, employers or the economy.
My amendment aims to ensure that regulations on DB scheme funding recognise the characteristics of sustainable open schemes, rather than setting a one size fits all policy for both closed and open DB schemes. It specifies that
“the objectives of the Secretary of State must include supporting the ability of the trustees of a relevant scheme to decide the funding and investment strategy for the scheme taking into account the current and future maturity and liquidity of the relevant scheme consistent with the trustees’ duty to invest assets in the best interests of members and beneficiaries.”
I know that the Pensions Regulator has issued an interim response to its first DB funding code consultation. It is apparent from some of the comments, including those of the PLSA, that there are misunderstandings or lack of clarity about the position of open schemes. Assurances are being sought from some in the pensions industry and elsewhere that the DB funding regime will remain scheme-specific. The noble Baroness, Lady Bowles, referred to this. Any bespoke approach under the new funding proposals should build on that foundation. The DB funding regime should continue to apply flexibly to take account of individual scheme circumstances.
I will listen carefully to the Minister’s answers to my questions and to those detailed by the noble Baroness, Lady Bowles. Given the concerns expressed in both Houses, it will be important to hear some answers to these questions and I do hope to hear the Minister tell us whether the Government plan to consult with open and immature schemes before publishing the draft regulations, including reflecting on the impact on members and sponsors of schemes that are meaningfully open. I hope the Minister can respond today in a way that addresses the concerns raised and indicates a way forward. I too have valued the conversations of which I have been a part. I have no wish to press my amendment to a Division, although I will listen carefully to what she has to say before making a final decision. I look forward to her reply.
Lord Vaux of Harrowden (CB) [V]
My Lords, we had lengthy discussions on Report around the concern that a one-size-fits-all derisking policy could render uneconomic otherwise healthy defined benefit schemes which remain open, and which are not close to maturity. The noble Baronesses, Lady Bowles and Lady Sherlock, have already described the issue in better detail than I ever could, so I will not repeat the case, but it would be a great shame if a laudable intent to derisk had the unintended consequence of leading to the premature end of healthy, well-run defined benefit schemes, which are of particular importance to lower-paid employees. I know that this is not the intention of the Government, as the Minister has just restated; I am confident that the Minister will be able to set our minds at rest by confirming the points asked by the noble Baroness, Lady Bowles, and that Divisions on Motions 4A and 4C will not be necessary.
As this is likely to be the last time I speak on the Bill, I hope the House will not mind if I take the opportunity to put on record my thanks to the Minister for her open and collaborative approach throughout its passage. She and her team have been extremely generous with their time and I am very grateful to them all. I am also grateful to all noble Lords for their patience as I have fumbled through my first involvement in amending a Bill; I have learned a lot from them. The Bill has been an excellent demonstration of the depth of expertise that resides in this House and of how well the House can work across parties to improve legislation. As the Minister said after Third Reading
“we collaborated, we talked, we listened and we made the Bill better.”—[Official Report, 15/7/20; col. 1671.]
I agree with her and, as I said earlier, I very much look forward to that same collaborative spirit continuing into the discussions on the regulations that will put the flesh on to the skeleton of this Bill.
The Deputy Speaker (Baroness Garden of Frognal) (LD)
Noble Lords in the Chamber have indicated that they wish to speak. I call the noble Baroness, Lady Altmann.
Baroness Altmann (Con)
My Lords, I congratulate my noble friend the Minister on introducing this group of amendments and particularly thank her, the Bill team officials and the Pensions Regulator for engaging with us in such a collegiate manner. The co-operativeness and openness that have been shown to all noble Lords across the House have been hugely welcomed and already commented upon; I reiterate that this approach has improved the Bill and that this will continue into the future when it comes to the regulations. I congratulate the noble Baroness, Lady Bowles, the noble Lord, Lord Vaux, my noble friend Lord Young of Cookham, as well as the noble Baronesses, Lady Sherlock and Lady Drake, on the way in which we have all been able to co-operate on this important issue.
I briefly express concerns about the MaPS dashboard being sidelined and the data-security issues that may be involved in the dashboard, as well as, importantly, the fairness issues that will be dealt with in regulations of CDC schemes. Having dealt with that, I turn to Motions 4A and 4C. It is important that my noble friend can provide reassurance that scheme-specific approaches that have endured so far will be preserved. As the noble Baroness, Lady Bowles, has outlined—echoed by the noble Baroness, Lady Sherlock—there are issues on which I am confident my noble friend will be able to reassure us.
The Deputy Speaker (Baroness Garden of Frognal) (LD)
I call the noble Lord, Lord Davies of Brixton.
Lord Davies of Brixton (Lab)
My Lords, I draw the attention of the House to my entry in the register of interests.
I need to ask the indulgence of the House because I accept that it is unusual for a Member who has not contributed at any previous stage of a Bill to intervene at this stage. However, I was not a Member of the House then, and so I was unable to take part. It will be recalled that the Bill was introduced almost exactly a year ago, and it is almost exactly a year ago that I was first aware that I would be joining your Lordships. I watched the entire progress of the Pensions Bill—with only slight exaggeration—like a child locked out of a sweet shop. I so much wanted to take part in the debate and discussions. I am not suggesting for one moment that the incredible work by my noble friends on the Bill has not been effective; I just would have liked to have been with them.
It is also worth mentioning, since the House places some stress on being a repository of expertise, that on Clause 123 I can claim considerable expertise because I am a fellow of the Institute and Faculty of Actuaries. In the course of my actuarial work I was a scheme actuary and I produced valuations, and that is what this clause is about. Since this is the first time that I have had a chance to speak when I have not been subject to a three-minute time limit, I am tempted to speak for a long time about scheme valuations, but I will spare your Lordships that.
Before I get to the substance, I thank the Minister. As I say, I have watched the debates, and I pay tribute to the way in which the Bill has been handled. I highlight that the introduction of what I still think of as collective DC is an excellent move forward and of considerable importance, as is—although of course there is more to be done—the work that has been done on the dashboard.
Turning to the amendments, I strongly support what is proposed here. The issue is the valuation of open defined benefit pension schemes. Real concern has been expressed by employers and trade unions representing their members about such schemes that the changes foreshadowed in the regulatory regime by the legislation will not work for such schemes, and the result will be higher costs and lower benefits. I am glad to see that a response has been made on the behalf of the Pensions Regulator, assuring us that it is not saying, “Don’t worry, just trust us with it all”, and making various commitments about how open defined benefit schemes will be handled. Well, why not put such assurances into the legislation? I certainly hope they will be included in the regulations.
At this point, it is worth acquainting the House with some evidence that the Institute and Faculty of Actuaries has presented on this clause. It said:
“Any employer that has left their DB scheme open to new entrants to date is highly likely to have done so as a conscious choice, and usually with strong support from members and associated trade unions. The risks inherent in DB are typically well understood not only by the employers but also by the scheme’s members, and their trade union representatives. These schemes should therefore not necessarily be treated the same, or need the same level of security, as closed schemes. In our view it is critically important that viable and successful open schemes are not caused to close through adverse legislative change or guidance from The Pensions Regulator.”
I fully endorse what the institute says there and what has been said by previous speakers, with which I concur. What is notable about what the institute said in that statement is that it emphasises how pension schemes emerged from the employment relationship. One thing that really worries me about leaving it to the regulator is that there is not a single person on the board of the Pensions Regulator who has any experience of employment or industrial relations, or at least not significant enough for them to put it in their biographical details.
I have one final point. This debate is about open schemes, as others have mentioned. I do not want anyone to think that the situation is that there is no more debate to be had about closed schemes. The noble Baroness, Lady Altmann, mentioned the issue of closed schemes. I concur with what has been said there, and that we have to get that right as well; there is more debate to be had on that issue. It is not just about open schemes. So there will be a continuing debate, but I hope the Minister will be able to give us some reassurance about the treatment of open schemes.
The Deputy Speaker (Baroness Garden of Frognal) (LD)
I call the noble Baroness, Lady Janke, whose name was left off the list inadvertently.
Baroness Janke (LD) [V]
My Lords, it is a great pleasure to follow the noble Lord, Lord Davies. No doubt we will welcome his expertise and experience into what is already a considerable group of experts and knowledgeable people in your Lordships’ House.
I support the amendment of my noble friend Lady Bowles. I pay tribute to her for the way in which she has pursued this matter with great skill and tenacity by working across the parties and seeking agreement on a way forward. There is clearly a problem for open DB schemes, as has been expressed to us already, particularly by the railway workers’ union but also by other pension funds. Clearly, as my noble friend has said, it is unrealistic and wrong for the same restraints to be imposed on open DB schemes that are not destined for closure in the immediate future as those imposed on closed schemes. As others have said, if that were to be the case, currently open DB schemes not on the path to maturity would suffer and may close as a result, with dire effects for their membership and a considerable impact on the wider economy.
I very much welcome the Minister’s opening statement, in which she indicated her willingness to ensure that open schemes not on the path to maturity should not be prevented from making more beneficial investments. I hope the five points clearly outlined by my noble friend Lady Bowles will form the basis of the future operation of these healthy open schemes, as the noble Lord, Lord Davies, referred to.
I too record my thanks to all those who have contributed to the Bill, such as the ministerial team, who have provided information and expert advice, and noble Lords who have demonstrated their knowledge, experience and expertise in considering the Bill. They have shown how this House has not only provided scrutiny and challenge but enabled improvements to the legislation and benefits to those who will depend on this in future.
I thank the Minister and her colleague in the other place for their willingness to keep an open mind and not only to listen but to take on board suggestions and use their best endeavours to address the issues raised by Members. I also thank all the teams supporting Members, particularly Sarah Pughe in the Lib Dem office, who has provided us with marvellous support. I very much look forward to the Minister’s response and hope that it will reassure my colleague that she is able to let this matter move forward and that her concerns will be listened to and acted upon.
The Deputy Speaker (Baroness Garden of Frognal) (LD)
Does anyone else in the Chamber wish to speak? I think probably not.
Baroness Stedman-Scott (Con)
My Lords, I will first respond to the question of my noble friend Lady Altmann on long-term horizons. The scheme funding measures in the Bill, together with secondary legislation and a revised scheme funding code of practice, seek to support trustees and employers to manage this scheme funding with a focus on longer term planning. As now, the scheme’s liquidity requirements, investment timelines and the amount of risk each scheme can support will depend on factors including its maturity and the strength of its employer covenant. Trustees can and do invest in illiquid assets such as infrastructure, and our measures do not seek to discourage such investments where they are appropriate.
I also thank the noble Lord, Lord Davies, for his contribution. The thought of being locked out of a sweet shop gives me more heartache than your Lordships will know. We will do our very best to make sure that it does not happen again. We welcome the noble Lord to the House and have no doubt that he will add a lot of expertise. He has joined the formidable band of brothers on pensions and we are very glad he is with us.
I am very grateful to the noble Baronesses, Lady Bowles and Lady Sherlock, for their amendments. I am also grateful to all those who have contributed to the debates we had relating to schemes that are open to new members. They have been highly influential and have helped us refine our thinking on how schemes in these circumstances should be treated. The Government are very sympathetic to the thinking behind these amendments, but there are good reasons why we do not want to deal with these matters on the face of the Bill.
One of the main drivers behind our reforms to the scheme funding arrangement is the desire to be able to more effectively tackle the small minority of schemes and employers who push the flexibilities of our scheme-specific arrangements further than is appropriate, to the detriment of their members. As the detail of the arrangements is necessarily complex, there is a real risk that attempting to deal with it in primary legislation will inadvertently weaken the funding regime as a whole and undermine the ability of the Pensions Regulator to tackle the very issues that these reforms were designed to address. Rather, we think that the best place to deal with these matters is in regulations—following a full consultation. That way, we can work closely with the full range of interested parties, effectively calibrate the system and get the right balance between member security and employer affordability. By placing such matters in regulations, we will retain the flexibility in the future to adjust the relevant parameters should the evolving economic situation demand it.
What I can do now is set out some key principles of how we will proceed with framing the secondary legislation, which I am happy to put on the record and am confident will provide noble Lords with the reassurance they are looking for. Much of our original thinking was driven by the fact that most schemes are closed and maturing, but we completely accept that we need to be clearer about our thinking on other important groups of schemes. These are the schemes that continue to admit new members. Many of these schemes will not be maturing in the same way as closed schemes and some of them will be admitting sufficient new members to avoid maturing at all. A genuinely scheme-specific approach has to recognise the characteristics of such schemes and treat them appropriately. I am therefore grateful to the noble Baroness, Lady Bowles, and others for helping us to focus our thinking on these schemes. Let me make it clear now that the Government, having further considered the debate on the Bill and feedback from the pensions industry, fully intend that the defined benefit funding regime will remain scheme specific, and any bespoke approach should build on this foundation. This regime will continue to apply flexibility to take account of individual scheme circumstances.
The department confirms that detailed provisions for ongoing defined benefit funding, including any necessary assessment criteria and metrics, will be set out in regulations and in the Pension Regulator’s defined benefit funding code of practice, which will acknowledge the position of open and less mature schemes. As noble Lords have said, Ministers at the DWP have gone to great lengths to make themselves available to those who have pressed them on the position of schemes that remain open to new members. Both Ministers and officials have had extensive discussions with interested Peers, and others, including on schemes that remain open to new members. I also understand that interested Peers have been able to discuss these matters in detail with senior officials at the Pensions Regulator. This has been a highly productive engagement and, as I have said, it has been instrumental in guiding us to a better and more refined policy position. That is something I expect to continue.
Prior to the publication of the draft regulations, the Government can commit to an engagement programme with interested parties, including a range of schemes. These will include those remaining open and immature. They will launch a consultation document informed by this engagement. The Government will also publish a regulatory impact assessment of the draft regulations and the Pensions Regulator will publish an impact assessment alongside its revised funding code. These will include analyses of different de-risking approaches on members and sponsors of all schemes, including those that are open or immature, and those that are not targeting buyout.
We absolutely do not want to see good and viable defined benefit schemes close unnecessarily. We want them to be treated on their merits in a truly scheme-specific regime. We have said that open schemes should be able to provide the same level of security for members as closed schemes. I want to make it absolutely clear that this does not mean that they necessarily need to invest in the same way. We simply mean that members in an open scheme should be able to enjoy the same level of confidence that the benefits they have worked hard to build up will be paid in full, as for members in a closed scheme. We completely agree that open schemes that are not maturing and have a strong employer covenant should not be forced into an inappropriate de-risking journey. We will ensure that such schemes and employers which can support a higher risk and higher expected reward investment strategy can continue to invest in this way. If they are already doing the right thing, they should not need to significantly increase contributions as a result of these new measures.
The Government accept that for some schemes, depending on the circumstances, de-risking is not the best way to safeguard members’ benefits. Member benefits can be best safeguarded by an appropriate integrated risk management strategy determined after careful analysis by the trustees, which takes account of time horizon, liquidity, employer covenant and appropriate diversification.
This is the way that we intend to proceed as, with the help of close engagement with interested parties, we work on the regulations that will set out the detail of how the funding regime will operate. I hope that what I have said reassures noble Lords of our intentions and that the noble Baroness will feel able to withdraw her amendment.
The Deputy Speaker (Baroness Garden of Frognal) (LD)
My Lords, I have not received any requests to speak after the Minister, so I now call the noble Baroness, Lady Bowles of Berkhamsted, to reply.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, I am not normally a speaker on DWP matters—I am usually in the business and Treasury box—but, after a first foray on this Bill, or into this sweet shop, as the noble Lord, Lord Davies, would put it, maybe I should come again.
I thank all those who have spoken in this debate. The issues have already been explained and the Minister in reply has given the reassurances that were sought. Before I formally withdraw the amendment, I thank the Minister for the way in which these proceedings have been conducted, for her geniality and openness and, similarly, thank the officials from the department and the Pensions Regulator, and everyone for tolerating me.
As has been said, the issues are complex and interlinked. I am grateful to hear the Minister say that the debate around this has been influential and has refined thinking. I acknowledge that some employers will abuse the system and, because of its complexity, I accept that the Government do not want to put words into the Bill that are hard to change and which might give rise to unintended consequences. Of course, I would have preferred to see a little something there, but I understand the reasoning. I accept that there will be good consultation around the regulations and that all of us are looking for the same results.
I thank again noble Lords who have spoken today and supported me in my previous endeavours and all those who gave their expertise in earlier stages of the Bill. I am pleased that we are joined by the noble Lord, Lord Davies of Brixton, and think that we will benefit from his presence greatly in future. Others who have also assisted include my noble friend Lord Sharkey from these Benches, as well as the noble Baronesses, Lady Drake and Lady Young. I also thank the various pension schemes that have been generous with their time and information, so we were able to look at the sort of spread of assets and risks that they were talking about and did not come to this debate without a good basis of information; we knew that our arguments were supported.
It has been a good co-operative effort. I doubt that it is the end of the story, as there will be more consultations and things to watch. I hope and expect that the engagement with noble Lords by the Minister and the department and our co-operation with one another will continue. For now, I beg leave to withdraw the Motion.
Baroness Sherlock
At end insert “, and do propose Amendment 4D in lieu of the words so left out of the Bill—
“221C Guiding objectives
(1) In exercising any powers to make regulations or otherwise to prescribe any matter of principle under this Part, the objectives of the Secretary of State must include supporting the ability of the trustees of a relevant scheme to decide the funding and investment strategy for the scheme taking into account the current and future maturity and liquidity of the relevant scheme consistent with the trustees’ duty to invest assets in the best interests of members and beneficiaries.
(2) In subsection (1), “relevant scheme” means an occupational pension scheme that is not near significant maturity and is open to new members and is reasonably expected to remain so, either indefinitely or for a significant period of time.””
Baroness Stedman-Scott
That this House do agree with the Commons in their Amendment 5.
Royal Assent
Thursday 11th February 2021
(3 years, 9 months ago)
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