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Pensions Bill
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The Deputy Chairman of Committees (Lord Brougham and Vaux) (Con)
Good afternoon, my Lords. If there is a Division in the Chamber while we are sitting, the Committee will adjourn for 10 minutes.
Clause 37: Automatic enrolment: powers to create general exceptions
Amendment 62D (in substitution for Amendment 62C)
Baroness Sherlock
“(5) Regulations under this section shall not be made to exempt entire classes of business or businesses, such as small and medium-sized businesses, from automatic enrolment.
(6) Regulations under this section shall be laid before and approved by resolution of both Houses of Parliament.”
Baroness Sherlock (Lab)
My Lords, Clause 37 is headed: “Automatic enrolment: powers to create general exceptions”. I am tempted to rest my case there but I will press on a little. I hope that this will be a relatively uncontroversial amendment that the Minister can accept.
If the Committee looks at Clause 37, it will see immediately that it is drafted very broadly—too broadly, I suggest. In effect, it gives the Government the power by regulation to create exceptions from the employer duties under auto-enrolment in a way or to an extent that could undermine the intention of Parliament in establishing auto-enrolment in the first place.
When this clause was discussed in another place, the Pensions Minister said that the Government needed the powers to make regulations in order to ensure that employers do not automatically have to enrol people whom it will be a waste of time to enrol because they will be immediately removed; for example, people who have resigned, are retiring or have used their lifetime tax allowance. Apparently the clause is broadly worded because, the Minister said in the other place, we cannot predict the future need for exceptions. I suspect that our Minister’s brief contains similar assurances.
Clause 37(2) inserts a provision into the Pensions Act 2008 which enables the Secretary of State by regulation to provide for exceptions to the employer duty that may,
“be framed by reference to a description of worker, particular circumstances or in some other way”.
We accept that there will be circumstances in which it will be inappropriate to auto-enrol someone who is likely to want to be removed immediately, but it is our view that the clause is unnecessarily widely drafted—a view that is shared by others, including the TUC and the CBI.
In Committee in another place, the shadow Pensions Minister, my honourable friend Gregg McClymont, quoted from a letter from the CBI in which it expressed support for the intention of the clause but said it was too broadly drafted because:
“The inclusion of ‘in some other way’ would provide too broad a power to government to change the scope of automatic enrolment at any time it saw fit. For instance, it would provide the Secretary of State with a secondary legislation power to exempt some businesses. This is a move the CBI could not support, as it undermines the consensus that was reached on pensions reform by giving exempted firms a cost advantage”.—[Official Report, Commons, Pensions Bill Committee, 9/7/13; col. 352.]
If the Government want to exempt a category of business, they should come back to the Floors of both Houses and amend their legislation. This is not fanciful. It is not long since the Beecroft report recommended that micro-employers be exempted entirely from auto-enrolment.
This amendment makes it clear that Clause 37 shall not be used to exempt entire classes of business, such as small or medium-sized employers. This will ensure that the Government’s apparent intention for auto-enrolment to apply to all categories of employer and business will be honoured. If the Minister is of the same view as the Pensions Minister on this point—in other words, if it is the Government’s intention that no such general exemption should be made—there can be no reason to resist this amendment. If he does, he has some explaining to do.
Lord McKenzie of Luton (Lab)
My Lords, I support my noble friend’s amendment. Auto-enrolment has, initially, clearly been a success and the Government deserve credit for implementing the policy. But we should recognise that we are just at the beginning: although it has been up and running for 18 months, we are just approaching the point in April this year when smaller and medium-sized employers, those whose largest PAYE scheme covers between 50 and 249 employees, have to commence their duty.
There have already been a range of changes to the process, implemented by regulations, resulting from a review of early live running. Those changes mostly came into force last November, although some are due this coming April. The consultation on the draft regulations also canvassed views on other changes, including the proposition of excluding a certain category of worker from auto-enrolment. It sought more information on three situations, identified that it had a substantive response to the use of an exception, and committed to publish the results, with government proposals and a further consultation. When will the results be published? Will it be before Report? At the very least, can the Minister provide us with a list of the circumstances being considered, if those extend beyond the three identified in the briefing note, which states:
“The initial evidence suggested that there is a case to re-examine the appropriateness of the employer duty in some, very carefully specified, circumstances”?
However, as my noble friend has clearly set out in the amendment, the power taken in Clause 37 is a very wide one.
The circumstances covering someone handing in their notice, where the notice spans the automatic enrolment date, and where an active scheme member gives notice of retirement and stops making contributions could, it is suggested, be the subject of specific amendment. As for those individuals with fixed or enhanced protection for their lifetime allowances, the Minister might tell us how an exclusion might be framed so that the employer could operate without input from the worker. That those circumstances need to be addressed to avoid detriment to workers is clear, but at present the encouragement from HMRC is to do so by opting out. If the system for exemption depends on the worker lodging the existence of enhanced or fixed protection, perhaps with some validation from HMRC, I am not sure that that is a more effective route than the worker simply opting out.
If the rationale for Clause 37 is based on just those three circumstances, I am bound to say that it is not overly convincing. If we are to understand that a range of other circumstances have been identified which justify the clause, we must be entitled to know what they are. The Government must be aware of them from representations that they have already seen. The briefing note sets down some core policy principles against which suggested exclusions are to be tested. One of these is:
“Are the individuals unlikely to benefit from pension saving?”.
This has echoes of some of the challenges to auto-enrolment when the policy was first originated and being developed, particularly around older women just approaching retirement.
It is entirely reasonable that there will be changes to the operation of auto-enrolment arising from practical experience, but we should be cautious of wide powers to remove the employer duty of enrolment. That is the cornerstone of the policy. Of course, we are mindful that the duty has already in practice been narrowed by aligning the starting point with the level of the income tax personal threshold, thereby removing thousands of the low-paid from its benefits. We are also mindful that there is a subtext to the overall Bill about generating savings for the Treasury, so my noble friend is right to be cautious about this clause.
Lord Bates (Con)
My Lords, it is now two years since the rollout of automatic enrolment began and we are seeing how it works in practice. Automatic enrolment is a blunt instrument, since everybody who meets the relevant tests is automatically enrolled. There is emerging evidence that we should consider refining and targeting, but it is impractical to make refinements by amending primary legislation every single time. A degree of flexibility is an integral part of future-proofing the policy. This clause provides that flexibility, with a power to exclude prescribed types of workers from the scope of automatic enrolment.
I should respond to the points made by the noble Baroness, Lady Sherlock, and the noble Lord, Lord McKenzie. The inclusion of all employers, whatever their size, is part of the broad consensus that continues to underpin support for automatic enrolment. That is Her Majesty’s Government’s position. I will come back to the specific points, which have rightly been raised, at some point.
We need to take the oddities out of the system and this clause enables us to do just that. Automatic enrolment is not always appropriate. Indeed, in extreme cases, pension saving could lead to an individual incurring a financial penalty. Until now we have relied on opt-out as a solution: an individual can opt out of automatic enrolment if pension saving is not right for them. However, a problem remains: inappropriate enrolments, opt-outs and refunds still cause work for employers and frustration for the individual. We need to consider how we can remove, or at least reduce, the administrative burden in cases where automatic enrolment serves no purpose.
The Government’s consultation on technical changes to automatic enrolment last year shows significant support from employers, pension providers and financial advisers for limited, carefully crafted exclusions which help individuals where automatic enrolment has no benefit or makes no sense. We are currently looking at the evidence from that consultation with a view to publishing proposals when a power is on the statute book. So far, the evidence suggests some clear examples. One straightforward example is that people with enhanced or fixed tax protection status could face a tax surcharge if they make any further contributions into a pension. As well as this, automatic enrolment may be illogical for leavers, since it may make no sense to force an employer to enrol a worker into a company pension scheme if they are serving out their notice.
Any exclusion is likely to be sensible and uncontroversial, which is why the Government suggest that a negative resolution in these circumstances is an appropriate use of Parliament’s time. In terms of the breadth of this power, we have been clear from the outset that the intention of this clause is not to exclude entire employment sectors from automatic enrolment or to carve out a particular size of employer; that is a specific statement in relation to this.
We know that undersaving is most prevalent among low-to-moderate earners, those who work for employers who have not provided an accessible pension scheme or those who do not pay into one. These are the core policy objectives on which the consensus was built and to which we are still committed. We are not considering exclusions to the automatic enrolment duty simply because some employers tell us automatic enrolment is an inconvenience. This is about exceptional situations where it makes sense to take a person outside the scope of the Bill, hence the exemption. Although I can understand the aim of the amendment, it is trying to stop the Government from doing something that we have no intention of doing. As noble Lords will know, it would not ultimately constrain future Governments in any event.
The noble Baroness, Lady Sherlock, mentioned Beecroft. We have already firmly rejected proposals to cut micro-employers out of auto-enrolment. Workers in those firms have as much right to save for their retirement as anyone else; we have been quite clear about that. Measures have been introduced, such as the timetabling for the introduction of auto-enrolment meaning that smaller businesses, with fewer than 50 workers, are not affected by the reforms during the lifetime of this Parliament. This provides an additional breathing space. That is how we are seeking to tackle this and intend to make allowance.
On the words “in some other way” in the clause, which have been the focus of remarks by noble Lords, the power is there to exclude people for whom pension savings make no sense. We want to be sure that we can deal with future situations in which exclusion is clearly justified. The drafting of this power enables us to react to unforeseen circumstances. That is critical, particularly as we are dealing with such a complex and technical area. On what happens next with the power to make exemptions, the Government’s intention is to publish draft regulations for consultation later this year.
The noble Lord, Lord McKenzie, asked whether this was about saving tax, or tax relief. We are looking at the use of this power. Saving money for the Treasury will not be one of the factors we consider. Although, of course, general consideration of the management of fiscal balances is sensible, the primary purpose here is to ensure that employers of all sizes, and employees, take the opportunity to engage with pensions and save for their retirement. Ultimately, in the long-term, that is in the best interests of the Treasury, the Department for Work and Pensions—indeed for all of government—and, chiefly, the people themselves.
I understand the thrust behind the amendment and that it is important to get those remarks on the record, but with those reassurances, I ask the noble Baroness, Lady Sherlock, to consider withdrawing it.
Lord McKenzie of Luton
Nobody disagrees that there could be some limited and carefully targeted exclusions in particular circumstances, but I am trying to understand the circumstances that the Government have currently identified. They have laid out three of them in the briefing document, which suggests that they might have had representations on a whole range of other areas. I reiterate my question: can we know what circumstances, other than the three identified, the Government are focusing on that warrant an exclusion from the provisions?
In particular, one of those that has been identified deals with enhanced or fixed-protection provisions. I accept that there is a financial detriment for people who get auto-enrolment in those circumstances, but HMRC has advised them pretty clearly to opt out in that case. How, specifically, would the Government draft an exclusion to encompass that group of people? The enhanced or fixed-protection status of individuals would not be readily known to employers. Would an employee have to report it to an employer? How is that a better arrangement than the employee simply opting out?
Fundamentally, I am trying to understand how many circumstances the Government have identified where they think there might need to be an exceptional exclusion from auto-enrolment. I accept the Government’s good faith on that remaining the cornerstone of the policy, but how many other circumstances, given all that has gone on and all the representations and discussions to date, have been identified which warrant this power?
Baroness Sherlock
I have a question to add to that. I am grateful for the Minister’s explanation as to why the Government feel they need to have some flexibility to deal with circumstances as yet unknown, but I do not think that the Minister addressed what the problem is with the specific amendment I moved. After all, the amendment does not seek to prevent the Government from having those powers; it simply says that the Government may not make regulations in such a way as to exclude categories of business such as small and medium-sized businesses from auto-enrolment. What is the Government’s particular problem with this amendment?
Lord Bates
I will come to the noble Lord, Lord McKenzie, in the first instance. We have said that there are three categories, which he rightly referred to: tax protection, leavers and retirees. Those are the issues that we have identified. We are, of course, having a consultation. One of the challenges we invariably have is that we phrase a piece of legislation and make certain statements on the record in terms of the progress of that legislation through the House. We give certain assurances and then put something in to say, “This is to cover for unforeseen circumstances”, to which the legitimate question is: “What are those circumstances?”. The legitimate response to that has to be that they are unforeseen at present.
Responses to the consultation are currently being processed. They will be dealt with and published later this year and could reveal examples that we have not actually identified at present. This is a new policy and a new area and we therefore need to look at this. As I made my remarks about unforeseen circumstances, I gave examples of areas where it would be unacceptable to exclude people from the terms. We have rejected these exemptions and certainly would not want to introduce them. We have identified casual staff and teachers with second jobs, for instance, as being examples of people for whom we would not want this provision to apply. However, there will be further consultation on this issue and I ask noble Lords, if not quite to trust the Government, at least to accept that sufficient assurances have been put on the record. We recognise that there is broad consensus, but this needs to apply to everybody. However, this is a young policy in general terms and therefore flexibility is still required.
Lord McKenzie of Luton
I do not want to labour this for too long but it is important that it is clear. As regards the range of circumstances under consideration—in addition to the three of which we have already had notification—will we get any details, or at least the headlines of those circumstances, before we get to Report? On the three that have been identified, does the Minister accept that you could deal with those—particularly two of them—through specific legislation rather than giving a power to the Secretary of State? I come back to my point about the enhanced and fixed protection provisions for the lifetime allowance. Do the Government have it in mind to craft an exclusion for those circumstances? How does the Minister see that working?
Lord Bates
The short answer is that it is not easy. As the noble Lord will well know, given his experience as a distinguished Minister in the previous Government, it is not easy precisely to craft provision in those areas. We will seek to produce further examples by Report, following the responses received to the consultation. However, I can certainly assure the noble Lord that none of the responses has suggested that small employers should be excluded from the scheme. I know that is at the heart of the concern and, I hope, is at the heart of the reassurances which I have sought to give.
Baroness Sherlock
My Lords, I thank the Minister for that response, but confess that I am still a little uncertain about what the Government’s position is. I understood him to say that it is the Government’s policy that all categories of employer should be included and that the Government are still consulting and categories of person may emerge who they do not yet know about who they may wish to exclude in the future, and therefore they need to keep this open. So the question I am left with is: are the Government open to the possibility that somebody may make a compelling case for excluding a category of employer by size? If they are not, there is no reason for them not to accept this amendment. If they are, then, frankly, their assurances are not worth the time that they have been given today. I am disappointed that the Minister has failed to address the specific amendment. However, as we are in the Moses Room, and I do not have the option to do anything other than withdraw the amendment, I beg leave to withdraw it.
Lord Bates
“Alternative quality requirements for UK defined benefits schemes
(1) The Pensions Act 2008 is amended as follows.
(2) After section 23 insert—
“23A Alternative quality requirements for UK defined benefits schemes
(1) The Secretary of State may by regulations provide that a defined benefits scheme that has its main administration in the United Kingdom satisfies the quality requirement in relation to a jobholder if any one or more of the following is satisfied—
(a) the scheme is of a prescribed description and satisfies the quality requirement under section 20 in relation to that jobholder;(b) the cost of providing the benefits accruing for or in respect of the relevant members over a relevant period would require contributions to be made of a total amount equal to at least a prescribed percentage of the members’ total relevant earnings over that period; (c) in the case of each of at least 90% of the relevant members, the cost of providing the benefits accruing for or in respect of the member over a relevant period would require contributions to be made of a total amount equal to at least a prescribed percentage of the member’s total relevant earnings over that period.(2) For this purpose—
“contributions” means contributions to the scheme by, or on behalf or in respect of, a relevant member;
“relevant earnings” means earnings of a prescribed description;
“relevant members” means members of the scheme of a prescribed description;
“relevant period” means a period specified in or determined in accordance with the regulations.
(3) A percentage prescribed under subsection (1)(b) or (c) must be at least 8%.
(4) Regulations under subsection (1)(b) or (c) may make provision—
(a) about how to calculate whether the requirement is satisfied, including provision requiring the calculation to be made in accordance with prescribed methods or assumptions;(b) requiring benefits of a prescribed description to be disregarded in determining whether the requirement is satisfied;(c) that a scheme only satisfies the requirement if the scheme actuary certifies that it does; and for this purpose “scheme actuary” has the prescribed meaning.(5) Section 13(3) (meaning of “earnings”) applies for the purposes of this section as it applies for the purposes of that section.
(6) The Secretary of State must from time to time review any regulations in force under subsection (1).
(7) A review must be carried out—
(a) during 2017, and(b) after that, no more than three years after the completion of the previous review.”(3) In section 24 (quality requirement: UK hybrid schemes), in subsection (1)(b), for “23” substitute “23A”.
(4) In section 28 (certification that quality requirement or alternative requirement is satisfied)—
(a) after subsection (3A) insert—“(3B) This section also applies to a defined benefits scheme that has its main administration in the United Kingdom and is of a description prescribed under section 23A(1)(a).”;
(b) in subsection (4), after paragraph (d) insert—“(e) for a scheme within subsection (3B), means the quality requirement under section 23A(1)(a).”(5) In section 29 (transitional periods for money purchase and personal pension schemes), in subsections (1) and (3) omit “for money purchase and personal pension schemes”.
(6) Section 30 (transitional period for defined benefits and hybrid schemes) is amended as follows.
(7) In subsection (3), at the end of the substituted subsection (2) insert—
“A reference in this subsection to a scheme does not include a scheme to which section 30(11)(a) or (b) applies.”(8) In subsection (5), in the substituted subsection (2)—
(a) in paragraph (a), after “defined benefits scheme” insert “other than a scheme to which section 30(11)(a) applies”; (b) in paragraph (aa) (inserted by section 38 of this Act), after “a hybrid scheme” insert “other than a scheme to which section 30(11)(b) applies”; after paragraph (c) (inserted by section 38 of this Act), insert—“(d) becomes an active member, with effect from the automatic enrolment date, of an automatic enrolment scheme which is a defined benefits scheme to which section 30(11)(a) applies, or(e) becomes a defined benefits member , with effect from the automatic enrolment date, of an automatic enrolment scheme which is a hybrid scheme to which section 30(11)(b) applies.”(9) After subsection (10) (inserted by section 38 of this Act) insert—
“(11) In subsection (2) references to a scheme do not include—
(a) a defined benefits scheme that satisfies the quality requirement in relation to the jobholder by reason only of section 23A(1)(a), or(b) a hybrid scheme if—(i) the appropriate paragraph of section 24(1) for any provisions of the scheme is paragraph (b) (those provisions are referred to below as “the defined benefits section”),(ii) the defined benefits section satisfies section 23A(1)(a) as applied by section 24(1)(b), and(iii) the defined benefits section does not satisfy any of the other requirements mentioned in section 24(1)(b).””
Lord Bates
My Lords, this introduces alternative quality requirements for defined benefits schemes being used for automatic enrolment. It will simplify the task of determining whether a defined benefits scheme is good enough to provide both increased flexibility for employers and protection for members’ benefits.
By way of context, I should first explain that currently, if an employer wishes to use a defined benefits scheme for automatic enrolment, the scheme must either be contracted-out, and provide benefits broadly equivalent to the state second pension, or provide benefits broadly equivalent to, or better than, a hypothetical “test scheme”. There is a separate test for money-purchase schemes based on minimum contributions, set at 8% of qualifying earnings.
These amendments add to these arrangements in two ways. First, they make it possible for certain schemes that are defined benefit in legal terms, but actually have a defined contribution structure, to be assessed against the money-purchase scheme requirement.
The Government will define the schemes to which this could apply in regulations but an example might be one where contributions are set out in the scheme rules—as with a money-purchase scheme—but there is a guarantee over investment performance that means it does not meet the strict legal definition of a money-purchase scheme. Such a scheme might well meet the money-purchase quality requirements but it would be difficult to show how it satisfies the test scheme standard. That is because the benefits are not defined in a way that is comparable with the test scheme benefits.
These amendments also—
Lord Bates
My Lords, these amendments allow for two simpler alternative tests for a scheme to demonstrate that it is of sufficient quality. These were developed following last year’s consultation on technical changes to automatic enrolment, asking for views on whether there is a simpler way to determine whether a defined benefit scheme is good enough for automatic enrolment.
As well as calling for a general simplification in these rules, responses to the consultation highlighted that once the contracting-out period ends in April 2016, all those schemes that are currently contracted out, and so considered good enough, must satisfy the test scheme standard. This is considered unnecessarily complex and burdensome, particularly as, until the end of the contracting-out period, the schemes will have satisfied the higher standard of the reference scheme test. The alternative tests provide for a scheme to be used for automatic enrolment if the cost to the scheme of the future accrual of benefits for active members would require contributions that are at least equivalent to one of two prescribed percentages of relevant earnings. The first will apply at the aggregate level, looking at the scheme as a whole, and the second will apply at the individual level and must be satisfied for at least 90% of relevant members. Moreover, in order to provide assurances about the quality of schemes satisfying this alternative test, the amendment ensures that the prescribed amounts will not be lower than 8% of relevant earnings, in line with the minimum level for total contributions into a qualifying money-purchase scheme.
We are mindful of the need to strike the right balance between increasing simplicity and flexibility and ensuring adequate member benefits across all qualifying schemes. This balance will be one of the key issues to explore as we consult stakeholders on the detail of the alternative tests, and will also be reviewed in 2017 to ensure that the legislation is working as intended. I beg to move.
Baroness Sherlock
My Lords, I thank the Minister for his explanation of these amendments. I have two questions. He may have answered them but, although I listened hard, it is hard to be sure. First, will he confirm whether the Bill, with these amendments, will qualify the existing accrued rights protections in any way? Secondly, will he assure us that, given the variations in definitions of pensionable pay, the new defined benefit scheme qualifying tests will be of no lesser standard than the certification alternative requirements used at the moment for employers using money-purchase schemes but using an alternative definition?
Lord Bates
I certainly give the noble Baroness the assurance that she rightly seeks with her second question: there will be that minimum standard. In answer to her question as to whether the amendments will qualify in any way the existing accrued rights protections, nothing that we are doing in this clause or in the regulations that we plan to make under it will have any impact on accrued rights.
Lord Freud
“(4) In subsection (5), in the substituted subsection (2)—
(a) in paragraph (a), for “or a hybrid scheme, or” substitute—“(aa) becomes a defined benefits member, with effect from the closure date, of an automatic enrolment scheme which is a hybrid scheme,”;(b) after paragraph (b) insert—“(c) becomes a money purchase member, with effect from the automatic enrolment date, of an automatic enrolment scheme which is a hybrid scheme.””
Lord Browne of Ladyton
“(2) In this section—
(a) “charges”; and(b) “transaction costs”,shall be defined in regulations by the Secretary of State.(3) Before making regulations under subsection (2), the Secretary of State must undertake a public consultation, which must include the views of—
(a) the Financial Conduct Authority; and(b) the Pensions Regulator.(4) With reference to subsection (2)(a), any public consultation must consider the different elements which comprise charges and not just the annual management charge.
(5) Such charges, together with any transaction costs incurred by the funds in which qualifying schemes are invested, shall be declared on an annual basis to the Pensions Regulator, which shall maintain a public register thereof.
(6) The Secretary of State shall by regulations set the standards by which pension schemes must declare charges and transaction costs for the purposes of the register and for declaration to their members and their members’ employers.
(7) The standards set out in regulations under subsection (6) shall be reviewed every three years.
(8) The Secretary of State shall have power to make regulations ordering other disclosure arrangements on administration charges.
(9) Regulations under this section may not be made unless a draft has been laid before and approved by resolution of both Houses of Parliament.”.
Lord Browne of Ladyton (Lab)
My Lords, I will also speak to Amendment 62H, which is again in my name and that of my noble friend Lady Sherlock. Amendment 62G would amend Clause 41, which is the statutory basis for the Secretary of State to make regulations to restrict charges or impose requirements on work-based pension schemes. The amendment would amend that clause to enable the Secretary of State, following a public consultation, to set the standard by which pension schemes must declare charges and transaction costs to their members and the members’ employers.
Amendment 62H would give effect to a DPRRC recommendation and prevent the Secretary of State from amending legislation “whenever made” and imposing requirements on certain work-based pension schemes by secondary legislation, thus bypassing full parliamentary scrutiny. The DPRRC made this recommendation because it was not persuaded adequately by the Government’s justification for granting themselves this power. We agree with the DPRRC. That is the simple basis for Amendment 62H.
While I am dealing with this group, the noble Lord, Lord Lawson, has two amendments in it. Amendment 63 would create a power to require disclosures at least annually of certain management and transaction charges incurred by administration and management of investment portfolios. Amendment 67 would create a power for regulations to be made requiring work-based pension schemes to disclose periodically certain costs and information relating to charges for management of investment portfolios. I shall return to these amendments later. However, by proposing them the noble Lord has made a powerful intervention into this debate and one I hope that his noble friends will treat with the respect it deserves.
Finally, there is government Amendment 70, which would give effect to a DPRRC recommendation that the first set of regulations under paragraph 1 of Schedule 17 should be subject to affirmative procedure. We support that.
In my noble friend Lady Sherlock’s excellent speech at Second Reading on 3 December 2013, in considering this part of the Bill she made the compelling point that the state owes a serious duty of care to the large numbers coming into auto-enrolment. It is crucial that every one of the 10 million auto-enrolled between 2012 and 2017 can be sure of getting value for money from that pension scheme. That necessity for value for money drives all the Labour amendments to Part 5 of the Bill, on private pensions.
In my noble friend’s Second Reading speech, she said:
“This is a huge industry in the UK. About £180 billion is invested in trust schemes and £275 billion of assets is invested for DC schemes. Some 180,000 people with assets worth £2.65 billion have money in pension pots with annual management charges of over 1%, and 400,000 people a year buy an annuity. The numbers are eye-watering but the principles are pretty simple: the pension industry has to deliver value for money. However, the OFT study published this year made it clear that there are some serious issues in this industry which need addressing”.—[Official Report, 3/12/13; col. 147.]
Her amendments are designed to address those issues. Amendment 62G argues for the full disclosure of all costs and charges, including the costs extracted by fund managers.
I am sure that all Members of your Lordships’ Committee agree that pension charges must be reasonable for people to have the necessary confidence to invest their hard-earned money in pension schemes. From the evidence available now, it is difficult to exaggerate how obscure the charging structure on pensions is. Pensions are pretty complicated to begin with because, in an occupational pension scheme, the employer—not the employee—is the person buying the pension. That pension schemes are then invested in asset classes by fund managers further complicates the challenge of understanding what is charged.
For reasons we have debated repeatedly in this Bill, the market cannot address this challenge. I regret that the Government have been slow to understand the depth of the problem in the pensions market. My right honourable friend Ed Miliband first raised this issue in July 2012. He identified pensions as the next big scandal, warned that savers must be protected from the scandal of hidden pension fees that can see people stripped of huge percentages of their savings, and called for a new regime imposing a clear charging structure on pension funds. He warned that fees need to be capped. He was accused by the Pensions Minister of being irresponsible. Regretfully, the Minister joined industry voices who were making accusations of scaremongering. The next day, the RSA published Seeing Through the British Pension System, which found that 21 out of 23 providers denied that there were any additional charges other than the annual management charge and administration costs. They failed to reveal what is charged for items such as audit, custodial costs and other costs such as taxes, lending fees and broking commissions.
Lord Lawson of Blaby (Con)
My Lords, I will speak to Amendments 63 and 67 in my name, which are linked. I am glad that some time after I tabled these amendments the Official Opposition tabled their amendments, which are very much on the same point. I hope that what I did may have been some kind of a stimulus to them, because we are to a considerable extent on the same point.
There is a difference between the approach that the noble Lord, Lord Browne, takes and that which I take. However, before I explain the difference, I wish to articulate what the problem is. This problem is not confined to the pension area but is well known to those who have studied any economics at all. It is known in the trade as the principal agent problem, where a principal cannot achieve his or her economic objectives without giving an agent responsibility for dealing with it. The incentive for the agent may be very different from the incentive with which the principal originally entrusted the agent to carry out what is needed. Here the principal is essentially the pension fund beneficiary, via the pension fund itself, and the agent is the investment manager. How is this of interest? I would hope that my noble friend the Minister, even if he does not accept either the Labour amendment or my amendments, will agree that there is a problem here that has to be addressed. I hope that he will say how the Government propose to address it.
There are two differences between the approach adopted in the amendment of the noble Lord, Lord Browne, and that adopted in mine. He seeks primarily to regulate various charges made for the carrying out of the investment. He mentioned disclosure, but the issue is mainly the cap on charges and other forms of regulatory charges. There are problems with that approach, which I shall not spell out because I do not want to detain the Committee.
What I have gone for is compulsory disclosure. In a competitive market, compulsory disclosure will go a very long way towards removing the mischief. If there is proper disclosure, there is no need for a cap or the regulation of charges in the first instance. We can then see how it works out. Events may subsequently suggest that there may be some need for regulation but initially the remedy must be to require disclosure. I have mentioned seven types of cost that I believe should be disclosed. The noble Lord, Lord Browne, said that the sector might very inventively find some other form of charge that does not fall within these headings. I think that is highly unlikely. If noble Lords look at the headings, it is difficult to see how any charge could not fall under one or other of them.
The important thing is the principle. The funds are inclined to say, “You don’t need to worry about costs; all that matters is the investment performance of the fund net of costs”. That is not acceptable. The costs are massive in this area. Of course, the investment performance may differ according to what period of time you look at. One fund may have a very good performance during one period and a bad performance during another. One has to look at the costs. Some costs are not revealed at all; some are. Even with the costs that are revealed, there is such a lack of consistency that it is difficult to compare them and to see whether or not they are remotely fair.
There are also other defects in the system. One is, I have to say, one of the many defects of the accountancy profession in this country. According to the accountancy profession, the Investment Management Association is responsible for writing the statement of recommended practice on cost disclosure for fund managers. This is ludicrous. You are asking the foxes to regulate the hen coop, as it were. If my noble friend the Minister looks at this, I am sure that he will find that it needs a remedy.
There is another relevant point. At the end of the day it is not merely the pension fund beneficiaries who are being cheated by these excessive costs—and many of these costs are grossly excessive—but there is also the problem of pension fund deficits. The more costs are ramped up unnecessarily by the pension funds, the worse that will make the problem of deficits. Of course, there is no incentive for investment managers to expose the costs that they are incurring in their recommendations to the funds if they are not obliged to do so. It will only make most of them look rather expensive.
There have been some studies in this area, both here and in the United States. Among the findings of these studies is that there is absolutely no correlation between investment management fees and performance. There is also no correlation between portfolio churn, which creates a lot of income for various people, and performance. There is some evidence, although it is not conclusive, that portfolios are deliberately churned in order to generate commissions. In the United States, a study has been done that shows that most foreign exchange currency pairs are not monitored but that, when they are, the foreign exchange costs paid by funds are halved. There are problems across the board, such as the fact that custodian banks pay lower rates on cash than money market funds or that financial intermediaries can collect excessive rewards.
The FRC has some of these problems in its sights, but it is totally inadequate. I believe that the FCA is pressing fund managers to manage their research procurement, another area of costs that I have identified, in a more defensible and transparent way. However, it is no accident that typically pension funds meet in Manchester and fund managers meet in Monte Carlo. I hope that my noble friends, who have done such an excellent job on this Bill, will take on board that this is a serious problem—the principal agent problem, as it affects pensions—and must be addressed one way or another.
The Lord Bishop of Chester
My Lords, I warmly support both these approaches. Although they are contrasting—the noble Lord, Lord Lawson, emphasises transparency while the other approach offers appropriate consumer protection through some degree of regulation—I do not think that they are incompatible with each other.
In approaching this matter I follow what the noble Lord, Lord Bates, said in response to an earlier amendment: the overall aim is to engage people so that they save for their retirement. As I said earlier in the passage of the Bill, the lack of provision in retirement for future generations is a time bomb. The Bill, which in general I warmly support, attempts to address that.
The sheer complexity of this area is a problem, as we have discovered in this Committee. If we find this issue complex, how does a member of the public find it when they are making a decision about whether to put additional contributions into their scheme? The money-purchase schemes that are now predominant will work only if people add contributions of their own and do not just rely on the employer contribution. I think that we need transparency in this area—not only the details set out by the noble Lord, Lord Lawson, but an overall figure of costs bringing together all the different costs discovered by the Which? report. Transparency over overall costs is necessary or people will feel disengaged.
One of the problems in our society is disengagement with politics in general, partly caused by the sheer amount of legislation turned out by Parliament. No one really understands what is going on and so people disengage from it. With all the jargon in the investment industry, not least in relation to pensions—terms such as “bid/offer”, “revenue splits” and so on—the average person in the street simply would not know what is being referred to. We need an overall figure that helps people to understand how much of the money that they are investing is actually invested, and investment returns, in a way that is transparent and where the consumer is generally protected. A few years ago, stakeholder pensions were an attempt to achieve this, but I am not sure what happened to them. As far as I can see, these amendments are entirely consonant with the broad push of Schedule 17. I conclude my remarks.
The Lord Bishop of Chester
I am not used to being interrupted in my perorations, but I was coming to an end. Schedule 17 says that the Government,
“may impose duties on the trustees or managers of a relevant scheme”.
These amendments spell out what those duties might be, in the interests of transparency, with a view to try to encourage people to invest in these products with some certainty as to how much of their money is going to be invested. I hope that the Government will look sympathetically on the issues that have been raised.
Lord German (LD)
My Lords, I am grateful to the noble Lords, Lord Browne and Lord Lawson, for raising these issues, because they allow us to examine the approaches which might be taken in the regulations which may follow and to ask the Government to describe which of these approaches, or what combination of these approaches, they might take. It is quite clear, in my view, that there are two separate approaches: one based on regulation and the other based on openness, transparency and disclosure. There is no reason why you cannot have some of one and some of the other; where the balance is drawn is a matter for debate and discussion. Ultimately, this matter goes to the heart of the success of our pensions industry for savers. The saver must have trust in a system which has a long tail behind it to understand that his or her money is being invested wisely and will return on that investment to provide a pension.
Auto-enrolment will, in the long run, be a success only if the schemes into which people are enrolled are well run and invest people’s savings responsibly. This is particularly important in DC schemes because, in the end in those schemes, the saver bears the investment risk of that complex decision process, which is more often than not made entirely without the saver’s knowledge or input. I was very interested in the chain described by the noble Lord, Lord Lawson, which stretched from Manchester to Monte Carlo. I dare say that if you started to plan these chains out around the world, you would probably find that these decisions were taken in all sorts of places and the connections very wide. That helps demonstrate the length of the chain in investment decisions, particularly if you start with the saver.
Of course, auto-enrolled savers do not choose their own pension provider. Poor pension companies might not become immediately evident to the saver. The best governance of the system would ensure robust oversight of savers’ interests and, most importantly, open communication with savers. It is not always obvious that those in the investment chain place the obligation to protect the best interests of savers at the heart of their decisions, particularly if they are in Monte Carlo. Fundamentally, that means improving transparency and promoting the disclosure of clear and relevant information to savers, as well as ways in which savers can easily find out information about their own savings.
I hope that the Government will tell us a little bit today about how they propose to deal with these very important issues and which approaches they intend to take that might guide the legislation that is to follow in regulations. Could my noble friend say something about how they intend to make the application of the UK stewardship code applicable to all pension schemes into which people are auto-enrolled?
Baroness Donaghy (Lab)
I just want to say a few words about the culture within the financial services companies and how difficult it is, given that culture, to have any compliance rules that staff will obey if their jobs depend on selling products. I think it was the whistleblower Dave Penny, who worked for Lloyds TSB, who gave a long list of tricks of the trade that he had tried to warn against. We all know the fines that that company had to pay for using those tricks in both PPI and bond selling. Mr Penny said:
“A supposedly strict compliance regime is meaningless if the management style is putting immense pressure on staff to sell, sell, sell. To keep their jobs, staff will always find ways around compliance”.
That has not gone away just because of the massive fines and compensation that these companies have paid. Only a couple of months ago, a woman in her 60s received a cheque from her son for £35,000. She planned to put that into a stock market investment. That same day that the money arrived in her current account, she was called by a Lloyds employee, who told her that the money could be at risk—an extraordinary claim to make about funds left in the care of a clearing bank. The Lloyds customer said, “The woman at the other end of the line said that my money might not be safe in my current account over the weekend and recommended that I transfer it to a savings account where it would be less easy to steal. I was naturally very worried about this and the bank did not really explain why my money would not be safe in my current account. The whole thing caused me a great deal of distress and eventually my husband intervened, and called the bank to say I did not want to transfer my money to a savings account and went ahead with my original investment plans”.
Of course, there is a financial incentive to place money in an investment account in a bank, no matter how low the interest rates compared with a current account, which is the sole reason why that employee made the effort to contact that person. I realise that that is not of direct relevance to these amendments, except to say that compliance will not work unless you deal with the issue of the culture in these companies. We will see all these tricks of the trade happening again, particularly as the Government are going on the pot-follows-member formula. This will give many more opportunities for companies to salami-slice their charges as each of these small pots is transferred.
Lord Bates
My Lords, this has been a useful debate with lots of high-quality and thoughtful interventions. I will try to follow that standard by putting some remarks on the noble Lord’s amendments on the record, and also on my noble friend Lord Freud’s Amendment 70.
As your Lordships will be aware, we launched our recent consultation on charging in October 2013, following on from the Office of Fair Trading’s September 2013 market study into defined contribution workplace pensions. That study raised concerns, which the Government share, about the weakness in the buyer side of the market—a point made powerfully by the noble Baroness, Lady Donaghy, in recounting those examples—the complexity of the product and a lack of transparency, which hinders consumers’ abilities to compare schemes. My noble friend Lord Lawson, a distinguished economist, mentioned the principal agent problem, which has at its heart, in an economic context, asymmetry of information. Transparency must therefore be part of the play which somehow levels the playing field between one side and the other.
Our consultation sought views on how the total cost of scheme membership, including transaction costs, might be captured, reported and managed. My noble friend Lord German rightly said that perhaps it was not an “either/or” solution, but more of an “and” solution. That was reflected in the consultation’s remit, which presented not just one idea but alternative measures to improve the transparency and disclosure charges, as referred to by my noble friend Lord Lawson with regard to his proposed new schedule: a cap on charges on default funds of defined contribution workplace pension schemes, a point made powerfully by the noble Lord, Lord Browne; a ban on active-member discounts and commission; and an extension of the ban on consultancy charges to all schemes used for automatic enrolment. Quite a wide-ranging consultation was launched.
By November last year we had 160 written responses from the evidence received. We will be publishing our response to this consultation shortly. In fact, Steve Webb, the Minister for Pensions, will be updating the other place on his response to the issue of a cap on charges on Thursday this week. I know how the machinery of government works; that does not quite deliver what we want before us in Grand Committee as we consider the amendment. But that information will be in the public domain, and I am sure will be a source of debate for others to draw upon on Report. I will offer some reassurances in the interim.
Lord Browne of Ladyton
Before the Minister moves off that point, I am conscious that if the FT report of Friday 17 January was based on information that should not have been in the public domain, the Minister will be constrained in what he can say. Those of us who have been in that position understand that. However, does the expected update from the Pensions Minister, Steve Webb, relate to the very consultation that has been reported in the FT as being postponed—I think it says shelved for at least a year—potentially indefinitely? Is the Minister prepared to address the specific piece of evidence which suggests that officials briefed members of the industry that that was the case—last week, it is said, which presumably was the week before last?
Lord Bates
The noble Lord was a very experienced Minister and a much more senior one than I will ever be.
Lord Bates
The noble Lord will therefore know that our position is that we do not comment on speculation in the press, even when it is in the Financial Times, and that the Minister’s announcement, which will be given to the House later this week, will be delivered first to the other place, and therefore we will have to respond to it.
Lord Lawson of Blaby
I am glad to hear that Steve Webb will make a statement in another place on this range of issues. Will my noble friend go further and say that the statement will accept the problem of the principal agent position as it affects pension funds, as was outlined in the contributions made by the noble Lord, Lord Browne, and myself, in this debate, and that it will put forward a remedy?
Lord Bates
After making deferential remarks to the noble Lord, Lord Browne, I have to make even more deferential ones to the noble Lord, Lord Lawson. The direct response is that I am not privy to the content of that statement, confirmation of which has been received only recently. However, addressing the principal agent problem which he so eloquently outlined for us was at the heart of the consultation process which was launched back in October, and was at the heart of what the OFT was driving at in its review. Therefore, in responding to that consultation, I reassure my noble friend that he will find—I hope—that this offers the reassurances he seeks. If not, he is at liberty to bring this matter back on Report, should he choose not to press his amendment at this stage.
On the definition of charges and transaction costs, Schedule 17 gives the Secretary of State the power to restrict administration charges by regulation. In the consultation we proposed specifying a broad definition of charges to encompass any expense that does not result in the provision of pension benefits for a member. We also asked for views on whether transaction costs should be included within a charge cap. Any charges that are restricted—even those under a possible cap—will have to be defined in regulations. These regulations will, of course, be subject to public consultation and we have accepted the DPRRC’s recommendation that these regulations be subject to the affirmative procedure on first use. Government Amendment 70 will achieve this.
With regard to the noble Baroness’s Amendment 62H on the Henry VIII power in Schedule 17, we have noted the comments and recommendations put forward by the DPRRC. However, we believe that it is vital that the Government’s ability to regulate effectively in this area is not inadvertently undermined by future legislation that could not have been foreseen. We are back to an earlier point.
Lord Browne of Ladyton
My Lords, I thank the Minister for his reply to this short debate and for the answers he has given to questions. I am grateful—and noble Lords will be grateful—for his acceptance that transparency and disclosure are a necessary part of the reform that we are engaged in; for his confirmation that he and the Government share the concerns that have been expressed in this debate; and, in particular, for his assurances, in so far as they are assurances, that the response to the consultation can be expected shortly but that we will receive from the Pensions Minister Steve Webb on Thursday in the House of Commons an update on the Government’s response to the consultation.
I feel that we now have to wait until Thursday to see whether this response is adequate and, in terms of what it allows us to expect or anticipate, whether it puts a timeous set of potential actions in place that will meet the challenges of the continued rollout of auto-enrolment and the increasing numbers of people who are being engaged by default in individual pension schemes. I will come back to that in my peroration.
I thank all noble Lords who have contributed to this debate. First, I thank the noble Lord, Lord Lawson, for his engagement. I can confirm that there was some stimulus from the fact that he tabled Amendments 63 and 67. Of course, the fact that he did so first in your Lordships’ House does not detract from the fact that an almost identical amendment was tabled in the name of the Labour Party in the House of Commons by my honourable friend Gregg McClymont before Committee there. I make this point not to in any sense undermine our common interpretation of this problem or our substantially common approach, but to point out that but for the slight difference of wording between the amendment my honourable friend tabled in the Commons and the one we tabled in your Lordships’ House, our amendment would probably have been tabled about the same time as the noble Lord’s amendment. The question of timing does not detract from the fact that we have been engaged with this issue for some significant time.
I am very grateful to the right reverend Prelate the Bishop of Chester for two things: first, for his identifying that the approach of the Labour Front Bench and that of the noble Lord, Lord Lawson, are much more compatible than others who have commented on this appear to believe. These amendments proceed by way of regulation but the regulation is to define what subsequently should be disclosed. I point out to those who have contributed to this debate that we, too, are about disclosure with this amendment. We have an ambition to cap the charges on the administration of pension funds but this is not the vehicle for that policy. This is about disclosure. It is about defining what ought to be disclosed in a very precise fashion through a process of consultation and regulation, and then about disclosure for all the same reasons that the noble Lords, Lord Lawson and Lord German, the right reverend Prelate, my noble friend Lady Donaghy and indeed the Minister all seem to consistently agree with.
The second reason I am grateful to the right reverend Prelate the Bishop of Chester is that he not only put his finger on the problem for the member, or potential member, of a pension scheme but explained more fully than I did—perhaps I should have done—why value for money is so important to our reforms. It is about confidence. If there is no confidence in the market, as the right reverend Prelate pointed out—and drew the Minister to agree—this whole package of reforms will fail. This will be half a reform, if there is no confidence in the private pensions industry. Our whole thrust is to address the issues that have been successively identified by reports and analysis of the issue in a form that is designed to reform the law and to provide the confidence that will be necessary for this whole reform—which we support—to go forward.
My noble friend Lady Donaghy reminded us of the importance of trying to change the culture more broadly in the financial services industry if we are to instil the confidence in the people of this country in saving and, I suppose, the mature handling of their own resources. That is a challenge we face that goes beyond just pensions, but it is crucial to them and she is wise to remind us of that.
I thank the noble Lord, Lord German, for engaging with the debate and for encouraging the Minister to respond to some of the important questions that needed to be answered. I remind him that although regulation and a more straightforward form of disclosure are the difference between the way our Front Bench here and the noble Lord, Lord Lawson, have approached this issue, we are concerned about disclosure as well.
It comes down to this: the Minister, as his honourable friend the Pensions Minister, Steve Webb, did in the other place, rests his case on the statutory structure which is being created and a process of consultation with a promise of significant regulation following thereafter, which will be engaging and confidence building. His case depends on how his honourable friend the Pensions Minister responds to the consultation thus far, which is so important to that process. We will all listen very carefully to that statement.
I fear that there may be more in the Financial Times report than the Minister is in a position to reveal to your Lordships’ Committee today. If that proves to be correct, he will appreciate that it is almost certain that we will return to this issue on Report. Between now and then, I hope that the noble Lord, Lord Lawson, will take up my offer to have discussions about where we agree and what is the best way for us to proceed on this issue. We share an analysis and a common concern, or remedy, about how to proceed.
However, in the mean time, I thank the Minister for his response and engagement with the debate and beg leave to withdraw my amendment.
Lord Lawson of Blaby
At what point should I contribute to the discussion on this?
The Deputy Chairman of Committees (Lord Faulkner of Worcester) (Lab)
It will be possible for the noble Lord to speak briefly on his own amendment, Amendment 63. He has already spoken but he can certainly respond then.
Baroness Drake
“(c) may provide for requirements for the identification, avoidance and management of conflicts of duty and interest”
Baroness Drake (Lab)
My Lords, Amendment 62GA is designed to address shortcomings in the governance of pension schemes, particularly contract-based schemes. It would give the Secretary of State the power to set regulations that
“provide for requirements for the identification, avoidance and management of conflicts of duty and interest”.
They would require, in the event of a conflict of interest, for priority to be given to the interests of the saver and to ensure that the duties to the saver are met despite the conflict.
In his review, John Kay criticised FCA rules as falling,
“materially below the standards necessary to establish”,
trust, confidence and respect. He recommended a shift towards fiduciary standards. In an auto-enrolled world, that comment has even more resonance because, increasingly, private sector workers’ pensions will be contract based, where, as the noble Lord, Lord Turner, mentioned in debate last Wednesday, there is a,
“fundamental inefficiency of the market ... It is a system absolutely shot through with market failure where the process of trying to provide in a competitive fashion simply does not work well”.—[Official Report, 15/1/14; col. GC 161.]
My amendment seeks to capture that governance challenge. To achieve an increase in pension savings, workers are auto-enrolled into workplace pensions. There can be no caveat emptor, as the saver does not buy. The system is designed to restrict the saver to one choice—either stay in or opt out and lose the employer contribution. Current regulation of contract-based pensions is at odds with the assumptions underlying auto-enrolment. Contract-based regulation is built on informed consent and consumer choice. Auto-enrolment is designed and built on the principle of inertia, on a population of savers who do not engage with investment choice. A plethora of reports has revealed the conflicts of interest in the industry. The OFT report confirms a dysfunctional pensions market with a weak demand side and concludes that the market could not be expected to self-remedy and that there is a need for intervention.
The introduction of auto-enrolment has been a success and the Government should be pleased. Opt-out rates have been low. The Government must now secure a level of quality and governance that delivers optimal results for savers in terms of building trust so that workers persist with their savings, thereby setting the ground for increasing contributions beyond the current statutory minimum and improving savers’ chances of achieving a reasonable income in retirement. Measures to encourage savers to engage with their pension savings are important but of themselves are not sufficient. The majority of savers will not actively engage. It is that very inertia that can be used by some providers to create or sustain profitable inefficiencies. The legal framework must protect those who do not engage.
The challenge of inertia means that there is a need for efficient defaults over the life cycle of the pension saver. For example, there is a need to get people saving; to determine a minimum they should save; to determine their investment choice at different intervals in the life cycle on, for example, joining a scheme or following a quality review as they get nearer to retirement age; and, by default, to transfer and consolidate their pension pots. Over time, I suspect that we will be considering default arrangements on decumulation when a person retires. The need for defaults raises the bar on governance because someone is using their discretion on behalf of the saver.
Contract pension provision has systemic weaknesses of governance and a particular feature that constrains efficient default arrangements. For example, looking forward, an employer conducting a triennial review that decides that the current scheme is poor value will be unable to switch workers in a contract-based scheme unless they individually consent. However, the very nature of auto-enrolment means that this active consent is unlikely to be granted by many savers. On legacy schemes and pots, I am sure that any OFT-driven audit will reveal poorly performing funds and high charges, but the solutions will not be effective if they require individuals’ consent.
We have a misalignment between what contract-based provision can do and what it is necessary to deliver in the interests of the saver. How does one respond to that challenge? Recent press comments are peppered with references to making it easier to move contract-based scheme members from old to new schemes. Standard Life’s head of workplace pensions, speaking at the NAPF conference, said that contract law acted as a barrier to moving people from poor-quality schemes to good-quality schemes, and added:
“We need to learn the stuff that works in the trust-based world”.
A recent Pensions Institute report found potential for massive improvement in outcomes where poor-quality legacy schemes transferred en masse into better-quality modern schemes with lower charges. The Pensions Institute called on the Government to facilitate changes to contract law to allow such transfers to be made without the individual consent of scheme members where it is clearly in their best interests. However, there is the rub. Who decides where it is clearly in their best interests? How is the primacy of the saver’s interest protected? Governance requirements must be fit for purpose under auto-enrolment and remove a constraint in contract provision, but in a way that ensures that the interests of the saver trump the interests of others when there is a conflict. Putting the legal responsibility for the best interests of the saver on the employer will be problematic, particularly for the long tail of SMEs and micros.
The Government’s use of statutory overrides has a role to play, particularly in placing new quality and governance requirements into future, existing and legacy pension contracts. I ask the Minister to confirm whether this Bill would give the Secretary of State the power to change retrospectively the terms of existing pension contracts to embrace any new quality or governance requirements.
However, the solution must rest in major part in raising the governance in the pensions industry. Like trustees, it should carry a fiduciary responsibility in the management and provision of its pension products and investments. Conflicts of interest must be resolved in the interests of the saver. An efficient private pension system that requires the default transfer of savers’ pots to new schemes and funds simply cannot happen without that.
There is an imbalance in the duties of contract-based pension providers, compared to those placed on trustees, which challenges the success of auto-enrolment. The OFT stressed the need for stronger measures to improve governance but I fear that the independent governance committees that it has agreed with the industry—here there are shades of what the noble Lord, Lord Lawson, referred to as the fox in the hen coop—will fail to achieve the requirement of aligning scheme governance with the interests of savers.
The proposed independent governance committees have many weaknesses. At the very least, such bodies need both a duty to act in members’ best interests and the power to make decisions. The current OFT proposal fails on both points. As the Law Commission commented,
“there are many difficult questions about how these committees will work”.
They,
“will not have the power to change investment strategies or investment managers ... Furthermore, it is not clear whether ... the committees will be under explicit legal duties to act in the interests of”,
the savers. Introducing independent governance committees accountable to the boards of pension providers, without addressing any of the conflicts faced by these providers, or clarifying that decisions must prioritise the interests of policyholders over those of the shareholders, does little to solve the governance deficit.
As a comparator, the governance requirements for the Australian private pension system have been toughened up recently. It is a sad reflection on my character that I spent a significant number of days over the Christmas holidays ploughing through the regulatory requirements under the Australian system—I promised in my new year’s resolutions to get a more exciting life in future. The Australian Prudential Regulatory Authority enforces a range of prudential standards on pension providers, including an unequivocal requirement that conflicts of interest must be resolved in the beneficiaries’ interests and a specific duty to deliver value for money.
The advent of auto-enrolment raises the bar on governance. I welcome the Government’s decision to impose quality and governance requirements on pension schemes, but I think that it is necessary to make it explicit that those requirements should provide for the identification, avoidance and management of conflicts of duty and interest. Conflicts of interest go to the heart of the problems in the private pension system. The regulations, when addressing governance requirements, must address the issue of conflicts of interest. Amendment 62GA, without being prescriptive, seeks to do that. I beg to move.
Lord Browne of Ladyton
My Lords, I speak to Amendments 67ZB and 67ZC in my name and that of my noble friend Lady Sherlock. It is always a pleasure to follow my noble friend Lady Drake on issues such as this. She has once again characteristically set out an informed and persuasive argument in her contribution to the debate. To a degree, I accept that it could be said to undermine Amendment 67ZC in that it approaches the same issue but in a distinctly different fashion, accepting the same principle. From my perspective, however, I am not that concerned how the Minister responds to the nature of the challenge that my noble friend set out. If he chooses to accept her amendment—I venture to suggest to him that he would invariably be wise to do so in such matters—he will find no great cavil from these Benches that our amendment fell by the way as a consequence.
Amendment 67ZB is designed to address the issue of scale by way of a new clause. It would promote good value in scheme sizes and would require trustees to consider whether the scheme had sufficient scale to deliver good value. I note that, in the Government’s consultation on quality standards in workplace defined-contribution schemes, the Government reveal that they are “interested” in the idea that trustees should have a duty, and underline their interest in the Australian approach to imposing duties on trustees.
I am glad that the Government are beginning to catch up with the Labour Party’s policy review on these issues, but I also note that they have not yet progressed sufficiently far in its investigations to recognise that the Australian Government, the policies of which have already been prayed in aid by my noble friend, also deploy the regulator in this respect. It is not clear why the Government think that trustees of very small UK schemes, which we know from the TPR surveys self-identify as not incapable of understanding investment processes, will be able to make a judgment as to whether they have sufficient scale. If these trustees fail to act, what is supposed to happen?
In Australia, those intending to supply a pension scheme have to apply to the regulator for a licence, and one of the licence conditions requires a reasoned attestation as to how the trustees of the scheme will meet best practice in terms of scale at the investment and administration layers. This process has a ratcheting effect, as the attestation must be repeated on an annual basis and, as best practice improves, this forces mergers. Failure to attest would mean a breach of the regulatory licence, and commentators believe that there will only be a sixth of the current number of schemes within 20 years. For trustees to move to scale we would need a ubiquitous requirement for trustees, a duty on them to assist scale and a mechanism to require action where they fail to act or mis-assess. That is what we seek to provide the beginnings of with this amendment.
Amendment 67ZC would provide for regulations to require any pension scheme to appoint a board of trustees which will have fiduciary duties towards the members of the pension scheme. Our view is that a minimum requirement for auto-enrolment schemes is that they must be governed in a way which legally requires the scheme to prioritise the interests of members over all other interests.
The Minister may say that they have consulted on governance for automatic transfer schemes; again, it is a good thing if he is catching up with our policy review. However, his quality standards are intended for automatic transfer schemes only. Under our approach, automatic transfer will be limited to aggregators, as the Minister is well aware. Our requirement for trustees applies to all qualifying schemes, not just to automatic transfer schemes, and, in addition, our definition of qualifying schemes includes closed-book schemes, which his does not.
As a further point, these conditions will apply to schemes that wish to operate as automatic transfer schemes, but an automatic transfer system is years away. The requirement for trustees is immediate, however, as my noble friend has pointed out. Why should we adopt a lesser principle than that adopted by the Australians? Their Cooper review found:
“Superannuation must always be for the benefit of members. The superannuation system does not exist to support intermediaries. Trustees must be relentless in seeking benefits for members”.
Thanks to my noble friend Lady Drake, we now know that that has also been translated into regulation in Australia.
Lord Bates
My Lords, ensuring that schemes deliver good value for, and are run in the best interests of, their members is a primary concern for this Government, so we welcome this discussion, which was set out with great insight and clarity by the noble Baroness, Lady Drake. We agree that the issues highlighted by these amendments—scale, fiduciary duties and conflicts of interest—are important ones to consider. However, we do not agree that simply encouraging the creation of large, trust-based schemes is the right approach to ensuring good value for members.
We are interested in testing how far scale can help schemes to deliver better quality and lower charges for members. Last year we published a call for evidence on defined contribution quality standards, in which we sought evidence about how a scheme’s size can influence outcomes for members. As noble Lords are no doubt aware, the issue of scale is not straightforward, and most responses to our call for evidence saw benefits to members in both large and small schemes. We are currently considering the responses to the call for evidence alongside the recommendations of the Office of Fair Trading, and will respond in due course.
We would have concerns about compelling schemes to merge in the way that this amendment suggests. Determining what is in all members’ best interests would be extremely challenging for the Pensions Regulator, which simply would not have the capacity or information needed to scrutinise every small scheme and consider whether it should close or merge. There could also be European Court of Human Rights issues in relation to property rights because to force a scheme merger could lead to some members losing out.
Turning to the idea that all schemes should be trust-based, in our call for evidence we set out the importance of ensuring that schemes are governed in members’ interests; of course, we recognise the vital role that trustees play in achieving this. However, we disagree that simply imposing a trust-based structure on all schemes is the way forward. Neither the presence of trustees nor fiduciary duties are a panacea for poor governance. This is shown in the findings of the OFT, which identified governance weaknesses in trust-based schemes of different sizes. The Law Commission’s current consultation on fiduciary duties notes that legal duties are,
“insufficient to ensure good outcomes for members”.
In addition, the amendment suggests that in scheme governance, trustees’ decisions should take precedence over an employer’s decisions in any circumstances. This does not provide any opportunity to balance interests, and would apply even if the trustees’ decisions are unreasonable. Such a broad requirement could lead to significant financial difficulties for employers, which would not be in anyone’s interests.
The amendment moved by the noble Baroness, Lady Drake, highlights the importance of identifying and avoiding conflicts of interest. The Government agree that this is an important area; in our call for evidence we suggested that all schemes should have a governance body that must be able to act freely in members’ interests. The noble Baroness referred to the Australian scheme, as did the noble Lord, Lord Browne. She was very dutiful in reading it over Christmas. I suggest that she would find the Australian pension code less onerous to read if she was reading it in Australia, but she was probably shivering here with the rest of us.
The Australian regulator’s new power is interesting but it is not translatable to the UK pension system. Following the Cooper review, which has been referred to, the Australian pensions regulator—APRA—has been given new powers to drive schemes to merge.
We are interested in this approach and will monitor how it is used and how effective it is, but it should be remembered that the Australian pensions landscape is significantly different from our own. It is our understanding that the APRA does not intend to use the power to target all small schemes but to focus, for example, on cases where there is a link between underperformance and an absence of scale.
The noble Lord, Lord Browne, argued that you need to drive up scale in order to increase consolidation, which has an effect on charges and therefore brings a benefit to members. Scale is not necessarily a determinant of value: bigger schemes are not always better. Consolidation is already happening. For example, in 2012 around half the active members of private occupational defined contribution schemes were in schemes with 10,000 or more members; in 2000 this figure was one in eight. The number of active members in small and medium-sized private occupational defined contribution schemes decreased from 0.3 million to 0.1 million between 2000 and 2012—a reflection of the greater regulatory requirements and burdens that are placed upon scheme managers, as well as the challenge of finding trustees who will undertake the work.
Finally, turning to the comment made by the noble Baroness, Lady Drake, about independent governance committees and whether they would have a fiduciary duty to members, the OFT has recommended a model of independent governance committees to address a number of problems that stem from weaknesses in the buyer side of the market. As part of the consultation on fiduciary duties, the Law Commission has asked about the duties that should apply to members of independent governance committees. Its tentative view is that members should be subject to legal duties to act in the interests of members. We are working with regulators and stakeholders on requirements for independent governance committees, and will respond in due course.
This has been a helpful discussion but I hope that my responses will enable the noble Baroness, Lady Drake, to consider withdrawing her amendment.
Lord Browne of Ladyton
Perhaps I might engage with the Minister on the issue of whether or not larger pension schemes provide better returns to their members. I do not intend to delay the Committee long on this issue but I have before me a page and a half of significant research that challenges the assertion made by the Minister. I will say only this: recent NAPF research shows that a person in a larger scheme will get a 28% larger pension pot than a person in a smaller scheme. Indeed, research from Australia supports the assertion that fund size has a positive impact on the performance of not-for-profit superannuation funds there. I shall arrange for the Minister to have access to this research but I could not let that assertion remain unchallenged.
Baroness Drake
I thank my noble friend Lord Browne for his supporting contributions in this debate. I thank the Minister for his response but he has not actually answered my question—I did listen; perhaps I missed it but I do not think so—which was: can the Minister confirm that this Bill will give the Secretary of State the power to retrospectively change the terms of existing pension contracts to embrace any new quality or governance requirement? It is a pretty key point because it goes to the heart of what the Government can or cannot do unless they take those powers to themselves. A lot of people are quite interested in whether the Government are taking those powers so that when they decide what the quality and governance requirements are, they have the power to retrospectively apply them to existing pension contracts.
Lord Bates
Perhaps I can seek some clarification from the noble Baroness on the nature of her question; I apologise for not responding to it directly. The whole point of what we are introducing is that we are seeking to tackle the issue of the quality of schemes. Therefore it would stand to reason that if one is seeking to improve the quality of schemes, it would be wrong to disbar those who were in previous schemes from getting the benefits of those improved quality standards. That provision is therefore there: it will be necessary to enhance the quality of schemes. I might be missing something; I am sorry if I am.
Baroness Drake
The Minister has got the sentiment of my point. I was looking for firm clarification that the Bill gives the Secretary of State the power to put in place those quality and governance standards, once they are decided, to existing pension contracts, because they are contracts.
Lord Bates
The noble Baroness has a high degree of expertise in this area, which is respected on all sides of the Committee. I wonder if I could write to her on the specific point on which she is pressing me, with a response on the record. If she wishes to press it further, she can of course come back to the issue on Report.
Baroness Drake
I thank the noble Lord for his offer to write to me on the matter. Maybe having it in writing will be better, because the efficiency or ability of any requirements under the Bill will be heavily influenced by the extent to which they can retrospectively apply to existing pension contacts. However, if the noble Lord is going to write to me on that point, I will also deal with other matters.
We need to get a sense of perspective on this. Auto-enrolment potentially affects 20 million people in this country. The whole of the private sector workforce, when it is engaged in employment above a certain income level, is a huge community of people; it is a great statement of trust between the working population and the Government. People are saying that they accept the argument that the people must take responsibility for providing for our income in old age, but they have the right of a reciprocal entitlement to know that the Government are doing what is necessary to ensure that those who have discretion over their savings and are managing them do so in a way which is in their interests and to high standards of governance.
I am afraid that I do not buy “balance of interests” at all on this issue. If you come into the market to provide a pension product under auto-enrolment, you cannot sell or manage a product that does not meet the needs of the savers. You would not say, “Well, I will leave the brakes off a car in the interests of not making the employees redundant”. You have to sell a product that meets the interests of the members and is designed and managed with the interests of the saver at heart.
The independent governance bodies, or committees, are very weak as they are proposed. There are lots of people commentating to that effect. As proposed, they have fewer new powers—or no powers—for resources, for information, or for appointment of members to the board. It is in the gift of the companies themselves. As currently advised, they have no powers or capacity to address conflicts of interest. I know that this issue of governance is a work in progress. The Government are considering the matter and are due to report further. The OFT says that it has more work to do on its recommendations. The Law Commission is looking into this.
What cannot be dodged at all, in my view, is that any governance structure, requirements or arrangements for a private pension system that does not put the identification and resolution of conflicts of interests in the interests of the saver at its heart will be flawed. Successive Governments will keep picking up the consequences of that. There must be some—cross-party or whatever—biting on the principle that if you give the market a huge demand side that it could never have created itself under a voluntary system, that carries with it the requirement for a high standard of governance. The Government must say that those who enter the market under auto-enrolment to provide pension products must operate on the basis that any conflicts of interest are resolved in favour of the beneficiary or saver.
The Deputy Chairman of Committees
We come to Amendment 63. Lord Lawson of Blaby?
Amendment 63
Lord Lawson of Blaby
ScheduleWork-based schemes: requirements for disclosure of charges and other informationThe Secretary of State shall by regulations make provision to require disclosure at least annually of the following management and transaction charges incurred by the administration and management of each investment portfolio managed by or on behalf of a work-based scheme—
(a) fees and performance fees paid to investment managers,(b) commissions and bid-offer spreads paid to brokers,(c) bid-offer spreads paid to foreign exchange counterparties,(d) fees, revenue splits and bid-offer spreads paid to custodian banks,(e) fees paid to in-house or third party scheme administrators,(f) fees paid to professional advisors (e.g. actuaries, legal advisers, auditors, investment consultants etc.),(g) initial charges, bid-offer spreads, exit charges, other fees and rebates charged on investments in pooled funds.”
Lord Lawson of Blaby
Thank you, Lord Chairman. You advised me that I need to move this amendment, which I am happy to do even though we have already had the debate on it. I will just say one or two things briefly. First, I thought the debate was very useful and I am particularly grateful to my noble friend the Minister for indicating that the Government accept that there is an issue here that needs to be addressed and that the Minister in the Commons, Steve Webb, will make an announcement about it later this week. Presumably, he will set out what he considers to be the remedy for the problem identified. It would certainly be churlish to persist with my amendment in the light of that. I will wait to see what Steve Webb and the Government have to say and then decide whether that is adequate or that it is necessary to pursue the matter further on Report.
I have two other quick points. First, the Minister said that the degree of specification for costs to be disclosed, as I have in my amendment, was not suitable for primary legislation. He is probably right but I interpret the meaning of that to be that he thinks it is suitable for secondary legislation. This is certainly a matter where legislation is needed and I am perfectly happy to accept his advice that there is a need for secondary legislation.
The other point is that the noble Lord, Lord Browne, suggested that between Mr Webb’s announcement and Report, he and I might discuss the matter to see what we feel about this. I am very happy to do that. This is not a party-political point, but if we think that the Government’s remedy is inadequate—I hope that will not be the case—it may be that he and I can agree an amendment to jointly move on Report in the best bipartisan traditions of this House.
Having said that, unless any Member of the Committee objects, I beg leave to—
The Deputy Chairman of Committees
The noble Lord should move the amendment first.
Lord Lawson of Blaby
The silence is eloquent and, in the light of it, I beg leave to withdraw the amendment.
Lord Whitty
Lord Whitty (Lab)
My Lords, in a Bill of extreme complexity, with a large number of amendments that are equally complex, this must be the simplest amendment on the Marshalled List before the Committee. Therefore, I assume it is one which the Government could easily accept or, alternatively, make a slightly different proposition in respect of. Most of my interventions in Committee have been on behalf of the interests of beneficiaries of pension schemes, which I think is right, but this amendment is on behalf of a subset of employers; namely charities, although it would extend more broadly to the non-commercial private sector.
Charities are providers of occupational pensions—in fact, the top 50 charities have pensions liabilities of more than £5 billion. Clause 45 provides some degree of protection for all employers engaged with the Pensions Regulator in restoring the affordability of pension schemes, long-term deficit reduction plans and related matters. It requires the Pensions Regulator to take into account the effect on the employer’s “sustainable growth”. That is obviously a very important issue for commercial private sector employers, but the aim of charities, and of certain other organisations that provide pensions, is not growth. The aim is to work on the object of the charity and, in some cases—for example, with the alleviation of poverty or the eradication of disease—the charity’s aim is to reduce that object and therefore to run down its actual activities in the long run.
“Sustainable growth” is not the appropriate term to give the equivalent protection to private sector employers and to charities and other bodies for which growth is not the objective. I am therefore suggesting that the broader term of “sustainability” should be substituted for “sustainable growth”. Alternatively, if the Government are not prepared to go along with that entirely, I suggest “sustained growth or sustainability”. Otherwise, charities which face equal and, in some ways, greater financial pressures than private sector commercial employers, because of the legal and trustee-type restrictions on how they can use their own money, will have difficulty running pension schemes in many respects. They need this protection, but appealing to this clause, which amends the Pensions Act, would not automatically give them that protection.
I hope that the Government can consider this amendment and accept it, or at least make it clear, in an amendment of their own, that the broader objectives of organisations are also covered by this otherwise very valuable clause. I beg to move.
Baroness Sherlock
My Lords, as my noble friend Lord Whitty has explained, the purpose of this amendment is to ensure that the objectives of the Pensions Regulator, as set out in the Pensions Act 2004 and as to be amended by Clause 45 of this Bill, can be applied appropriately to charities.
We on these Benches are sympathetic to the aims of Clause 45 and recognise that there is a balance to be struck between the requirement on the Pensions Regulator to ensure that there is enough money in pension funds to meet their liabilities and the need to ensure that burdens are not placed on employers, with requirements so tough that they are effectively forced out of business and thus rendered unable to make any future contributions to said pension funds. However, as my noble friend pointed out, there are real concerns among those responsible for managing the finances of charities and other non-profit organisations over whether the clause, as drafted, is fit for purpose.
Charities have charitable objects that effectively circumscribe their purpose and activities. I declare an interest as the chair of some charities now and having been formerly chief executive of three different charities. I also remind noble Lords of the interest I declared previously as a non-executive director of the Financial Ombudsman Service.
As my noble friend has pointed out, charities do not necessarily aspire to grow as companies do. They may happen to grow, if demand is there and money is available to fund their activities. They may aspire to grow, to increase the number of people that they work with in line with their charitable objectives. However, they may not. In my time, I have presided over charities that grew but I have also taken decisions that effectively reduced charities by refocusing them on core objectives and ensuring that they were sustainable. While charities generally do grow, they also need to be sustainable, and that is what my noble friend is addressing here.
This is not a negligible issue. Registered charities employ around 850,000 people. The voluntary sector, according to the Charity Finance Group, contributes £11.6 billion to UK gross value added, compared, for example, to the contribution made by agriculture, which is just £8.3 billion. As my noble friend pointed out, there is a significant issue with charity pension funds. The Charity Finance Group estimates that the top 50 charities are carrying almost £5 billion in liabilities. I am advised that those liabilities, and the actions that have been required to flow from them, are driving a significant number of charity mergers. This is having an effect on the architecture of the sector, not just on the individual charities and their employees. Those charities are understandably nervous about any shift in direction or emphasis that is not appropriate to their circumstances.
I have personal experience of the fact that charities have often suffered at the hands of legislation or public policy that was based on the assumption that most organisations were either public or private and did not take into account the often quite different structure and funding arrangements of charities. The noble Lord has had significant involvement with charities and will understand that point.
If the Government are not minded to accept this amendment, can the Minister tell the Committee how the Government envisage “sustainable growth” being applied by the regulator to charities? What reassurance can he give to worried finance directors of charities? Can the Minister remind the Committee of what relationship, if any, there is between his department and the regulator when it comes to deciding how best to interpret their objectives as set out in statute?
Lord Bates
My Lords, this amendment relates to the proposed new objective for the Pensions Regulator. The Pensions Regulator oversees the scheme funding regime for defined benefit pension schemes. This regime requires, among other things, the regular evaluation of a scheme’s funding position and a formal recovery plan to plug any deficit identified.
In undertaking this evaluation, the Pensions Regulator is guided by a number of objectives set out in the Pensions Act. It is therefore important, in reference to the remarks of the noble Lord, Lord Whitty, and the noble Baroness, Lady Sherlock, that when we talk about this new requirement, it is placed in the context of the six or seven different measures that the Pensions Regulator will take into account in determining the funding rate that is necessary for the scheme to make up any deficit. While some consideration of sponsoring employers is implicit in these objectives, the new objective will make it explicit that the regulator must consider them, alongside members and the Pension Protection Fund, in deciding upon the suitability of deficit recovery plans and other decisions related to scheme funding.
The new objective responds to concerns expressed by sponsoring employers which felt that they needed to be recognised in the regulator’s statutory objectives, given their importance to defined benefit schemes. The current wording of the objective refers to sustainable growth, as the Government believe that the best protection for scheme members is a strong, healthy employer standing behind its scheme now and in the future. Whether that is a charitable organisation or a commercial organisation, its health must be the first objective in order to keep a sustainable body behind the scheme. Sustainable growth can benefit both the organisation and pension scheme members via a potentially stronger employer covenant underpinning the pension promises made.
Lord Whitty
My Lords, I am grateful to the Minister, at least for his quote from the consultation of the Pensions Regulator, which recognises that growth may well not be considered in the same way by certain non-profit organisations, including charities. However, I find the Minister’s conclusion from that to be slightly illogical. If he is correct and pension fund administrators in the not-for-profit sectors look at this apparent protection and do not interpret growth or have it as an aspiration in the same way that commercially driven organisations do—the strength of not-for-profit organisations will relate to their objectives, not to a growth objective—I do not really see a problem for the Government in extending the phrase in the Bill, thereby ensuring that the position of not-for-profit organisations is covered.
The somewhat convoluted way in which the Pensions Regulator’s consultation is spelt out does not convey that. I ask the Minister to take this issue away and consider whether it would not be easier to make this minor amendment rather than to have a convoluted explanation that belied the text of the Act, or perhaps retain both “sustainability” and “sustainable growth”. It is a fairly simple point but it would make clearer the position of a lot of charities and other not-for-profit organisations. However, I will leave that with the Minister and, in the mean time, beg leave to withdraw the amendment.
Lord Bates
“Pension Protection Fund: compensation cap to apply separately to certain benefits
(1) Paragraph 26 of Schedule 7 to the Pensions Act 2004 (Pension Protection Fund: compensation cap) is amended as follows.
(2) In sub-paragraph (1)(b), for “sub-paragraph (2)(a) or (b)” substitute “sub-paragraph (2)(a), (b) or (c)”.
(3) In sub-paragraph (2)(a)(ii), for “paragraph (b)(i) does not apply” substitute “neither of paragraphs (b) and (c) applies”.
(4) In sub-paragraph (2)(b)—
(a) before paragraph (i) insert—“(zi) benefit A is attributable to the person’s pensionable service,”;(b) in paragraph (i), after “one or more other benefits” insert “that are attributable to his pensionable service”.(5) In sub-paragraph (2), after paragraph (b) insert “, and
(c) this paragraph applies if—(i) benefit A is attributable to a pension credit from a transferor,(ii) at the same time as the person becomes entitled to relevant compensation in respect of benefit A he also becomes entitled to relevant compensation in respect of one or more other benefits that are—(iia) under the scheme or a connected occupational pension scheme, and(iib) attributable to a pension credit from the same transferor,(“benefit or benefits B”), and(iii) the aggregate of the annual values of benefit A and benefit or benefits B exceeds the compensation cap.” (6) In sub-paragraph (5), after “sub-paragraph (2)(b)” insert “or (c)”.
(7) The amendments made by this section are to be treated as always having had effect.”
Lord Bates
My Lords, the four amendments I will speak to fall into two groups of two. The first two, Amendments 64A and 72A, relate to the application of the PPF compensation cap to individuals who have entitlement to both an occupational pension and a pension credit arising from a divorce or civil partnership dissolution settlement. It has come to light during the drafting of the Bill that the way in which the PPF currently applies the compensation cap to this group, while in line with the policy intent, does not comply with legislation. When compensation is calculated, these two entitlements are kept separate. It was the intention that the compensation cap would also be applied separately and this is what the PPF is currently doing. However, the legislation, as currently worded, requires the two amounts to be added together and the total capped, leading to a significantly lower payment. These amendments simply bring the existing legislation into line with the policy intent and the actual practice of applying the cap separately. They also allow the change to be applied retrospectively to cover past calculations and for them to come into effect from Royal Assent to reduce the period in which the practice and the legislation are out of alignment.
The second set of amendments—Amendments 67A and 67B—relates to the provisions in the Bill that establish a long-service compensation cap in the PPF. Those provisions in Clause 47 already make provision for how the long-service cap will apply in the calculation of PPF compensation for individuals in the PPF when the long-service cap legislation is commenced. The amendments deal with how the long-service cap should be applied when a scheme is either undergoing assessment by the PPF or winding up when the long-service cap is introduced. When the legislation commences, a scheme could be in the PPF assessment period—that is, being considered for entry to the PPF, or the scheme could be in wind-up.
Members of schemes in the assessment period will see their payments increased to reflect the long-service cap. However, any valuation of the scheme’s liabilities as part of the assessment period will continue to be based on the current cap structure. Any scheme that winds up outside the PPF, after being in assessment or not, will allocate its assets against the current cap structure. I hope that is absolutely clear. I beg to move.
Baroness Sherlock
My Lords, I thank the Minister for that very helpful explanation of these amendments. He may have answered the question that I am about to ask in his final sentence but I did not quite catch it, and I apologise for asking him to repeat it. In relation to the cap, for schemes currently in assessment, do the current PPF rules and levels of benefits or the more generous rules apply?
Lord Bates
The answer is that the current provision applies if a scheme is wound up outside the PPF. Schemes will increase payments where appropriate to reflect a long-service cap. However, the scheme’s liabilities will continue to be measured against the old cap. This is to prevent the actuary having to recalculate the scheme valuation, leading to delays and extra costs. I hope that that is helpful to the noble Baroness and thank her for raising the point.
Lord Bates
“Public service pension schemes: transitional arrangements
(1) Section 18 of the Public Service Pensions Act 2013 (restriction of existing pension schemes) is amended as follows.
(2) After subsection (5) insert—
“(5A) Scheme regulations may also provide for exceptions to subsection (1) in the case of—
(a) persons who were members of a public body pension scheme specified in the regulations, or who were eligible to be members of such a scheme, immediately before 1 April 2012, and(b) such other persons as the regulations may specify, being persons who before that date had ceased to be members of a scheme referred to in paragraph (a) or to be eligible for membership of such a scheme.”(3) In each of subsections (6) and (8), after “(5)” insert “or (5A)”.”
Lord Bates
My Lords, this group of amendments makes a small change to the Public Service Pensions Act 2013 and a number of consequential amendments to this Bill so that members of public body pension schemes can benefit from the transitional protection provided for by the 2013 Act as it was intended, but in a way that delivers much greater administrative savings.
The Public Service Pensions Act delivers the commitments made in another place by the Chief Secretary to the Treasury, Danny Alexander, that those members of the larger public service pension schemes who are less than 10 years from their normal retirement age in April 2012 should not be impacted by the Government’s reform programme. He was clear that this transitional protection should also extend to members of the smaller public body pension schemes; for example, those administered by the UK Atomic Energy Authority, the various research councils, or the Homes and Communities Agency. The larger schemes are those that cover the major public sector workforces: the Civil Service, judiciary, local government, teachers, the NHS, firefighters, the police and the Armed Forces.
As part of the Government’s reform programme, the intention is for the smaller schemes to be consolidated into the larger schemes wherever possible to allow for savings to be made from reduced administration and management costs, without affecting the value of members’ benefits. However, the current phrasing of the Public Service Pensions Act limits those eligible for transitional protection in the larger schemes to,
“persons who were members of an existing scheme, or who were eligible to be members of such a scheme, immediately before 1 April 2012”.
This means that moving transitionally protected individuals who do not meet this criterion from smaller schemes into the larger schemes would cause them to lose their protection, and the Act currently provides for them to remain in these smaller schemes.
This amendment removes the necessity to leave the smaller schemes in place to provide for transitionally protected members who do not meet this criterion, leading to unnecessary administration and management costs. It will have no impact on the value of members’ benefits and they will continue to receive the transitional protection as set out in the Public Service Pensions Act. Amendments 71, 72 and 73 are consequential amendments to allow the Treasury to commence the provision by order. I beg to move.
“Railways pension scheme
(1) The Railways Act 1993 is amended as follows.
(2) In Schedule 11 (pensions), after paragraph 11 insert—
“11A (1) This paragraph applies if an insolvency event occurs in relation to the employer or former employer of a protected person.
(2) Where this paragraph applies, the Secretary of State shall become liable to discharge any liabilities in respect of relevant pension rights, to the extent that they are not discharged by the trustees of a new scheme in which the employer was a participating employer.
(3) For the purposes of this paragraph—
(a) “insolvency event” has the meaning set out in section 121 of the Pensions Act 2004;(b) “relevant pension rights” means the relevant pension rights referred to in paragraph 6(3) above.11B The duty referred to in paragraph 11A also applies if an insolvency event has occurred in relation to the employer or former employer of a protected person on or after 1 October 1994.””
Lord Dubs (Lab)
My Lords, Amendment 65A is concerned with persons who worked for a company called Jarvis, which went into administration. Jarvis was one of the private companies that had subcontracts for renewal work with Network Rail; essentially this was the replacement of worn-out track and signals. This company was one of the main firms working on behalf of Network Rail—all well and good.
In March 2010, Jarvis went bankrupt and 1,200 skilled rail workers across Britain were thrown on to the dole. I believe that the situation could have been avoided, and I will come back to that in a minute. Jarvis’s work was transferred to new companies but the 1,200 workers were not transferred. Jarvis was forced into administration because Network Rail deferred renewals work to comply with the Office of Rail Regulation’s decree that Network Rail needed to make 21% efficiency savings over the next five years. Therefore, Jarvis going into administration was not the result of the recession and is separate from the general question of railway funding. It is ironic that Network Rail has recently been criticised for delays caused by its decision to scale back renewals work in 2009.
Jarvis had cash-flow problems but its rail business had an order book of up to £100 million. However, Network Rail and the previous Government refused a £19 million rescue plan from the administrator for the Jarvis rail division for running costs and wages over the next month or so, which would have bought time in order to ensure an orderly transfer of Jarvis employees to new contractors. Representations were made by the unions to the Government, who refused to allow their legal powers under the Railways Act to treat Jarvis as an essential railway activity, which would have allowed them to step in and protect the work of the members of the union. Instead, these 1,200 were thrown on to the dole. This is despite the fact that the Government, according to information provided in response to an FOI request, knew quite a long time in advance that Jarvis was in imminent danger of collapse. Had Jarvis remained in business, the pension entitlements of the workers, past and future, would have been protected.
Lord Bates
My Lords, we have discussed protected persons status previously in relation to the statutory override provisions, but it might be helpful in the context of this debate briefly to restate the position.
The status of “protected persons” was created when rail and other public sector industries were privatised, and new pension schemes were created to ensure that ongoing pension provision was made. Protected persons status gave members of certain schemes protection against their new employers providing pension benefits that were less favourable than those offered prior to privatisation.
However, there was never any intention by the Government for protected persons status to protect pension benefits already accrued in the event of a future employer insolvency. The amendment would oblige the Government to provide the full pension of those members of the railway pension scheme who have “protected persons” status in the event of their employer becoming insolvent. This would also apply to benefits accrued after privatisation.
There is, of course, a need to protect members of schemes where the sponsoring employer is insolvent. Since the Railways Act 1993, successive Governments have created a stronger pension-protection regime. This regime crucially includes measures that increase the security of members when their occupational scheme is underfunded and the sponsoring employer of the scheme becomes insolvent. It is that regime which is intended to provide protection to members of defined-benefit schemes. The status given to protected persons, on the other hand, was focused on ensuring that their pension benefits after privatisation were at least as favourable as those before. When it comes to protection in the case of employer insolvency, it is right that members of the railways pension scheme are treated the same as other members of occupational schemes in a similar position.
The railways pension scheme is a multi-employer sectionalised scheme. The different sections of the scheme are covered by the full provisions of the pension protection regime. The sections have to meet the funding requirements, debt requirements and compensation arrangements. They are covered by the Pension Protection Fund and pay the pension protection levy. This means that the scheme has been making specific payments to provide its members with protection in the event of any of the sponsoring employers becoming insolvent.
I am aware of the situation of the members of the Jarvis sections in the scheme. Of course, we have enormous sympathy for them and for any individual who is placed in the stressful and depressing situation not only of losing their job but of potentially seeing a limitation on their benefit entitlements. It is right that the full range of protection requirement rules should apply to the sponsoring employers of the railways pension scheme.
If this amendment were made, the Government would be responsible for covering a scheme’s liabilities if the employer became insolvent. Sponsoring employers would therefore not have to worry about the liabilities of certain members. The noble Lord, Lord Dubs, rightly referred to moral sensibilities, which of course we have, but there is also the danger of moral hazard if the Government were to stand in that way. Finally, the amendment is retrospective, which would mean that insolvencies that have already occurred would have to be unpicked and arrangements that had already been made would have to be revisited.
This seems like a fairly negative response but of course legislation has been passed in the intervening period. I pay tribute to the then Government for introducing the statutory system of protection for scheme members and the levy, which Jarvis contributed to prior to its insolvency. In that sense, Jarvis members enjoy a higher level of protection even now as a result of the Pension Protection Fund. I understand the sensitivity of the issue and I do not underestimate the distress that has been felt by those members and their families, but this is not something that the Government feel able to accept and I ask the noble Lord to consider withdrawing his amendment.
Lord Dubs
My Lords, I am not totally surprised by the answer but, as I understand it, whatever the Minister said, these former Jarvis workers have lost out through no fault of their own and, because an earlier Government decided to privatise the railways, they are the victims of a process that began with rail privatisation. At the time, they had pretty secure jobs—nobody should have a secure job in the face of any eventuality but they were given assurances at the time. I agree that those assurances did not cover the prospect that the firm might become insolvent; nobody anticipated that and none of the safeguards covered this particular situation. But in moral terms, assurances were given and those assurances should transcend the other points that the Minister made.
It was a very disappointing answer and I will consider coming back to this on Report. In the mean time, I beg leave to withdraw the amendment.
Lord Browne of Ladyton
“Decumulation
(1) Any qualifying money purchase scheme must direct its savers to an independent annuity brokerage service or offer such a brokerage service itself.
(2) Pension schemes shall ensure that any brokerage service selected or provided meets best practice in terms of providing members with—
(a) an assisted path through the annuity process;(b) ensuring access to most annuity providers;(c) minimising costs; and(d) ensuring that information and support is available on alternative at-retirement products.(3) The standards meeting best practice on decumulation shall be defined by the Pensions Regulator after public consultation.
(4) The standards set out in subsection (3) shall be reviewed every three years and, if required, updated.”
Lord Browne of Ladyton
My Lords, Amendment 67ZA is in my name and that of my noble friend Lady Sherlock. It proposes the addition of a simple clause to the Bill which would require the provision of an independent annuity brokerage service or the offer of such a service to all members pending retirement. Later provisions set out how best practice should be defined and maintained in the brokerage service offered to the retiring member or to which he or she is directed; in other words, it calls for an independent brokerage service to assist people to annuitise at the point of retirement.
This is hardly a radical proposal. It is best practice. It is what many employers with DC pension schemes already offer. The ABI code of practice says that providers should tell people who are decumulating that they can shop around and transfer their funds to another provider and that they should seek advice before so doing. But that is not enough. As Dan Hyde, in an article in the Telegraph on 10 December last year, wrote:
“The process starts with a ‘wake-up’ pack sent to savers … in which pages of often unintelligible information, packaged in unhelpful ways, baffle even the well-informed”.
Of course, people can purchase their own independent financial advice but the majority do not retain or use independent financial advisers or accountants. Even a one-off appointment would be expensive, equivalent to a week’s take-home pay for workers on the average wage, even if they knew where to go.
The scandal of annuities is well known and widespread. When this amendment was debated in the House of Commons, Steve Webb, the Pensions Minister, used the same diversionary tactic as did the Minister, Mark Hoban, who responded to the later Westminster Hall debate on annuities. It is all very well to suggest that those reaching retirement age can do many things other than plan for an annuity, but it is insufficient to say that people should have many different opportunities and lots of different advice. The fact is that the variety in the kinds of annuity that are offered and the variety of deals available is considerable and an annuity is invariably the default position of most of those retiring. They need independent support at that time.
The need for that independent support at this point may be obvious but the reasons for it are worth repeating. The first is the complexity of choosing the right annuity option. Annuities are complex products and decumulation is a complex process. Comparison between providers is very difficult. I saw a recent quote for an annuity pot of only £30,000. In one short e-mail the following terms were contained: single life; level escalation; anticipated bonus rates and required smooth return rates, all without explanation. It offered four alternatives to a conventional lifetime quotation, annuity was described as income choice annuity or with-profit annuity, and out of nine total options the rates varied between £700 and £1,400, with most about £1,200. With this complexity no one should exercise a choice without independent support, so no wonder more than 50% of people—according to the Telegraph—go with their existing provider.
I understand that the first comparator website has been launched, and I suppose that is a step in the right direction, but Ros Altmann, the independent pensions consultant who gave evidence to the Commons committee, did not think that it was particularly simple. She said that it was disappointing and not easy to use. Annuities are complex products with multiple options and it may be that there never can be a simple comparison website. Does the Minister accept that annuities are complex and people need independent brokerage support at the point of decision-making? Does he accept that obtaining that support is beyond the grasp of most people, particularly those with no knowledge of investments? If he does accept that, how does he suggest that those who need that support can be guaranteed to get it?
The variety in the kinds of annuity that are offered and the deals that people can get is just bewildering. The NAPF and others have said that annuitising with some pensions scheme providers pays on average 20% less than shopping around. Ros Altmann said on “Newsnight” that if you had an annuity with the worst performers you would have to live until you were 100 to get back the money that you paid in. In effect, inertia or, alternatively, being overwhelmed by the complexity of making a choice, is exploited by pensions providers. Insurers are making excessive profits from purchasers failing to shop around. Inertia is a powerful force that results in excess profits for insurers. They penalise, not reward you, for loyalty. Perhaps it was that which drove the Pensions Minister, Steve Webb, to make his announcement on portable annuities last week—a Statement, by the way, that went down like a lead balloon in the industry. Well, it would, wouldn’t it?
The current system is a lovely little earner, as they say in my new adopted home in the East End of London. The FSCP report published in December made many points. To assist my analysis of it, I have drawn the following points from the report which states that the tactics used by insurance companies and brokers are “tantamount to burglary” of old age pensioners, and that it is nearly impossible for pensioners to know whether they are getting a good deal. Pensioners are hit by excessive profits and exploitative pricing. Insurance companies make 20 times more profits on annuities than on any other financial product. There are poor returns: on a pot of £100,000, Clerical Medical offered £4,664 per annum, while Reliance Mutual offered £6,111. Over their expected lifetime, the pensioners would have been just over £36,000 worse off with one rather than the other.
Lord Bates
My Lords, this Government recognise the importance of supporting individuals in making decisions about their retirement income choices. These choices can be bewildering and the implications of choosing an unsuitable product can be devastating, as the noble Lord has very clearly set out for us in moving this amendment. That is why the Government continue to lead on and to support a whole range of initiatives aimed at driving up standards among providers, providing guidance to trustees and education to members. As well as the ABI code of conduct, we welcome the new Pensions Regulator guidance setting out expectations for what trustees should provide for their members. In addition, the Money Advice Service is further developing its support for those approaching retirement to help them engage with how their personal situation relates to products and services which might be appropriate to their needs.
However, we need to understand whether this activity is making a significant difference in terms of value to the consumer. The Government will therefore be assessing the ABI evaluation of the code of conduct planned for later this year, and the Pensions Regulator will be assessing the impact of the new guidance this summer. We will also be looking at other indicators to assess the extent of change in the market.
Wider regulatory activity includes the Financial Conduct Authority’s thematic review of annuities and consideration of a market study. The review will assess the extent of detriment to consumers of not shopping around—the numbers presented this afternoon have been quite startling and stark—and will consider other indicators of risk, such as insurers’ retention rates and whether profits in the market are high or unreasonably high. The FCA will report later this quarter. In addition, Her Majesty’s Treasury and the Department for Work and Pensions are currently reviewing the broad range of available research and statistics on decumulation to explore the impacts and interactions between market and consumer behaviour and government policy.
Our concern about the noble Lord’s amendment is that, while rightly highlighting a key issue, it would increase the risks for consumers and place additional burdens on employers. I will deal first with the risk for consumers. By sending all members to an annuity broker, we would effectively be pushing them away from regulated advice routes, as brokers, unless they are also FCA-regulated advisers, are not required to ensure that the product is suitable for the consumer. At this point, it is worth saying that the range of options available to somebody facing retirement are bewildering but are also many: there is not just the open market option but whether they should be retiring at all or whether they should be using the flexibility that is available, whether they should be drawing down on a pension pot rather than actually purchasing a new version of it, and what type of annuity—
Baroness Hollis of Heigham (Lab)
That is very helpful from the Minister but, if he is going to do that, he is going to have to look at the artificially high base of alternative income—the £20,000 a year you have to have before you are allowed to enter into these arrangements, which was based on not being a charge to public funds but which is unreasonably high. I fully support the Minister’s argument but it follows that he must actually look at his minimum alternative income requirement.
Lord Bates
Those points about alternative income requirement are correct but there are a number of reasons, not just those, as to why annuity rates are historically low, to do with interest rate levels.
Baroness Hollis of Heigham
The Minister may not have understood my point. He was, quite sensibly, making the point—I entirely agree with it—that people should be able to consider alternatives to annuity arrangements, such as draw-down and the like. All I am saying is that to do that, and not to have to cash in, you have to have, under Treasury rules, a minimum of £20,000 in alternative regular income. That is on the grounds that you need to protect people against falling into a charge on public funds if they exhaust their private savings. That figure seems to be artificially high and the Minister will need to look at that again.
Lord Bates
Okay, I have the right answer now: £20,000 is needed for flexible draw-down but not for capped draw-down or trivial commutation of benefits. There are different elements of it. My point, from which I have probably strayed into a trap—I should have stuck to the script—was that there is a range of choices, not simply the annuity rate which people face. That is why it is vital that all members engage early. That is the reason for the wake-up programme which is now being organised, to encourage people to engage with what they should be considering later on.
Also, making brokers the first port of call for all would create a captive market for one part of the industry, without effectively adding to consumer protections. Another risk to consumers is that they could fail to engage with options other than annuities that are more appropriate to them.
The noble Lord’s amendment suggests that a brokerage service would have to provide information on alternative at-retirement services, but it has to be recognised that brokers are not impartial. They make their money if the member buys an annuity, but not if they choose to draw down or defer, or to commute. While it is right that schemes should play a central role in informing consumers of their options, we would be wary of making this part of the qualifying criteria for automatic enrolment. The duty to enrol into a qualifying scheme does, of course, fall on the employer, and so to require them to take this step would be an unwelcome, additional burden.
I make it clear that we are committed to ensuring that consumers have the information they need to make good choices and that the annuities market works effectively for consumers and so, in this respect, we welcome the debate. The noble Lord, Lord Browne, has perhaps chided my honourable friend Steve Webb for raising this matter on annuities but, in many ways, he was doing just what the noble Lord is doing: saying that this is an area which needs to be discussed and debated. In many ways, this debate enables us to do that, but so do the reviews which are taking place and to which I have alluded in my response. I trust that, as part of that, the noble Lord will feel able to withdraw his amendment.
The Lord Bishop of Chester
My Lords, briefly, I listened to the Minister with great interest. I regard the amendment as important because, in a sense, the proof of the pudding is in the eating; it is when you are taking the benefits of the saving.
The Minister’s reply, it seems to me, says that in addition to all the complexities which the noble Lord, Lord Browne, set out, there is actually a whole load of other complexities about whether you should be having an annuity at all. My question is simply as follows. Until now, when we have often had final-salary schemes around, these decisions have been largely managed. However, we are increasingly moving into a position where most people will be on money-purchase schemes, and this will become normal; we will have to engage with these issues. Given the complexities which the Minister has so helpfully set out, is the Government’s view that the obligation to work this out is on the consumer—the person taking the pension—with some information provided somewhere, or is the obligation on the pension provider to provide information which covers all these options? Where does the responsibility primarily lie to advise the person at the point of retirement? I thought it was not quite clear enough as to where that lies in what the Minister said.
Baroness Hollis of Heigham
I will ask another question associated directly with that. To what extent does the Minister expect the Money Advice Service to take on some of this responsibility, given the slightly bumpy ride it has had so far? Or do the Government—and here I declare an interest—expect an organisation like the Pensions Advisory Service to take on some of this responsibility? It has to be free, independent, impartial and professional. Those are the only two organisations of which I am aware which might fit that role at the moment.
Lord Bates
I am grateful for the interventions of the right reverend Prelate and the noble Baroness. The Money Advice Service and the Pensions Advisory Service are, of course, important. However, the argument we are having at present is about saying that individuals need to focus on this issue. It is their responsibility. It is vital to them. That is what the debates about transfers and auto-enrolment are trying to do.
However, we are wary of putting the responsibility for providing information to members solely in the hands of annuity brokers. It is better to drive up standards by ensuring that all the players in the annuity market—providers, schemes, trustees and consumers—are engaged. That is why the Government have led in support of a number of different initiatives to address this important issue and will continue to challenge the industry if there is no significant improvement.
Lord Browne of Ladyton
My Lords, I am grateful to the Minister for his response. I am disappointed, although not surprised, that his speaking notes sought to deploy what I would call a diversionary tactic in addressing the issue that this amendment seeks to address, and that clearly concerns a number of Members of this Committee. I am grateful to my noble friend Lady Hollis for her intervention and for the detail that she extracted from the Minister. I am also grateful for the intervention of the right reverend Prelate the Bishop of Chester, who encapsulated in a couple of sentences the fact that the Minister had compounded the complexity and the difficulty of the challenge facing those approaching retirement in such pension schemes, rather than giving them any comfort.
Of course, we must all accept what the Minister says about the variety of choices facing those who reach this point before or at the same time as they engage with the issue of annuity. However, the fact is that the level of understanding of the vast majority of those retiring is such that significant numbers—400,000 a year—are entering into annuities. They are taking out these complex insurance policies at the point of retirement and the results that they are achieving, even within the annuities themselves, suggest that they are not making the best choices for their own futures. This amendment seeks, within the confines of this Bill and in the context of other work that must be done in relation to annuities, to provide at least a step in the right direction now, demonstrating that Parliament understands and engages with this issue and wishes to prevent it from becoming the next mis-selling scandal of the financial services industry.
With respect to the Minister, it is no answer to say that, of course, the answers can be bewildering but that these same people should engage with a whole other set of bewildering choices in order to avoid the bewildering nature of the choices in relation to annuities. That is hardly a way to move forward. This is a relatively simple initiative. It is not perfect but it seeks, within the body of the clause as drafted, to address the very issue that was the target of the Minister’s principal criticism. It seeks to establish a method of ensuring that best practice is adopted by those brokerage services and gives the regulator a role in defining what best practice is. Surely this is acceptable, if only as a place marker while we go on to deal with the much more difficult issues that have been revealed, through the reports and the information that I have shared, and that the Minister knows exist in the annuities market. There is something fundamentally wrong with the market and it is driven by exactly the same motives as we have engaged with in other parts of the private pensions industry and in our debates in this Committee.
I understand why the Minister gives this disappointing reply to this amendment. I understand why his Government are reluctant at this point to engage with this initiative. However, I am determined that, at some stage, your Lordships’ House will have an opportunity to consider whether or not this is something that it wishes to engage with. I predict with some confidence that this matter will come back on Report but, given where we are in these proceedings, I will look forward to the debate on this issue in the Chamber and to discovering how much those who hear that debate will be reassured when the Minister or others put forward the arguments that we have heard this afternoon. At this stage, I beg leave to withdraw the amendment.
Baroness Sherlock
“National Employment Savings Trust transfers
(1) In relation to NEST, the Government must by 30 August 2014 notify the European Commission that it wishes to lift the ban on transfers and the contribution cap.
(2) The Secretary of State must make a statement to Parliament within 14 days of the Government notifying the European Commission in accordance with subsection (1).”
Baroness Sherlock
My Lords, the amendment in my name and that of my noble friend Lord Browne would require the Government to lift the restrictions on the National Employment Savings Trust, or NEST, on transfers made before 30 August 2014, and to notify the European Commission that they wish to lift the ban on the transfers and the contribution cap. Following this, and within 14 days of the notification, the Government would be required to make a Statement to Parliament.
The Government’s decision to legislate now but not to lift the restrictions on NEST until 2017, and to refuse to lift the ban on transfers in and out until pot follows member commences, is cause for real concern. Crucially, it cannot be in the public interest for the Government to proceed in such a way. Incidentally, I am sure that the Minister has noted the recommendation from the Work and Pensions Select Committee that the restrictions be lifted without delay.
I agree that there was a good case for having restrictions before it was clear how the market would progress, but these restrictions are no longer justified. The auto-enrolment market is now well under way and NEST has not taken all the business, which had once been a concern among some. Indeed, the restrictions have meant that NEST has been able to get less of that low and medium-earning segment than it otherwise would have done, which will contribute to the increase in the number of small dormant pots.
While the contribution limit will be lifted from 2017 by legislation, the restriction on individual transfers in and out of NEST will be left to coincide with the beginning of pot follows member. Whether the income cap is such a problem up to 2017, the continuing ban on transfers in and out will be. The DWP’s own research found that more than 80% of employers want one provider. However, the ban means that any employer who is thinking about using NEST but currently has a pension scheme of any type will be discouraged from using NEST because they cannot transfer in the pension assets in their current scheme. The Government are encouraging employers to use NEST but, by refusing to lift the ban on transfers in and out right away, they are discouraging those employers who currently have a scheme elsewhere. In this way, NEST is being disadvantaged against many of its market competitors.
Our amendment would enable employers who currently have an existing pension scheme to take their employees with their existing savings into NEST. While there remains a ban on transfers in and out, those employers cannot use NEST, or can use it only by leaving any existing pension pots in a stranded place, with a different scheme. Has the Minister considered that aspect of the Government’s decision?
It appears that what the Government are actually doing is ensuring that the restrictions on NEST remain until every employer has staged. By the time the NEST restrictions are lifted, auto-enrolment will be complete. There are a number of significant problems with the Government’s position. First, as the pensions industry acknowledges, NEST provides best-practice standards, which has obliged the insurance companies to improve their standards. Yet NEST is disadvantaged in competing for many of the low and medium-earning savers for whom it is designed. That may well result in customer detriment for many of those workers. Secondly, the Government’s proposals fail the public interest test. If large numbers of low and medium-earning employees cannot use NEST, it is thereby being prevented from delivering its public interest obligation. Thirdly, restricting NEST impacts on its financial position and makes it harder to pay back the state aid earlier and thereby allow it to reduce its charges even further. This again undermines NEST’s public interest obligation and its mission to deliver a low-charge, high-governance pension proposition. Finally, the rest of the industry is reported in the pensions press as increasingly not having the capacity or, possibly, desire to cope with all the employers who are still to stage in. Having had, it is said, the advantage of the NEST restrictions in place while larger employers move in, the rest of the industry is perhaps less interested in the smaller end of the market.
I trust that the Minister will be able to explain why the Government have so far refused to lift the restrictions. However, whatever has been said in the past, I urge the Minister to accept this amendment; but if he cannot do so today, I hope that he will take it away and reconsider before Report the strong case for these restrictions to be lifted—not in a few years’ time but now, before auto- enrolment is complete. I beg to move.
Lord Bates
My Lords, I thank the noble Baroness, Lady Sherlock, for giving me the opportunity to update the Committee on all things NEST.
As noble Lords know, the National Employment Savings Trust was established to support automatic enrolment, providing access to a quality, low-cost scheme for a target market of low-to-moderate earners and smaller employers. We are now just over one year into automatic enrolment and NEST has around 800,000 members and 2,500 participating employers. Opt-out rates are low, with only 8% of individuals enrolled into NEST choosing not to save for their retirement. NEST is already very successfully doing what it is there for—supporting automatic enrolment.
However, we are approaching a peak in the staging profile. Between April and July this year, 27,000 medium-sized employers will start to enrol their workers, and from April 2015 more than 1 million small employers will do the same. We anticipate around 65% of these small and medium employers will use NEST. By the end of staging we expect NEST to have admitted around 750,000 employers and to be providing a pension saving vehicle for between 2 million and 4 million members.
This implementation challenge is what we need NEST to focus on. We need to ensure that the millions of people currently not saving sufficiently for retirement are provided with an opportunity to do so, and that NEST plays its part in starting to make pension saving the norm rather than the exception. For this reason, during the implementation of automatic enrolment, it is critical that NEST focuses on the key task of getting employers and workers on board without distraction. That is why we announced that we will be lifting the annual contribution limit and transfer restrictions currently placed on NEST by April 2017, when implementation for all existing employers is complete.
I am pleased to advise the Committee that, following an invitation from the European Commission, the Government submitted a formal notification earlier this month of their plans to lift these two constraints. The Commission will provide its response in due course. Once this has been received, the Government intend to consult on draft regulations and bring forward secondary legislation later this year to lift the constraints in 2017.
These regulations will provide certainty that beyond 2017 NEST will be on a similar footing to other providers and its members in the wider pensions market. It will enable NEST to support the successful implementation of automatic enrolment but will send a clear message to employers that these constraints will not have any bearing on them in the longer term, helping them to make an informed decision about automatic enrolment scheme choice for their members.
The Government are committed to ensuring that the introduction of automatic enrolment is a success. Effective implementation is important for building and maintaining consumer confidence in the reforms. Removing the annual contribution limit and transfer restrictions by April 2017 is the right approach.
The noble Baroness asked if the ban on transfers stopped employers from choosing NEST. NEST already has 800,000 members and 2,500 participating employers. Given that the overwhelming majority of employers that have staged so far are large employers, the evidence suggests that the constraints have not unduly deterred employers from choosing NEST.
This is an operational capacity issue for NEST. The restrictions on transfers in and out of NEST were designed to enable NEST to focus on its primary objective of supporting the introduction of automatic enrolment. Between April and July this year, an anticipated 10,000 to 15,000 medium-sized employers will start to use NEST to meet their automatic enrolment duty. It will not stop there, with more than 1 million small employers starting to enrol their workers from 2015.
I hope that those comments and updates, and the responses to the questions that the noble Baroness rightly raised, will enable the noble Lord to withdraw his amendment.
Lord McKenzie of Luton
My Lords, I was not going to intervene in this debate but I must challenge something the Minister said. It is as though the ban on transfers and the contribution cap were originally put in place because otherwise there would be a distraction from the fundamental purpose of NEST. That was absolutely not the position. There was a lot of detailed discussion. My noble friend Lady Drake would have been involved in that.
When the legislation was introduced, the imperative was to try to get a consensus of employers, trade unions and the providers, to make them feel comfortable with auto-enrolment. That certainly means that the Government of the day conceded things to get that consensus, so that the thing could move forward. However, those restrictions were not put in place because NEST would be distracted from the very important task that it was given without them.
Baroness Hollis of Heigham
I support my noble friend, as that is precisely my recollection too. During a series of meetings with the organisations, the temporary cap came up because of the fear among pension providers that they would lose significant sums of money they had under management and the associated fees. The sole reason for doing it at the time was to get consensus to get it off the ground. Distraction was not a word that was ever uttered, and I must have been in about three years’ worth of those negotiations.
Lord Bates
These recollections will be there. I take it that it was in the mind of the Government that NEST had a huge task to focus on in actually attracting people who had never saved for their retirement before to start saving. That was a major responsibility, and issues were debated around that time relating to the effect that NEST’s creation would have on the market. Certain things were considered. It would be wrong to say that it was the only thing that was considered in terms of restrictions and the need to focus, but it was certainly one of the things which should have been focused on.
Baroness Hollis of Heigham
Does the Minister have any evidence that NEST—its chair, chief executive or board members—wanted this limit?
Lord Bates
I do not have any information to hand on that. However, we have got the point that I was perhaps overegging this by saying it was the only thing, and I need to recognise that other factors were perhaps considered when it came to putting this restriction in place. There was no sinister purpose, it was simply to say that there was a huge task to be undertaken and to ensure that NEST’s systems and operations could actually handle this. We do not want to put excessive burdens on NEST so that it fails when so many are dependent on its success.
Baroness Drake
Will the Minister also accept that volumes are critical to the success of NEST and to its charges, and that there is a fine balance between accommodating the concerns of other operators in the industry and not maintaining constraints so long that it undermines the efficiency of the NEST project as a whole?
Lord Bates
The noble Baroness makes a important point in relation to this and I would not dissent from it. NEST has a vital role to play and we want it to be a success. However, it is new, and a new system is coming online, so this ought to be done through learning from experience in a gradual and incremental way rather than as a big bang, of the sort which has had its problems in the past.
Baroness Sherlock
My Lords, I thank all my noble friends who have contributed to the debate and am grateful to the Minister for his graciousness in revising his position. It is quite possible that my noble friends are in a better position to decide what the Labour Government intended by these measures than he perhaps is, despite his knowledge and his current position, since they were involved in shaping it.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud) (Con)
My Lords, I think confusion may have arisen between the discussions that the previous Labour Government had on this and the discussions that we had in Committee on the previous Pensions Bill, which introduced NEST, or at least some revisions to it. I shall check the Hansard record but I distinctly remember discussing this point with the noble Lord, Lord McKenzie, and making an astonishingly similar argument about the importance of making sure that NEST got its primary role right before we moved on to other aspects and transfers. I shall look forward to writing him a letter—I hope—pointing him to the exchange that we had three years ago.
Lord McKenzie of Luton
I look forward to the letter and its contents in due course. We were relaying the origins of NEST in the first place. These issues—the restrictions—were not intended by the then Government that introduced it to avoid NEST being distracted.
Baroness Sherlock
I thank my noble friend for that. First, I am disappointed that the Government decided to go ahead and stick with their current position. I would have liked the House to have the opportunity to discuss this further, as I do not think the Minister took on seriously the arguments made from this side. There was no reference at all to the question of scale. If the reports one hears from the industry are correct, it is possible that some of the big players may, this year or next, shut their doors to new members. We should do everything possible to enable NEST to build an appropriate level of scale and to enable it—far from distracting itself—to do precisely what it was set up for: to fulfil its public service obligation by delivering a high-governance, low-charge offer to those who can benefit from it.
The Minister made reference to employer choice but of course, by definition, the constraints actually reduce employer choice. Employers who want to go into it are unable to because the restrictions remain in place. I am disappointed that, despite the pressure from this side of the House, the Government have not revised their position. However, given that we are in Grand Committee and I can do nothing else, I beg leave to withdraw the amendment.
Lord Bates
“Part 4Transitional provision: schemes undergoing assessment or winding up on the commencement dateSchemes undergoing assessment on the commencement date15 (1) This paragraph applies in relation to an eligible scheme that is undergoing assessment on the commencement date.
Continue to use the old cap as the basis of assessment(2) For the purposes of sections 127(2)(a) and 128(2)(a) of the Pensions Act 2004, ignore any effect that this Schedule has on the compensation which would be payable if the Board assumed responsibility for the scheme in accordance with Chapter 3 of Part 2 of that Act.Going forwards, pay pensions on the basis of the new cap
(3) For the purposes of section 138(2) of the Pensions Act 2004 take into account any effect that this Schedule has on the compensation which would be payable if the Board assumed responsibility for the scheme in accordance with Chapter 3 of Part 2 of that Act on the assessment date.
Schemes that begin winding up before the commencement date16 (1) This paragraph applies in relation to an eligible scheme that is being wound up if the winding up began (or is treated as having begun) before the commencement date.
(2) For the purposes of section 73 and 73A of the Pensions Act 1995, ignore any effect that this Schedule has on the compensation which would be payable if the Board assumed responsibility for the scheme in accordance with Chapter 3 of Part 2 of the Pensions Act 2004.Going forwards, pay pensions on the basis of the new cap during assessment
(3) If for any period the scheme is being wound up and is also undergoing assessment (“the overlap period”), sub-paragraph (4) applies.
(4) For the purposes of section 73A of the Pensions Act 1995 as it applies in relation to the overlap period, take into account any effect that this Schedule has on the compensation which would be payable if the Board assumed responsibility for the scheme in accordance with Chapter 3 of Part 2 of the Pensions Act 2004.
Meaning of “undergoing assessment”17 For the purposes of this Part of this Schedule an eligible scheme is “undergoing assessment” if an assessment period has begun in relation to the scheme but has not yet ended.
Meaning of “eligible scheme”18 Section 126(4) of the Pensions Act 2004 (list of provisions in relation to which regulations may provide that a scheme remains an “eligible scheme”) is to be treated as including a reference to this Part of this Schedule.
“Part 5GeneralInterpretation19 In this Schedule “the commencement date” means the date on which it comes fully into force.
20 Other expressions used in this Schedule have the same meaning as in Part 2 of the Pensions Act 2004.
Further transitional provision may be made by order21 The inclusion of Parts 3 and 4 of this Schedule does not prevent transitional provision being made by order under section 51(7).”
Lord Bates
“(a) regulations under section 3, 17, 18(3) or (5), 19, 20, 29, 31 or 33,”
Lord Bates
My Lords, in moving Amendment 68, I will also speak to the other amendments in this group. Government Amendments 68 and 69 respond to recommendations of the Delegated Powers and Regulatory Reform Committee. They provide that regulations made under certain powers in the Bill would be subject to the affirmative resolution procedure. I am grateful to the Committee for its consideration of the powers in the Bill and subsequent report.
As I do not wish to detain noble Lords for too long, I thought it would be helpful to briefly outline the regulation-making powers affected by the government amendments. They would provide that the regulations made under the following clauses would be affirmative: Clause 17, which provides for regulations to prescribe the rate at which deferral increments will be calculated for the single-tier pension; Clause 18(3), which provides for regulations to modify the amount of state pension to be used when calculating the deferral increase due where a person has been resident overseas during their period of deferral; Clauses 19 and 31, which provide that regulations may be made to disqualify a prisoner from being paid a single-tier pension or bereavement support payment; Clause 20, which provides for regulations to exclude people who are not ordinarily resident in Great Britain or a specified territory from entitlement to the annual uprates of the single-tier pension; and Clause 33, which provides for regulations to prohibit the offering of incentives with the intention of inducing a member of a defined benefit pension scheme to agree to a transfer of their rights to another pension scheme or arrangement.
Turning now to the other amendments in this group, Amendment 68ZA would make regulations under Clause 17(5) affirmative. As I have already said, Amendment 68 provides for regulations under Clause 17 to be affirmative so this amendment is not necessary. Amendment 68B would make regulations under Clause 42 affirmative. Clause 42 provides for regulations to be made to enable the recovery of Pension Protection Fund levies for past periods. This is a technical area relating to ensuring compliance with EU law on state aid, following a decision by the European Commission and a subsequent ruling of the General Court in respect of the BT pension scheme. This found that partial exemption from the PPF levies due to the existence of a Crown guarantee constituted unlawful state aid. The Government understand that BT has appealed the ruling of the General Court to the European Court of Justice.
Regulations were made in 2010, following the Commission’s decision, to ensure payment of the levies going forward. Clause 42 simply provides for regulations to allow recovery of outstanding levies relating to the period from 2005-06 until 2010, when the regulations took effect. In agreement with the Commission, an escrow account was set up pending the final legal outcome and already holds the maximum amount of risk-based pension protection levy that could be due, plus applicable recovery interest. The Government are not aware of any other scheme in the same position as BT, so any regulations would have limited application.
Given the limited scope of this power and the opportunity to scrutinise the Government’s intentions during the passage of the Bill, we consider the negative procedure appropriate in this instance. Any regulations made under this power would simply ensure that the prompt payment to the PPF of the levies for past periods is possible should BT’s final legal challenge not succeed. This will ensure that the UK is in compliance with state aid law and so avoid possible fines. I therefore ask noble Lords not to press their amendments. I beg to move.
The Deputy Chairman of Committees (Baroness Harris of Richmond) (LD)
My Lords, if Amendment 68 is agreed to, I cannot call Amendment 68ZA by reason of pre-emption.
Lord Browne of Ladyton
My Lords, I speak to government Amendments 68 and 69, and to Amendment 68ZA, for what that is now worth, and Amendment 68ZB in the name of my noble friend Lady Sherlock and myself. As the Minister pointed out, Amendment 68ZA is now unnecessary in the light of government Amendment 68.
We welcome the government amendments in this group. As the Minister explained, they have been tabled in response to some of the recommendations made by the DPRRC. I am pleased to see that the Government have come to accept the DPRRC’s recommendation that Clause 17 powers relating to the effect of pensioners postponing or suspending state pensions should be affirmative; that was the purpose of our Amendment 68ZA.
Amendment 68ZB is purely a probing amendment, and has been remarkably successful in drawing from the Minister an extensive explanation of the regulation-making power under Clause 42, and why the Government felt that it was appropriate that it should proceed by the negative resolution procedure. I am extremely grateful to the Minister for that detailed explanation and, in the light of his full explanation, which is now on the record, I will not press that amendment.
Lord Bates
Lord Bates
“(3) The following come into force on the day on which this Act is passed—
(a) section 28;(b) section (Pension Protection Fund: compensation cap to apply separately to certain benefits);(c) this Part.”
“(6A) Section (Public service pension schemes: transitional arrangements) comes into force on such day or days as the Treasury may by order appoint.
(6B) An order under subsection (1) or (6A) may appoint different days for different purposes.”