Pensions Act 2011 (Consequential and Supplementary Provisions) Regulations 2014

Wednesday 9th July 2014 Grand Committee

Motion to Consider

15:58

Moved by

[Lord Bates]

That the Grand Committee do consider the Pensions Act 2011 (Consequential and Supplementary Provisions) Regulations 2014.

Relevant document: 3rd Report from the Joint Committee on Statutory Instruments

My Lords, I am satisfied that these regulations are compatible with the European Convention on Human Rights. They make consequential and supplementary changes to primary legislation to support the clarified definition of money purchase benefits in Section 29 of the Pensions Act 2011.

A further, and more detailed set of regulations, The Pensions Act 2011 (Transitional, Consequential and Supplementary Provisions) Regulations 2014, deal with consequent changes to secondary legislation. These were laid before Parliament on 3 July 2014. Both sets of regulations will come into force at the same time as the clarified definition in Section 29 of the Pensions Act 2011.

The clarified definition of money purchase benefits will ensure that only benefits which cannot develop a deficit in funding can be money purchase benefits. Noble Lords may be familiar with the decision of the Supreme Court in 2011, in the case of Houldsworth and another v Bridge Trustees Ltd, that certain benefits which could develop funding deficits or surpluses could still fall within the definition of money purchase benefits.

While this decision concerned two specific types of benefit structure found in a particular scheme, it created widespread uncertainty in the pensions industry. That was because the decision could also be interpreted as covering other types of benefits and place these outside the protection of the regulatory framework for benefits that are not money purchase, even though they had the potential to develop funding deficits.

Section 29 of the Pension Act 2011, which has retrospective effect, and the supporting regulations remove that uncertainty. Where in the past decisions have been made by schemes that are in keeping with the clarified definition, the retrospective effect of Section 29 will ensure they remain valid, despite the fact that those decisions may be incompatible with the Supreme Court’s judgment. Where decisions have been made that are inconsistent with the clarified definition there is transitional provision in the regulations so that schemes will not need to unpick past decisions. Going forward, however, it is important that the trustees and managers of schemes know what action they need to take in respect of benefits they have previously treated as money purchase, but which do not meet the clarified definition. That will ensure that their members are protected.

In particular, these regulations amend Section 84 of the Pension Schemes Act 1993 to provide an alternative method for trustees or managers to revalue certain types of benefits known as cash balance benefits. The cash balance method allows the sum available for a cash balance benefit for a deferred member to be revalued by any method that is applied to the benefits of active members where it cannot be calculated by reference to the salary.

The regulations also include decisions made by the board of the Pension Protection Fund that relate to benefits affected by the clarified definition as matters that are reviewable under Schedule 9 to the Pensions Act 2004. That will ensure that during the transitional period, where the board has exercised discretion as to whether to treat benefits as money purchase benefits, that decision can be challenged and subject to a formal review process.

The Government have worked closely with the pensions industry to identify the type and number of schemes that will be affected by the clarified definition of money purchase benefits. The majority of schemes will be hybrid schemes—that is, they will contain a mixture of money purchase and non-money purchase benefits. Hybrid schemes make up about 2% of the estimated 40,000 private occupational schemes in the UK which include money purchase benefits—that is, approximately 800 schemes.

I commend the Pensions Act 2011 (Consequential and Supplementary Provisions) Regulations 2014 to the Grand Committee and ask its approval to implement them.

[Lord Kirkwood of Kirkhope (LD)]

My Lords, I am pleased to have the opportunity to contribute to this technical debate. I declare an interest as chairman of the defined benefit superannuation scheme of the General Medical Council, so unfortunately I know nothing about money purchase schemes. I did try, honestly—I took home the 36-page judgment of the noble and learned Lord, Lord Walker, and read it carefully until Germany scored the second goal. I still do not understand the noble and learned Lord’s reasoning, but I am sure that it is sound.

I hope that the Minister can help me. I understand that we are dealing with two sets of statutory instruments. The department deserves credit for taking on board the suggestion made by the Secondary Legislation Scrutiny Committee of teasing out the negative from the affirmative. That is always good practice. However, I do not know where the transitional regulation, Regulation 1711, comes from. I assumed that it would have been sensible to have taken these together because they talk about the same thing and are all part of a piece. However, I may have missed something and the Minister might be able to put me right on the procedure that is involved.

This is a small but important issue and anyone who looks at it will be reminded of the ineffable complexity of our pensions system. I have to say that although this is the right thing to do and I am content with the regulations, they form another layer of complexity—because they have to. If money purchase is not defined in this way, it would leave a terrible amount of uncertainty. If people do not understand a valid, watertight description of money purchase, chaos will ensue. Lots of schemes could get into even greater difficulties in the future.

We always have to be careful about retrospective provision. These regulations go back to 1 January 1997. I understand perfectly why and, in the circumstances, that is justified, but, as I say, we must always be careful about retrospective provision. However, I think this is the right tactic. It is not perfect because retrospection never is, but the stated case is accepted, certainly as far as I am concerned. Clarity is the order of the day, as much as we can achieve it in pension provision.

I have a couple of questions for the Minister. Some of these things are imponderable because the data are not available in money purchase schemes to the same extent as in defined benefit schemes, but the number of affected schemes has been listed as being around 800. Is there an update on that figure and is there now a better definition? Has the number gone up or down since these matters started to be drawn up by the department? I also want to try to understand what the costs of non-compliance would amount to. What is the worst that could happen? If everything that can go wrong does go wrong, what would happen to hybrid schemes such as these which involve money purchase in a way that we have to change through these regulations?

As the chairman of a superannuation scheme myself, the key and overriding priority of a trustee is to protect the members’ benefits. Are there any circumstances where benefits afforded to members could be prejudiced by these changes? I have looked at the very helpful Explanatory Memorandum. Paragraph 19 explains the provisions of,

“transitional measures to assist affected schemes in three ways”.

The first bullet point talks about,

“retrospective protection so that schemes do not have to revisit past decisions”,

and goes on to conclude that,

“there is very likely to be no detrimental material impact on member benefits”.

That is a nuanced subordinate clause, and perhaps it has to be so. I would rather have the truth than be given a more definitive statement that was easier to understand and more reassuring. However, that is a key question for me. If I could be given some reassurance on that point, I would be even happier than I am at the moment.

Finally, I think that the consultation was exemplary. I looked at the document very carefully and the department did everything it could. The consultation was responded to well and those who did respond are experts who know the exact consequences of these changes. For me, that has lifted a great deal of concern and apprehension about the effects of these changes. These regulations reflect circumstances that no one could have foreseen and the Government have responded to them in the best way they can. The situation is still a bit fuzzy at the edges, but I hope that the Minister will give us an assurance that the appropriate officials who understand these things will monitor the position so that we can be assured in the fullness of time that the assumptions we are making of very little or no loss of benefit to individual members are found to be what happens in practice in the future.

[Baroness Drake (Lab)]

My Lords, I declare my interests as a trustee of both the Santander and Telefónica pension schemes.

This statutory instrument has been on a rather interesting journey. In part it supersedes draft regulations published in May, which were withdrawn and subsequently divided into two in order to separate provisions required to go through affirmative procedure from those required to go through negative procedure. It has therefore been a little confusing to try to anticipate the affirmative provisions to be relaid in the form of a pared-down instrument, as this SI was not laid until last Thursday. Having said that, I appreciate that dealing with the uncertainties and complexities that flow from the Supreme Court decision in Bridge cannot have been straightforward for the Government. I compliment the drafters of the Explanatory Memoranda and the impact assessment, who tried to provide clarity as to what the Government intend and why, in what to most normal people would seem a rather dense and complex set of requirements.

The two regulations have separate Explanatory Memoranda, but they share a common impact assessment, so one can assume that certain key assumptions and conclusions underpin both orders. I refer in particular to the fact that, having considered the consultation responses, the department has changed its policy on retrospection for non-compliant schemes. Decisions taken by schemes between 1 January 1997 and the coming into force of Section 29 will be validated, except in two limited circumstances that relate to winding up and employer debt, where there is a risk to members’ benefits.

The department has been persuaded that it would therefore be unduly burdensome to require schemes to revisit past decisions, which could give rise to expensive administrative costs that could deplete scheme assets and therefore the ability to fund members’ benefits—that is the argument put by the Government—and that the impact of members’ benefits of revisiting past decisions since July 2011 would be negligible. In summary, the Government are persuaded that with two exceptions, Section 29 will come into force only with prospective effect; there will be retrospective protection for schemes and past decisions will be validated.

However, in coming to that view and giving that retrospective protection to decisions made, the department is unable to quantify the impact of the regulations on schemes likely to be affected. There are no data available at an industry-wide level. The consultation did not elicit sufficient data at scheme level to allow the department to produce reliable estimates of the impacts on schemes and on members—and indeed, on employers. The department engaged further through the pensions regulator’s annual survey and the wider pensions industry to enable some quantification of costs and benefit. However, insufficient information was forthcoming.

A question must be, therefore: are the Government right to be persuaded, and indeed confident, that except in the defined limited circumstances that they have identified, there is negligible risk to members’ benefits in validating decisions taken by schemes before the coming into force of Section 29? Should there be more exceptions to the retrospective validation? How do the Government give themselves the level of confidence they need to give that retrospective validation? I will illustrate my concern with reference to a couple of examples.

The very important rules which govern any attempts to change pension rights or entitlements are detailed in Section 67 of the Pensions Act 1995, popularly referred to as “Section 67 rights”—an often quoted phrase because of its protected nature. During the course of the consultation on the regulations arising from the Pensions Act 2011, stakeholders advised the department that there could be schemes which had inadvertently changed their benefits from non-money purchase to money purchase; for example, by removing a guarantee from a cash balance scheme because of their interpretation of the law in force at the time. In doing so they may not have secured the members’ consent as is required.

The department has taken the view that schemes should not be required to revisit these decisions and that it would deem that the requirements of Section 67 of the Pensions Act 1995 had been satisfied where the actuarial equivalence requirements were met before such a scheme modification took effect. But those actuarial equivalence assumptions may not hold good over the longer term, and the issue remains that a guarantee or some other right has been removed without consent. The Section 67 requirements have not been met and the beneficiaries may be worse off.

16:15

We have little information on these breaches and yet the regulations amend the requirements of Section 67 of the Pensions Act 1995. Traditionally, Governments, including this one, have been reluctant to override Section 67 rights—for good reasons—but appear to be doing it in this instance. Does the Minister not agree that this could be seen as a worrying precedent, particularly by those who are concerned that members’ Section 67 rights are not tampered with, prejudiced or undermined?

Another example arises from the regulations modifying the retrospective application of winding-up legislation to schemes that have made decisions on a basis incompatible with Section 29, which gives the definition of the distinction between money purchase and non-money purchase, such that wind-ups that commence before the coming into force date are not required to be reopened unless the winding-up is under way at commencement in limited, prescribed circumstances.

The impact assessment refers to non-money purchase members who have taken early retirement as a class of member that could benefit from requiring schemes to revisit past winding-up decisions, but then adds:

“Even these members could only benefit where the amount of money available increases to a level above the Pension Protection Fund minimum, but below their full entitlement”.

The impact assessment is in effect saying that because the revisiting of a wind-up decision would increase such members’ benefits only to a level above the PPF level of compensation and not back to their full entitlement, that in itself is an acceptable reason for wind-up decisions not to be revisited. I ask the Minister: is taking such a subjective view of the value of the lost benefit an acceptable premise for giving retrospective protection to schemes?

Turning to the exact content of the order before us today, it is clearly understandable why it should not apply to the Imperial Home Decor pension scheme. It is also understandable why the list of matters relating to decisions made by the PPF that are subject to review should be extended to include directions made about whether any benefits affected by the Section 29 definition should be treated as money purchase benefits for the transitional period.

On that point, some DC schemes will have to totally “flip”—a word I have borrowed from the department—to being DB schemes that cannot qualify for access to the PPF before 1 April 2015 and whose members will not be covered by a protection regime during this period. This could, I assume, put the Government in breach of their obligations under Article 8 of the European Union’s relevant insolvency directive. I ask the Minister: if the employer supporting such a flipping scheme were to become insolvent between July 2014 and April 2015, what action would the Government take to protect those members in line with their obligations under the relevant directive?

Finally, on the matter of cash-balance benefits, which are non-money purchase benefits based on a promise in relation to a pot of money accumulated, the requirement to revalue the benefit for members who have left the scheme is in line with the annual revaluation order and can be complex—as was that sentence, try as I did to make it less complex. Basically, there was an entitlement to have benefits revalued in line with a certain order, and I accept that that requirement can be complex.

I agree that it seems sensible for the Government to provide clarity in the regulations to allow for a cash-balance method of revaluation based on a more simple formula, for which the order makes provision —in effect, a flat-rate formula that provides for active and deferred members to be treated in the same way. However, I remain concerned on this retrospective point. There are schemes which have had revalued deferred benefits in a way which is incompatible with the Section 29 definition. Some members may consequently receive lower-value benefits. I accept that it may be possible that some receive higher-value benefits as a result. However, this is another instance where retrospection protection is given to revaluations which have not been compatible with the Section 29 definition.

I understand the complexities, and trying to construct this speech so that it did not sound too complex was a challenge in itself. I remain concerned at how the Government accord themselves a level of confidence at which they can say that, in giving this retrospective protection, the disregard on members’ benefits is negligible.

[Baroness Turner of Camden (Lab)]

My Lords, my noble friend Lady Drake has made an exhaustive study of this complicated matter. I certainly do not have her kind of in-depth understanding. I came this afternoon because I am interested in what happens to members of DB schemes who have been concerned that the various changes would threaten the safety of their benefits.

As we have heard this afternoon, there have been quite heavy assurances from the Government that the protection of members is paramount to them; that is of course important. We have already heard that there have been assurances on retrospection. The changeover in some schemes from non-money purchase into money purchase can give rise to uncertainty and a lack of assurance among the people receiving it. I am therefore interested to hear what the Minister has to say in response to my noble friend, who has raised these points sharply and with great clarity. It is necessary when you are making adjustments in pension benefits in whatever area to make sure that people who are on the receiving end are confident that what they have been paying for and supporting all their lives will be safe. That is terribly important.

We understand that the Government have given assurance both in relation to protection under the ECHR, which is important, and to general protection as well as protection of some means of challenging if people feel concerned and are not happy about what is happening. I await with interest what the Minister has to say in response to the issues which have been raised, which are very pertinent in the circumstances.

[Baroness Sherlock (Lab)]

My Lords, I thank the Minister for his introduction to these regulations and for explaining how we got to this place, the noble Lord, Lord Kirkwood, for some very good questions, and my noble friends Lady Drake and Lady Turner for raising some significant concerns.

There has rightly been a long consultation on this issue, and it is right that the Government have taken the time to listen to a wide range of voices, particularly regarding the retrospective nature of the changes, the significance of which has been highlighted by the noble Lord, Lord Kirkwood, and others. While on one level these are very technical changes—I say to my noble friend Lady Drake that, being a relatively normal person as far as pensions are concerned, if in no other respect, I found that “complex” did not begin to describe my emotions—sadly, I felt the same way as Brazil when I was reading these. None the less I confess that the questions I am asking the Minister are quite genuine and I will find the answers fascinating, because I certainly do not pretend to understand the exact implications of what is happening here.

As my noble friend Lady Drake explained, the original draft SI was withdrawn after being challenged by the Joint Committee on Statutory Instruments. It has been replaced by two orders: this affirmative draft instrument and a negative instrument, the Pensions Act 2011 (Transitional, Consequential and Supplementary Provisions) Regulations 2014, to which I shall refer from now on as the negative instrument, if noble Lords will bear with me. Those two orders are completely intertwined. Indeed, the Government issued a single impact assessment covering both. Therefore I hope that the Minister will forgive me if some of my questions end up straying into that territory. I simply want to understand the settlement that the Government reached, and inevitably the ground is split in practice between the two instruments.

On commencement, my noble friend Lady Drake explained that these regulations will apply primarily with prospective effect, with the exception of two limited circumstances relating to winding up and to employer debt where there is a risk to member benefits. However, there will be retrospective protection for the affected pension schemes, with earlier decisions effectively being validated. The key effects of that of course—as has been mentioned—are on schemes that switch from being money purchase to defined benefit, with all the significant regulatory, governance and funding implications that that switch carries. There is also the effect on wind-ups and administration and the impact on employer debt. The Government originally intended that the provisions should all be retrospectively applied, but changed their position on consultation. The Government response to the consultation on the definition of money purchase schemes says at paragraph 50:

“However the Department has been persuaded that, where there is negligible risk to member benefits, it would be unduly burdensome to require schemes to revisit past decisions. This would give rise to expensive administrative costs that could deplete scheme assets and therefore, the ability to fund members’ benefits”.

Paragraph 51 continues:

“Nevertheless, where there is a real risk to member benefits, it is right that the legislation provides that employers fund a scheme deficit if a scheme is underfunded on wind-up, or if the scheme is unable to put in place a recovery plan”.

The response goes on to explain that in practice the transitional regulations validate the actions of trustees or managers in respect of those non-money purchase benefits, except in limited circumstances.

If that is the basis of the transitional protection that is being offered by the Government, can the Minister tell the Grand Committee a bit more about the basis of their assessment? The impact assessment says that,

“there is insufficient information available to accurately estimate the number of schemes affected by these regulations”.

It goes on to say that there are approximately 40,000 private occupational pension schemes in the UK that include money purchase benefits, of which about 2% are hybrid schemes.

The impact assessment says that during the consultation the department held four stakeholder forum events, with more than 100 stakeholders in attendance. It had 95 responses to the consultation document. The department also made direct approaches to relevant organisations, including employer representative bodies. As my noble friend Lady Drake mentioned, it also went out and made direct attempts to get data, in order to better understand this. However, paragraph 25 of the impact assessment says:

“Despite these efforts the Department is unable to quantify the impact of the regulations on the schemes that are likely to be affected. There is no data available at an industry-wide level and the consultation did not elicit sufficient data at scheme level to allow us to produce reliable estimates of the impacts on schemes, employers or members”.

However, the Government were obviously given a pretty clear steer by the industry that the consequences of retrospection would be significant, because the impact assessment says at paragraph 30:

“The Department have taken into account the strongly expressed views of those in the industry. Having carefully considered these responses, the Department is persuaded that this change to the policy”—

as was quoted—

“will not appreciably increase risk to members’ entitlement or make any material difference to members’ pension outcomes, given the protections put in place through these regulations”.

My noble friend Lady Turner said that she was pleased the Government were able to give assurances that members would not find their benefits being affected. However, I have to ask—along with my noble friend Lady Drake—how the Government can be confident that the risk to members’ entitlements is negligible and will not increase appreciably, when they are unable to quantify even the number of schemes affected, never mind the number of members, and when they do not seem to have been able to gather any data about what the quantum of that effect might be. I understand that they are in a difficult position, but I wonder what degree of confidence the Government have, and therefore what degree of assurance the Minister can offer the House through this Grand Committee, that these regulations will have the effects that the Government believe they will.

16:29

I look next at timing. The plan is to give a reasonable period for effectively newly DB schemes to comply with existing legislative requirements. It is proposed that 2015-16 will be the first year that the PPF levy will apply to them. They will not have to appoint actuaries until October. The effective date at which assets and liabilities are valued is within 12 months of coming into force, and valuation must be completed within 15 months. I understand the rationale for the first two, on the levy year and the actuaries, but can the Minister explain why the Government felt it necessary to allow 27 months for affected schemes to comply with existing funding requirements?

Despite having read all three instruments, the Explanatory Notes and the impact assessments, I have ended up being unable to work out if there are any losers and, if so, who they might be and what they might lose. Can the Minister shed any more light on that? Which groups of beneficiaries have the potential to lose out as a result of these changes and the decision on retrospection and transitional protection? My noble friend Lady Drake gave some interesting examples, I would be interested to hear the Minister’s response to her. I would also be grateful for any further light he can shed on that.

Then there is a question of the definition of money-purchase benefits. The Government introduced a new definition in Section 29 of the Pensions Act 2011. That new statutory definition will not come into force until the regulations are in force, but it will then apply retrospectively from 1 January 1997. As I understand it, that means that benefits that have been administered and communicated to members as money-purchase benefits will become defined benefits. If so, that raises a number of questions. Will the trustees of a newly DB scheme have to pursue former employers who left without paying a Section 75 buyout debt, or whose debt was calculated without regard to the formerly DC assets and liabilities? Will trustees of a newly DB scheme have to revisit past valuations to ensure that they pick up former DC assets and liabilities and include those assets and liabilities in future valuations, even though that could add materially to the costs?

If members of a new DB scheme were told that their contributions to a DC scheme brought benefits which would get top priority were the scheme to wind up, and that these benefits would now be reduced due to a deficit on the DB scheme, how should any claims from members be addressed? On the Pension Protection Fund, what assessment have the Government made of the impact on the PPF levy going forward?

Finally, trustees of newly DB schemes will need to decide how they will administer the scheme between now and when the new statutory definition comes into force. They are in a strange position: their scheme is currently a DC scheme, but they know that it will probably become a DB scheme with effect from 1997. Obviously, it is welcome that these regulations provide a degree of clarity, but can the Minister elaborate on any advice that his department has offered or is offering on these issues? I look forward to the Minister’s reply.

[Lord Bates]

My Lords, a number of questions have been asked. I have counted 19, which compares to the five that were asked when these regulations were scrutinised in the other place. I am sure that that is a reflection of the quality and expertise, if not the viewing habits, of the members of the respective committees. I confess that at one point last night I was not sure whether the scoreline reflected the football match I was watching or the judgment of the Supreme Court which happened to be open on my lap at the same time.

[Lord Kirkwood of Kirkhope]

That was 4-1.

[Lord Bates]

At half time.

There are many questions and I want to try to address as many of them as possible to get the responses on the record for people to scrutinise. First, my noble friend Lord Kirkwood asked how many schemes were affected by the clarified money-purchased benefits definition. It has not been possible to quantify the exact number of the affected schemes as trustees and scheme managers are only required to make detailed reports to the pensions regulator on benefits that they consider to be non-money purchase. Schemes are not required to provide detailed reports of benefits that they consider to be money purchase, so any information held by the regulator here is self-reported by the scheme on a voluntary basis.

We consulted extensively on this point, and the regulator has also tried to secure additional data. However, stakeholders have been unable to share with us the detailed scheme-level data because that information is sensitive and restricted. A small number of consultation responses indicated the size of the scheme and the potential costs involved. However, the information is not representative of all the schemes affected, and cannot be reliably used to produce an aggregate estimate. The DWP continues to work with the regulator to identify and communicate with effective schemes to establish more comprehensive data on how many schemes are to be affected.

My noble friend Lord Kirkwood also asked whether with the new definition the Government are adding costs and increasing the administrative burden on the schemes. I can assure my noble friend that that is not the case. Although the clarified definition is retrospective to 1 January 1997, in most cases the regulations modify the retrospective application of regulatory legislation so that schemes will not need to look back at events where benefits could fall into a category affected by the Bridge judgment or the clarified definition in Section 29. The clarified definition will mean that the member benefits are protected. The transitional measures will bring schemes into compliance, are proportionate and bear in mind the risks and the burdens on members, schemes and employers. We believe that that is the sensible approach, precisely because the Government want to minimise the additional requirements on schemes without jeopardising the protection of the scheme’s members.

My noble friend also asked why the Government insisted on a change of definition, and asked whether the Supreme Court decision was wrong. The Supreme Court judgment concerned two specific scheme benefit types: benefits which provided a guaranteed pot, otherwise known as cash balance benefits, and pensions in payment from schemes derived from money purchase benefits, both of which the court decided could be money purchase. The decision meant that some guaranteed benefits from outside the regulatory regime conflicted with the Government’s view of what constituted a money purchase benefit.

Why are the regulations not together? The department’s advice was that both sets of regulations would be debated together subject to the affirmative procedure. However, following comment from the Joint Committee on Statutory Instruments, the department decided to split the regulations. However, we expect that because both sets are closely linked together, the discussion will encompass transitional arrangements for both regulations.

I have addressed the question of why there are two separate regulations, but I will add one additional point. It has been necessary to divide regulations in that way because the primary legislation under which the regulations have been made—Section 33 of the Pensions Act 2011—provides a different parliamentary procedure for regulations which amend primary legislation. I appreciate that that procedural requirement has not made discussion and debate in this area easier, but I am happy for this debate to encompass both sets of regulations, as it has already done. On why the clarified definition of money purchase benefits is retrospective to 1 January 1997, the Government have decided on retrospection to that date so that the effect of the clarified definition coincided with the inception of key pension protection legislation. Provisions of the Pensions Act 1995 largely came into force in April 1997, hence the chosen date, but retrospection was set up on 1 January 1997 as the financial assistance scheme eligibility began for schemes which started winding up from that date. However, since the Pensions Act 2011 was passed, we have no evidence that any of the schemes in this position would have been affected by the Bridge Trustees judgment or Section 29.

The noble Baroness, Lady Drake, asked whether there was a pre-existing requirement to have benefits valued consistently with legislative requirements in the past. Some schemes may have valued in a way that was not consistent with those requirements. Evidence from the consultations showed that members’ benefits which here are affected by Section 29 and the regulations might have been revalued by the application of notional interest or investment return. It is possible that this would have been less than revaluation in accordance with statutory requirements. However, we had to balance the protection of members against avoiding administrative complexity for schemes. Evidence suggested that the cost of applying revaluation arrangements would outweigh the benefit to members.

The noble Baroness, Lady Drake, also asked what the new cash balance method was. The new cash balance method is based on an existing flat rate method, which requires deferred members to receive any increases that they would have received if they had still been active members of the scheme. She also asked why there is no requirement to revisit the scheme if it is wound up. If the scheme is still being wound up at the time that the regulations come into force and is underfunded, trustees will be required to revisit an employer debt before the regulations come into force. If the scheme has completed winding up when the regulations come into force, there is no scheme in existence to unwind; all the assets of the scheme have been dispersed. The regulations therefore do not require a scheme that has completed winding up to be unpicked.

A question was asked about why schemes newly eligible for the Pension Protection Fund will not be treated as such until 1 April 2015. That date marks the beginning of the first full levy year after these regulations are planned to be in force. The delay will allow the schemes time to correctly determine whether they are eligible for the fund and to carry out the necessary valuations on which the first levy bill will be based. It also ensures that schemes will not be required to pay the levy in respect of past periods. It would not be fair to other levy payers to provide protection for an earlier period for a scheme that has not paid any levy.

The noble Baroness, Lady Drake, raised the question of flipping. The department’s consultation exercise did not identify any scheme that will become newly eligible for the Pension Protection Fund that has a sponsoring employer likely to become insolvent in that small window of time. If such an event does occur, the Government will give consideration to the most appropriate way of protecting scheme members. It would therefore not be fair to other pension protection levy payers to protect the members of a scheme in respect of a period of time when the scheme had not paid into any levy.

The noble Baroness, Lady Drake, asked whether once the regulations are in force it would still be possible to change the scheme benefits without member consent from one form of non-money purchase arrangement to another with a lesser benefit promise. A change of this nature—a detrimental modification under Section 67 of the Pensions Act 1995—would still be subject to a requirement that the value of the members’ rights or benefits was not less than before the change. If this requirement were not met, the change would be subject to being made void by the Pensions Regulator.

The noble Baroness also suggested that there were insufficient data for the Government to be able to conclude that there will be a negligible effect. Section 67 will continue to apply except in very limited circumstances where schemes have changed benefits from cash balance to money purchase. This circumstance is catered for in the negative set of regulations, which require the actuarial calculation between cash balance and benefits collected in the money purchase schemes to be maintained. In addition, the trustee approval and reporting requirements must have been satisfied.

The point was made that retrospection makes these regulations too complex. The clarified definition, when in force, will be retrospective to 1 January 1997. Retrospection to January 1997 is needed to protect the position of schemes that had taken decisions in accordance with the clarified definition in Section 29—that is, not in accordance with the Supreme Court’s judgment—but for schemes that have acted in accordance with the judgment, these regulations modify the application of regulatory legislation with retrospective effect and for the transitional period where necessary. The regulations cover the many different types of pension arrangements that currently exist and which could have been affected by the judgment of the Supreme Court in respect of Section 29.

16:45

I shall come shortly to the question asked by the noble Baroness, Lady Turner. The noble Baroness, Lady Sherlock, asked how many schemes would be affected during the transitional period. The negative regulations contain detailed provisions to cover the transition from compliance with money purchase regulatory requirements; for example, Regulation 68 provides for the schedule of payments to remain in place until a first schedule of contributions is prepared.

On the noble Baroness’s point about advice for scheme members, we are working with the Pensions Regulator to provide information for trustees to cover that area. The noble Baroness asked who could lose out, as did the noble Baroness, Lady Turner. Schemes may face additional cost. We believe that we have taken a more balanced approach, to ensure member protection.

The noble Baroness, Lady Sherlock, asked about commencement, retrospective protection for schemes, decisions being validated and how the department decided on these. It is correct that the Government have been unable to quantify the full impact. However, we have gathered data on the practices of affected schemes. Where schemes have provided benefits affected by Section 29, those benefits would have been treated as money purchase and would have been subject to fixed-rate and notional revaluation. Those benefits would not have been subject to transfer or in a scheme transferring to the Pension Protection Fund. They would have been paid in full. Therefore, we concluded that the measure was unlikely to have any detrimental effect on members.

On why 27 months are being given to comply with the existing funding requirements, this applies only to schemes that wholly flip from money purchase to defined benefit or hybrid schemes with money purchase benefits in them. They are treated as if they are a new scheme under the existing legislation and will have 27 months to take a revaluation and to put in place a recovery plan, if required, in accordance with the scheme funding requirements. However, this applies to ongoing schemes. If the scheme is a hybrid scheme and already undertaking scheme funding, it would carry over its responsibility for the existing scheme funding cycle. These measures were put in place to allow ongoing schemes enough time to undertake complicated and detailed actuarial evaluations required for scheme-funding purposes. Schemes that have been treated as money purchase will continue with their existing schedules of payments for contributions in respect of member benefits until a scheme funding contributions schedule is enforced within the 27-month period.

The noble Baroness, Lady Turner, asked about protection for people in defined benefit schemes and possible movement across. I can confirm that members of defined benefit schemes will still be subject to existing protection under their schemes.

I am grateful for the points that have been raised in this debate in relation to the regulations and more widely to the more detailed and linked regulations, the Pensions Act 2011 (Transitional, Consequential and Supplementary Provisions) Regulations 2014. The two sets of regulations are inextricably linked in that, together, they support the clarified definition of money purchase benefits in Section 29 of the Pensions Act 2011, and it is right that we consider them together.

For the vast majority of schemes with benefits affected by the clarified definition of money purchase benefits, the two sets of regulations will be helpful and provide much-needed clarity about what is and is not a money purchase benefit. They will facilitate everyday decisions made by trustees and managers in running a pension scheme by setting out how and from when the existing legislation relating to benefits that do not meet the clarified definition of money purchase benefits must be applied.

Many in the pensions industry agree that clarity was needed following the Supreme Court judgment in the case of Bridge Trustees and others. The Government have consulted widely and extensively with the industry and others in developing these regulations. By and large, the provisions within them have been welcomed. In the case of a small minority of schemes where representations have been made that these changes should not apply, the Government have worked closely with individual schemes in order to understand the reasons why. The Government are sympathetic to such representations and, as far as possible, easements have been made through transitional arrangements to facilitate such schemes to comply with the new requirements.

The Government also recognise that some trustees and others may have had a different understanding of money purchase benefits in the past. That is why the Pensions Act 2011 (Transitional, Consequential and Supplementary Provisions) Regulations 2014 made detailed transitional provisions so that in the main such past decisions will not need to be revisited. The fundamental point here is that pensions law has a range of provisions that exist to protect members with pension benefits against the risk that their scheme is not able to meet the pensions promise. These include the statutory regulation of funding and the backstop of the Pension Protection Fund if sponsoring employers become insolvent and the schemes are underfunded.

Money purchase benefits fall outside this legislative protection, and that is why the Government have always taken the view that the term “money purchase benefits” should not refer to benefits where there is no risk of a funding deficit. For example, it is not appropriate to reopen the decisions made in relation to schemes that have completed their wind-up some years before or to require schemes to comply with scheme funding requirements going back in time. Further, it would not be practical to revisit past levy bills or valuations on re-entry into the Pension Protection Fund, as it was determined. If the Government had not acted following the judgment, members would have found that their schemes were unable to pay their benefits, but they would still not have been eligible for help from the Pension Protection Fund. It could also have led to anomalous results where the assets of schemes in wind-up were distributed. Similarly, if any scheme were to be exempted from the provisions in either set of regulations going forward, their members would not be protected. It is paramount that all members have the reassurance that their pensions will be protected if there is a risk of a deficit in the funds that they support.

It is also important that members, trustees and the wider pensions industry are clear about what the definition of money purchase benefits actually means in practical terms. These regulations provide that protection for members and give much-needed clarity about what action is going to be needed. At the same time, they provide transitional measures to ease the schemes and employers into the regulatory regime where they have previously not considered it to apply. For example, schemes that have not previously complied with scheme funding requirements are treated like new schemes and given 27 months to put in place appropriate scheme funding requirements which aim to ensure that the scheme is able sufficiently to fund benefits that have been guaranteed to members.

These draft regulations make modifications to the existing primary legislation to provide supplementary and consequential measures—

[Baroness Drake]

My Lords, this may be an appropriate moment to intervene because I want to push the Minister on a couple of points. I have been trying to anticipate when he would be coming to the end of his remarks.

Perhaps I may go back to two points. First, Section 67 rights under the 1995 Act are pretty important rights that get people rather excited. The concern I was trying to express was that this seems to set the precedent that you can provide retrospective protection for schemes that have breached Section 67 rights and obligations. What level of assurance can the Minister give that this is not a precedent that could be used for undermining the strength of Section 67 in the future by giving retrospective protection?

Secondly, in terms of how this retrospective protection applies where schemes have breached Section 67, I should point out that the Government do not know which schemes have done this. They have just heard about this from the industry, so they are giving a sort of blanket assurance without knowing the number and type of breaches of Sections 67. If they do not meet the actuarial equivalence terms, it is not clear whether they will have to go back and redo it.

Thirdly, if they did it inadvertently, they probably did not do any actuarial equivalence exercise at the time. Is it therefore being said that they can do one with hindsight now, and can look back and say, “Had that been applied at the time”? It is quite important to get clarity on this Section 67 point, because there are lots of disputes and case law around it. It tends to get people who are interested in members’ benefits quite excited if there is an attempt to compromise it in some way.

On the flipping schemes, which are not protected in terms of access to the PPF until April 2015, I note that, as was said, if you have not paid the levy then the liability if your employer goes insolvent should not go to other levy payers. However, the issue is that it is a government responsibility, because the Government are obliged under the EU directive. I was looking for as firm an assurance as possible that, if an employer with a scheme that has to flip from DC to DB goes into insolvency before or up to April 2015, the Government will not walk away from giving some kind of protection to those schemes with DB benefits the members of which may now be caught outside the protection regime; hopefully there are none or, if there are, they are very tiny.

[Lord Bates]

I am grateful for those additional points. Let me try to answer them as best I can. It might be helpful if I wrote to the noble Baroness and shared those responses with the Committee. I realise that they are important issues.

To respond to the specific issue of Section 67 rights, the appropriate regulation is Regulation 8(3)(b). The Government believe that the protection is not undermined, because there must have been an actuarial equivalence. If they do not meet the actuarial equivalence requirements, they will have to go back and unpick them. In fact, the regulations introduce a new protection for members, which underpins the benefits. However, as I said, I shall seek further guidance on that and write to the noble Baroness and other Members of the Committee.

These draft regulations make modifications to existing primary legislation to provide supplementary and consequential measures to support the coming into force of the clarified definition of money purchase benefits in Section 29 of the Pensions Act 2011. I hope that I have set out for the Committee the rationale for these regulations and have responded to the matters raised. I commend these regulations to the Committee.

Motion agreed.