DRAFT Tax Credits (Income Thresholds and Determination of Rates) (Amendment) Regulations 2016
(8 years, 9 months ago)
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The Committee divided: - Ayes: 10 / Noes: 8 - Question accordingly agreed to.
The Exchequer Secretary to the Treasury (Damian Hinds)
I beg to move,
That the Committee has considered the draft Tax Credits (Income Thresholds and Determination of Rates) (Amendment) Regulations 2016.
It is a pleasure to have the opportunity to serve under your chairmanship for what I believe is the first time, Sir Alan. I confirm that the regulations are compatible with the European convention on human rights.
I will set out the purpose of the regulations. As hon. Members will recall, tax credits were introduced in 2003, at which point the income rise disregard was set at £2,500. At that time, the tax credits system was unable to cope and in 2006 the then Government increased the disregard to £25,000. Two families with significantly different incomes could therefore receive the same tax credit award. I will shortly give some examples of how that works in practice. Following the 2010 election, the coalition Government reduced the disregard to £10,000 and then to £5,000. Improvements to stabilise the tax credits system and the increased use of real-time information mean that the system is now able to be more responsive to claimants’ changes of circumstances.
The regulations make a single change: they reduce the income rise disregard from £5,000 to £2,500, taking it back to the level it was set at when tax credits were introduced by Gordon Brown in 2003 and aligning it with the income fall disregard. That change was announced in the summer Budget on 8 July 2015.
The change brings forward some of the benefits of universal credit, which will replace tax credits. Universal credit does not have an income change disregard, so awards will more accurately reflect the claimant’s most recent earnings and overpayments will be reduced. Tax credit claimants will see a change in their award within a tax year only if their income increases in year by more than £2,500, and there will be no cash losers.
The disregard provides a buffer zone in which a family’s income can increase during a year without that affecting their tax credit entitlement. The disregard has been a feature of the tax credits system since its inception in 2003 and, as I said, was set originally at £2,500.
I will explain how the disregard works in practice. Following receipt of a claim, Her Majesty’s Revenue and Customs makes an initial tax credit award based on the claimant’s current circumstances and their income in the previous year. As the tax year progresses, claimants can notify HMRC of changes in their circumstances. Certain changes—for example, a partner moving in with a previously single claimant—must be reported within one month. Other changes, such as changes in income, do not need to be reported until the end of the year, but claimants are encouraged to keep HMRC up to date if their earnings change, otherwise they could end up with an overpayment, which they would need to pay back.
After the end of the tax year, HMRC sends the claimant renewal papers. The purpose of the renewal papers is to determine the claimant’s actual entitlement for the year that has just ended and, if appropriate, to initiate a claim for the year ahead; HMRC does that by asking the claimant to confirm their income and circumstances for the year that has just ended. Where the claimant’s income has stayed the same as the year before or has risen by less than the disregard, the tax credit award for that tax year is not affected, as any such increases in income are disregarded from the final calculation of the award. However, if claimants’ income has risen by more than the tax credit disregard, their award is decreased in year. Those individuals will, of course, still be taking home more money because of the increase in their income.
Either way, in the subsequent year, a claimant’s tax credit award will be calculated in the usual way, with their full annual income used to determine their tax credit entitlement. After the change in the tax year, the disregard is irrelevant; regardless of whether the recipient’s pay rise was above or below the disregard level, their tax credit award for the following year will be adjusted downwards to what it would have been had no disregard existed.
In practice, under the system that we inherited in 2010, where the then Government had set the income disregard at £25,000, somebody on tax credits could get a pay rise of £2,000 a month—which I am sure hon. Members will agree is a significant sum of money—and still be technically entitled to the same tax credit award until the end of the tax year, whereupon they would then see a big drop in their award and in their total income. We changed that, but even under the current, far more equitable system, a household can see its income rise by £400 a month and still be entitled to the same award as they were previously, until the end of the tax year. Claimants would subsequently see their tax credit entitlement reduced in the following year, having become accustomed to that quite large change in income.
Let us assume that that pay rise of £400 a month now means that the household is taking home as much money as their next-door neighbours, whose circumstances are exactly the same in other respects. The next-door neighbours are not entitled to the same level of tax credits, even though they have exactly the same income and circumstances. That is hardly fair; nor is it right. Under the system set out in the regulations, the household with an increased income of £4,800 a year would see its tax credit award adjusted sooner, to reflect its increased earnings. The household’s total income would rise more than the decrease in the tax credit award, which would provide the buffer zone that the income rise disregard is designed for, as well as more closely aligning the award with the next tax year’s entitlement, and making it the same as that of the next-door neighbours.
That example shows how reducing the income rise disregard reduces the unfairness in tax credit awards for families in similar circumstances. This is the right thing to do, to ensure fairness to all tax credit claimants. The principle is already live in universal credit, where a claimant’s award changes each month based on their earnings; this change brings forward some of those benefits. HMRC will communicate the change by providing information in tax credit renewals packs, which will highlight the change to the disregard, what it means when claimants have a rise in income and what they should report to HMRC.
With the introduction of real-time information, employers are now able to submit employee payroll information in real time. As 99% of employers are covered by the scheme, HMRC is now in a much better position to proactively check that it has the correct income details when claimants come to renew their awards at the end of the tax year; it also provides an opportunity to check awards within a tax year. From September 2016, HMRC will use the RTI to conduct automated checks of an individual claimant’s monthly income. Therefore, HMRC will be better able to assess a claimant’s tax credit entitlement in relation to their increased income. Should RTI find that a claimant’s entitlement should be reduced by £500 or more, HMRC will send a letter, text message or automated voice message to the claimant, prompting them to make contact with HMRC within 14 days. If they do not make contact, their income on the system will be automatically amended.
Let me be clear. HMRC will not only tell all claimants up front when they must report changes in their income, but in the majority of cases prompt claimants to report significant increases in income that HMRC picks up through the RTI feed. If claimants do not respond to the prompt, the system will automatically make the change and reduce the claimant’s tax credit award. That reduces the risk of overpayments, while making clear to the claimant their responsibilities.
The disregard reduction will affect only those claimants whose income increases in year by more than £2,500. There will be no cash losers. The change will make tax credits more responsive to income changes, reduce the over-inflated rise and subsequent fall that follows an income rise and reduce the inequality of very different awards to families in similar circumstances, with similar employment incomes. It returns the disregard to its original design and purpose. Now is the right time to do so, because the tax credits system is much more able to deal with income changes. I commend the regulations to the Committee.
Rebecca Long Bailey (Salford and Eccles) (Lab)
It is a pleasure to serve under your chairmanship, Sir Alan, and to debate such an important issue with the Minister.
As all hon. Members here will be aware, the Chancellor deviated—shall we say?—from his original plan for sweeping cuts to tax credits after ferocious opposition from Opposition Members and from some Members of his own party and, of course, after defeat in the House of Lords. However, we are now discovering that the deviation is not quite what we had hoped for; arguably, most of the cuts have been delayed and others are still going ahead.
As we have heard, the regulations seek to cut the income rise disregard, which is the buffer zone that protects families from incurring financial hardship as a result of repaying tax credits in the event that they earn slightly more than anticipated in any given year. It is an element of leeway in the system that allows a household’s income to rise a certain amount in a financial year without affecting the household’s tax credit award for that year.
A household’s tax credit award for the year ahead is based on income in the previous financial year. HMRC finalises the tax credits at the end of the year to reflect the actual income during the course of that year. If income was higher than predicted, the Government deem that to be an overpayment—effectively a debt that must be repaid—which will be automatically deducted from the claimant’s tax credit award for the next year. If the debt is greater than the award the Government will seek to recover it, in some cases potentially using private debt collectors. It is not unreasonable to expect people to repay any tax credits if they earn more than anticipated. However, the Government’s proposed approach to recover such sums appears to present a number of issues, which I hope that the Minister will carefully consider before reaching any conclusions on whether to recommend that the Committee pass the regulations.
Many families will see a change in income for various reasons over the course of a year. A member of the household may find a job or increase their working hours, exactly as the Government encourage them to do. The income rise disregard ensures that a small rise in income is not immediately clawed back, leaving low-paid families in sudden debt. It is important to make it clear that that does not mean that a household’s tax credit award remains unchanged for the following financial year, but simply that they do not have to repay any overpayment that may have occurred as a result of income rising by a small amount during the financial year just ended. The coalition Government had already cut the disregard from £25,000 to £10,000, and then halved that to £5,000 as recently as 2013. Today’s regulations will halve it again. The number of families breaching the limit has gone from 13,000, when the Tory-led coalition took office, to nearly 350,000 in 2013-14—the last year for which figures have been provided.
I ask the Minster to explain the rationale behind the £2,500 threshold. For example, has this figure been determined pursuant to an evidence-based review of all tax claimants’ increases in earnings over a specified period, resulting in a median threshold? Sadly, I do not believe that is the case. I understand that the figure is simply a return to the figure used at the inception of the income disregard in 2003. Although this figure was deemed reasonable at the time, it became immediately obvious to HMRC and the Treasury that it was too sensitive to small fluctuations in hours worked and, as such, was difficult for HMRC to manage efficiently. It also caused disproportionate hardship to many families.
Leaving the management of the overpayments system to one side for a moment, the Opposition are seriously concerned about the impact of the reduced figure of £2,500 on low-income families. The Government have stated that they champion the strivers who want to work hard and get on, but cutting the income rise disregard to such a low level means that people on lower pay are particularly vulnerable to being hit with an overpayment debt should they get a new job, work more hours, or earn a small pay rise or promotion. We are therefore concerned that the change could create a disincentive for people on low pay to take on more hours or move into full time work through fear of being hit with an overpayment debt.
The proposed reduction presents a real dilemma to families, especially those with members in jobs in which additional hours are less stable, such as zero-hours contracts, or where overtime might be offered from time to time. There might be a stark choice for these families: either work a few more hours from time to time and risk future repayments being imposed on the basis of a predicted salary, or simply decline the offer of extra work and ensure stability in long-term financial planning.
Dawn Butler (Brent Central) (Lab)
Is my hon. Friend aware of the extent of the impact assessment that the Government have undertaken on these new limits?
Rebecca Long Bailey
My hon. Friend will hear throughout my speech that I consider that to be a significant issue, which I hope the Minister will address today.
I want to make the Minister aware that our concerns are exacerbated by what can only be described as the Government’s continued silence on the potential impact of these cuts. To date, I am not aware of the publication of a specific impact assessment for these regulations or of an equality impact assessment. The fact that the Government have provided minimal information is reflected in an exchange between the Government and the Lords Secondary Legislation Scrutiny Committee on 28 January. The memorandum submitted by the Treasury stated:
“Next year there are expected to be 800,000 claimants with a reduced award as a result of their income increasing—none will be cash losers”.
But that did not provide an answer to the question posed by the Committee:
“Can you…give an indication of how many people will be affected by the change…and what the financial impact on those people is likely to be?”
I feel equally starved of information in the light of the responses I have received to my own written parliamentary questions. Since the autumn statement in which this cut was first outlined, I have tabled numerous written questions to ask for the details of its impact. I requested the modelling or case studies the Treasury undertook when formulating the policy; the impact on some example claimants; the total numbers likely to be affected; the estimated average change in tax credit award as a result of the change; and the evidential basis for the statement in the memorandum submitted to the other place that there would be no cash losers from this reduction.
I am saddened to inform the Minister that I have not received any satisfactory answers to my questions or to my requests for the case studies used to formulate this policy. I would have expected such case studies to have been undertaken as a matter of course, in the interests of acting prudently, before even drafting the regulations. It should simply have been a case of passing on the information used by the Government as their evidential base for making the suggested changes to the income disregard in the first instance. The Minister may be able to provide such evidence today—I would wholeheartedly welcome that—but from the information I have been able to glean so far, the only example provided was someone who earned £1 over the new disregard. I must flag up to the Minister that the Government have yet to confirm whether they have conducted an equality impact assessment.
I have no doubt that the Minister will understand my feelings of exasperation. Will he confirm today that a proper impact analysis and an equality impact assessment have been carried out in formulating the policy, or are the Government unaware of what the impact may be? The Minister will be pleased to know that from time to time I endeavour to be helpful to him in solving such conundrums. I have commissioned a bit of evidence-based research into the matter from the Library, and it is indeed illuminating. Its analysis of a household with one working adult on the current national minimum wage, over the age of 25 and with two children, demonstrates that, if that adult’s working hours were increased from 16 to 30 and then to 35 over successive tax years, the new disregard would be triggered and an overpayment incurred. That would then lead to their net income actually going down in at least one year, despite working more hours and earning more pay. Indeed, they would have lost £1,000 of income in at least one year, compared with the same situation under the current disregard. The Government’s claim that there are no cash losers would not be of much comfort to that family. Indeed, it would be interesting if the Minister expanded on what the Government mean by no cash losers, because that case study seems to demonstrate that there will be circumstances in which claimants who are increasing their pay could actually end up with a lower income for at least the year in question. That is just one example, of course, but an entirely plausible one.
Unfortunately, we still do not know the Government’s estimate of the maximum amount a family could lose. It would be helpful if the Minister provided that figure today; if not, perhaps he will say why it cannot be provided. He will no doubt appreciate that my hon. Friends and I are not prepared to allow legislation to be enacted that will affect 800,000 working people, without first knowing the potential impact on those people and without evidence that the Government have carried out due analysis.
To return to the management of the overpayments system, the Government have claimed that the updated real-time information system for pay-as-you-earn will make HMRC more sensitive to changes in income throughout the financial year, so that tax credit payments can be adjusted quickly, avoiding a build-up of debt. However, evidence suggests that the system is no more sensitive than it was in 2003-05, when the overpayments were recognised by all sides as excessive, peaking at £1.9 billion. The then Conservative Opposition were highly critical, and for our part, we recognise that there were problems with the initial introduction of the system. Unfortunately, it seems that while we have learnt the lessons, this Government want to make their own mistakes. Perhaps the Minister can reassure me that those fears are unfounded.
Since the coalition Government slashed the disregard to £5,000, the total value of overpayments has rocketed and again exceeded the £1.9 billion that caused the initial crisis. That does not suggest to me that HMRC is any more efficient at adjusting tax credit awards now than it was then. Cutting the disregard by half again adds further administrative burden for HMRC at a time when the Government are closing HMRC offices and reducing staffing levels across the country.
Campaigns such as Child Poverty Action Group have highlighted that people on lower pay tend to see fluctuations in their income from month to month. If the RTI does in fact prove to be effective, that could create huge administrative issues on its own, as people have their tax credit awards stopped, cut and restarted from month to month. Indeed, Mark Willis from Child Poverty Action Group has said:
“It doesn’t really matter what someone’s monthly income is... You always need an accurate estimate of annual income when you’re making these in-year changes. And no-one can really accurately predict the future, especially as we’re often talking here about people with fluctuating earnings”.
The impact on low-paid workers is particularly stark when compared with the money spent on the Chancellor’s tax cuts for the extremely wealthy. For instance, those selling a stake in a business of up to £10 million now pay only 10% capital gains tax on their profits—a tax relief worth £3 billion a year, around three times the amount estimated and dwarfing the savings made by the cut to tax credits. The bulk of this money goes to a very different group of people. The latest analysis suggests that the full £1.8 billion went to just 3,000 individuals who enjoyed a multimillion pound bonanza from selling shares—an incredible £600,000 each.
In conclusion, the Opposition are not sufficiently satisfied that the Government have considered, or indeed carried out adequate analysis of, the impact of the regulations. If indeed they have, I would ask that the information is shared and the passage of the regulations through this House paused until such time as Members have had the opportunity to review such information.
We are further concerned that setting the income rise disregard at such a low level makes people on low pay more vulnerable to accruing an overpayment debt simply by doing what the Government are asking of them. That is a disincentive for those in low-paid jobs to work harder and earn more, and is a punishment for doing so. Quite simply, working people have already suffered enough under this Government, and we will therefore oppose the regulations.
Dr Eilidh Whiteford (Banff and Buchan) (SNP)
I want to put a few brief points to the Government about the reduction of the income rise disregard in the regulations.
As a constituency MP, I know—I am sure all of us know—just how distressing it is for parents in low-paid jobs to find out they have had an overpayment of tax credits, and the hardship and real anxiety that the recovery of those overpayments causes. These changes will make it harder for some families to budget and will create particular uncertainty for those in seasonal, temporary or otherwise insecure employment. As the hon. Member for Salford and Eccles pointed out, that is very likely to push some of those families into debt.
In 2013-14, there were 138,900 overpayments of tax credits in Scotland alone, which is more than 30% of the total number of awards. I take on board what the Government have said today about real-time information improving that situation for some families, but the new arrangements really will not help people with fluctuating or unpredictable incomes. Increasingly, so many people in low-paid jobs are not salaried; they are working on zero-hours contracts, on hourly rates, and their incomes can vary enormously from week to week. Even real-time information cannot predict the future; in areas such as mine, where many work in seasonal jobs, those people could be particularly vulnerable to the impact of these changes, which cannot predict the future and exaggerate the impact of very minimal changes on people’s incomes.
The reduction of the income rise disregard will make the existing problems more acute for people whose wages are variable. That brings us to what is, in my view, the biggest flaw in this measure: low-paid parents especially will be financially worse off if they take a better paid job, get a promotion, or work overtime. Once their income has increased by more than the disregard, a claimant will lose tax credits of 41p in the pound. That is a colossal rate of marginal taxation. It could also affect a claimant’s level of housing benefit or council tax reduction, leading to perverse incentives and anxiety and uncertainty for low-income families.
The impact assessment process and the inadequacy thereof has already been debated this morning, so I will not reiterate those arguments, but we are indebted to CPAG, which has modelled the impact of the changes on low-paid working families. It contends that a couple with one child, both working full time on minimum wage and with the mother returning from maternity leave, and £100 a week childcare costs—which is probably at the low end of realistic—will be more than £1,000 worse off next year than they would have been under the current arrangements. A lone parent with one child, but no childcare costs, who moves into work next month, doing 30 hours a week at minimum wage, will be nearly £950 worse off over the coming year. I do not think that the Government want to disincentivise work, but that will be the unintended consequence of what the Ministers proposes today. For all those reasons, my colleague and I intend to oppose the regulations today.
Karin Smyth (Bristol South) (Lab)
I wish to take issue with the rationale for why the change is happening and why it is happening now. I am a fairly new member of the Public Accounts Committee, to which HMRC officials are regular visitors, and I do not share the confidence in HMRC’s ability to react suitably in real time. Office closures have caused issues, but its ability to respond to customers through its various helplines and to manage that process is well documented in our reports.
HMRC officials are not the only regular visitors that cause the Public Accounts Committee concern about the adequacy of data collected across Government Departments to manage such changes. Every Department seems to have a problem with data and systems and there is no evidence that real-time information is efficient. Concerns have also been raised about the impact assessment and how the change will affect real people.
Government Members like to report that what we introduced in 2003 did not go well. We hold our hands up. It did not go well. We put in place measures to ensure that things were better, so it is a shame that the Conservatives do not want to learn the lessons of that previous system.
The Public Accounts Committee has also been looking at the roll-out of universal credit. It is thought that some of the changes here will be picked up in how universal credit is rolled out, but the PAC has concerns about how that is going and about the Department’s ability to inform Members of Parliament about when and how the change will reach their constituencies. I have no confidence in the Government’s ability to make this work in practice and urge that an impact assessment be reconsidered.
Christian Matheson (City of Chester) (Lab)
I intend to speak only briefly to seek reassurance from the Minister on one particular matter. My hon. Friend the Member for Salford and Eccles and the hon. Member for Banff and Buchan both spoke eloquently about the problems that this measure may cause to people in insecure, low-paid work or on zero-hours contracts—some of the most vulnerable members of society. We hear a lot from Government about helping such people, but we are seeing less and less practical assistance. My hon. Friend the Member for Bristol South mentioned the problems with HMRC, and anybody who has tried to phone HMRC over the past few years will know of the difficulties there.
It could be that I need to apologise to the Minister as I have may have misunderstood this, but something that has not yet been mentioned is the effect that the requirement for real-time reporting will have on businesses, and small businesses in particular. They may have to report from week to week or month to month on fluctuations or changes in their employees’ pay. I am not talking about large corporations with big payroll departments and good IT infrastructure that can perhaps report automatically. Real-time reporting will be an additional strain on small and medium-sized businesses that are already doing monthly VAT returns and other returns for HMRC. Is not there a danger that, in addition to a burden on the lowest paid, there will be a burden on small and medium-sized businesses, in having to keep up with payment week to week and month to month? I should be grateful if the Minister could clarify that.
Damian Hinds
I thank everyone who has taken part in the debate, which was constructive and useful. I particularly thank the hon. Member for Salford and Eccles, who speaks for the Opposition, for a measured and constructive speech in which she put some reasonable points and questions.
Alongside the broader steps that the Government are taking on long-term reform to welfare, the creation of jobs, and making work pay, the regulations will reduce the unfairness in the tax credits system. The reduction to the income rise disregard will decrease the instances where one family receives a higher tax credit award than another family with precisely the same income and the same circumstances. That is a clear point of fairness, and I hope that hon. Members can agree that on principle it is the right thing to do.
As I have already set out, the provision returns the income rise disregard to the original level; but there is a key difference, compared with 2003. This time the Government are making sure that the system is able to cope with fluctuations in family incomes. The answer to one of the parliamentary questions tabled by the hon. Member for Salford and Eccles would be that we estimate that the income of about 800,000 claimants will increase by more than £2,500 in year, and that therefore they will have an adjustment to their tax credit payments. Those people are doing the right thing, as a number of Opposition Members have said. They are working hard to increase their income. No one will have a cash loss, because their pay rise will always exceed any change to their tax credit award in year; so there will still be a clear incentive for working claimants to increase their earnings, as they will take home more money.
Dawn Butler
As there is no impact assessment, does the Minister agree that the measure will probably affect women and children more than any other group?
Damian Hinds
The 800,000 recipients are households, and the majority of them will be couples. The majority of those couples will be male and female couples. However, let us be clear, come the end of the tax year, whatever the income rise disregard and with or without today’s statutory instrument, their tax credit award will be adjusted downwards to take account of their higher income—by which time they may, of course, have become accustomed to what was to be a temporarily higher award.
The measure ensures fairness to the taxpayer, because a system of large income disregards unnecessarily increases costs. The Exchequer—hon. Members’ constituents— bears the cost of paying tax credit recipients a much higher award than they would get if their increased income were taken into account. Rather than continuing with that, the Government are taking action to make tax credits more responsive to income changes, which ensures that more claimants receive the entitlement that more closely reflects their actual income.
Real-time information will ensure that the changes to income can be identified earlier. From September 2016, the majority of claimants will be prompted to report increases of income to HMRC through a text message, voice message or letter, with the default action, in the event of non-response, that the award will be adjusted to reflect the income change. That will mitigate the likelihood of overpayments, and will make clear to claimants, in a fair way, their responsibility to report an increase in their income.
HMRC will provide information to those affected by the change, in tax credits renewals packs and updated guidance and notes to claimants, as well as in briefing lines for the tax credit helpline, to ensure that claimants are aware of the change and what it means for their tax credit award. The Government are committed to seeing the change implemented correctly, and are taking a considered approach to both the operational IT delivery and engagement with claimants, to ensure there will be a reduction in tax credit overpayments and the number of claimants falling into debt.
I will now answer some of the points raised by the Opposition during the debate. The hon. Member for Salford and Eccles asked about the rationale for the precise number, and we have had a similar discussion in previous debates. There is never one single magic number that can be applied to such a threshold.
As the hon. Lady said, the figure of £2,500 brings the design of the income rise disregard back to Gordon Brown’s original figure. It is a balance between on the one hand making sure that the system adjusts as quickly and smoothly as possible to someone’s rise in income—to reduce the fall they would otherwise experience at the end of the tax year—and on the other not having to make an administrative change, and change the tax credit award, when there is a very small increase, such as from an annual pay award or a small increase in hours. The big change compared with 2003 is real-time information. To answer the hon. Member for City of Chester, real-time information is already operational and has been since 2013. A lot of the debates he mentioned have happened, but it is an important part of the continuing development of our taxation system.
The hon. Members for Salford and Eccles and for Banff and Buchan mentioned people on zero-hours contracts. I think it is always worth repeating this point because sometimes one could get the impression from listening to the Opposition that people on zero-hours contracts are the overwhelming majority when they are not; something like 2.5% rely on a zero-hours contract. Some of those are coming back into the workplace, and some of them are students. On average, zero-hours contracts deliver 25 hours of work a week.
The important point, which also applies to later in the debate, is that tax credits are still based on an annualised estimate of income. It is not necessarily the case that every single time there is a change in someone’s hours in a particular month they will have to say that this year’s permanence level of annualised income has changed. Through the RTI system there is an opportunity for those on PAYE to be prompted to do so, and others still can do so. The point is what they expect their total annual income to be. That is what the tax credit architecture of the system is based on today. It has always been based on an annual view of income.
The hon. Member for Salford and Eccles also asked how we define no cash losers. It is very simple. People’s pay is going up, which is a good thing. Because the tax credits award cannot go down by more than the pay has gone up, therefore these people will be better off.
Chris Stephens (Glasgow South West) (SNP)
I have listened attentively to what everyone has said. We know that a large number of the Government’s employees are on tax credits. For example, the Department for Work and Pensions has 40% of its employees on tax credits. I ask the Minister whether any assessment has been done on what this proposed change would mean for the Government’s workforce.
Damian Hinds
I do not want to repeat myself as though I have nothing new to say. Those are people whose income is going up. This is good news for those people. The change is responding more quickly than would have happened anyway. That is a really important point. It is responding further and more quickly to that change in income, but their income has gone up.
There were quite rightly questions about the equalities impact. In response to the hon. Member for Brent Central, I have already talked about the proportion who are women. We have provided information to the Secondary Legislation Scrutiny Committee. As with all secondary legislation, the Government take into account the equalities impact, as we are legally obliged to do.
I think I have dealt with the questions around fluctuating incomes in relation to zero-hours contracts and the introduction of real-time information. I also want to respond to the point about HMRC and operational efficiency. The hon. Member for Bristol South is right to raise those important points. HMRC’s performance has improved significantly this year, answering more than 90% of calls with wait times averaging under six minutes. Of course, we still want those numbers to improve; do not misunderstand me. It brought in additional staff to cover some of the busiest times, recruited some 3,000 more staff and put on additional training.
In conclusion, this change to reduce the income disregard to £2,500 is fair to claimants, reducing inequalities in the tax credit system, and it is fair to the taxpayer, reducing unnecessary cost. There are no cash losers because these are people whose pay is going up quite substantially. It will reduce the incidence of temporarily inflated awards because the system will respond sooner and further to people’s change in income. I commend the regulations to the Committee.
Question put.
draft Greater Manchester Combined Authority (Election of Mayor with police and crime commissioner functions) order 2016
(8 years, 9 months ago)
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The Parliamentary Under-Secretary of State for Communities and Local Government (James Wharton)
I beg to move,
That the Committee has considered the draft Greater Manchester Combined Authority (Election of Mayor with Police and Crime Commissioner Functions) Order 2016.
It is a pleasure to serve under your chairmanship, Ms Ryan. I welcome the shadow Minister, the hon. Member for South Shields, to the Front Bench. This is our first full outing against, or in conjunction with, one another. I do not agree with much that comes from the Labour Front Bench, but I welcomed her appointment when it was announced not that long ago.
The draft order was laid before the House on 1 February 2016. If approved, it will deliver another significant milestone in fulfilling our manifesto commitments—specifically, our commitment to implement the historic devolution deal between the Government and Greater Manchester. That deal is an agreement that the Government will devolve significant new powers and that, in return, Greater Manchester will have a directly elected mayor for the Greater Manchester area, which will give the strong, transparent and accountable governance across Greater Manchester that the significant new powers require.
In November 2014, we agreed that those powers would include control over transport, housing, planning, skills and employment. We also agreed a reformed earn-back deal worth £30 million a year for 30 years. In July 2015, we agreed that the Mayor would have fire and rescue functions, and planning powers on compulsory purchase and mayoral development corporations. In November 2015, we agreed that the Mayor would be able to implement a community infrastructure levy, and we committed to the joint commissioning of certain employment programmes.
The Manchester deal or, more accurately, the Manchester deals—there can be more—are part of the ongoing process of devolution, allowing areas to control their own destiny and their own growth, thus supporting our commitment to rebalance our economy. The deals are part of building the northern powerhouse, which has huge potential to add an extra £37 billion to our national economy by the end of the next decade.
The draft order is the first under the Cities and Local Government Devolution Act 2016. It will deliver three major steps in devolution for Greater Manchester, which reflect the agreement entered into with Government in the original deal. First, it creates the position of a directly elected Mayor for Greater Manchester; the first election is to be held in May 2017, under the 2016 Act. The Mayor will both chair the combined authority and exercise individually those powers agreed in the devolution deals.
Secondly, the draft order specifies that the first mayoral term will last three years, with the next election in May 2020, and that subsequent terms will last for four years. That enables Greater Manchester to align the mayoral election with the other local elections in 2020. Finally, the draft order specifies that the Greater Manchester Mayor will exercise the functions of a police and crime commissioner, and extends the term of office of the sitting police and crime commissioner until May 2017, when the Mayor will be elected.
The draft order is an important step on the journey that will implement fully the groundbreaking devolution deals that we have reached with Greater Manchester. We will be introducing further secondary legislation to confer on Greater Manchester and its Mayor the powers agreed in the deals, including the legislation to provide the detailed arrangements as to how the powers, including the police and crime commissioner functions, will be exercised in practice. The secondary legislation, which of course the House will have an opportunity to debate and, if it so chooses, to approve, will include the provisions necessary on the relationship between the Mayor and the other members of the combined authority.
Devolution has the potential to lay the foundations of greater prosperity and to build a more balanced economy. The draft order is an important step in meeting our commitments and in delivering on our side of the Greater Manchester deal, which is similar to deals made with many other areas. I commend the order to the House.
Mrs Emma Lewell-Buck (South Shields) (Lab)
It is a pleasure to serve under your chairmanship, Ms Ryan, and to be having our first outings in our respective roles. I also thank the Minister for his kind words.
I do not intend to press for a Division, and I will keep my comments brief, but the Opposition have a number of concerns that we would like the Minister to address. Labour has always been a party of devolution. We strongly support the principles of devolution. Absorbing the police and crime commissioner role into the mayoral position certainly has merit when we consider the potential for joined-up services, such as mental health, where there is already close working between the police and local authorities.
While a combined directly elected Mayor and police and crime commissioner will have the opportunity to be more locally responsive and to make joined-up responses on vital areas of governance, it is of paramount importance that a role that commands such power is created through a thoroughly transparent and democratic process. Our greatest concern is that there is little evidence of that.
The significant and worrying lack of public consultation and engagement at all stages of the process, including with today’s order, is well recorded. The Centre for Public Scrutiny and the Communities and Local Government Committee have criticised the fact that far too many deals have been rushed and reached behind closed doors, without a proper assessment of how devolution will improve powers. Not to allow the people of Greater Manchester to assert their democratic right to be involved in a process that will radically change how their region is governed is troubling to say the least. In his response, will the Minister talk about the lack of public consultation?
The present Greater Manchester police and crime commissioner was appointed as an interim Mayor by the combined authority leaders. His tenure was extended to five years. Whatever his merits are, neither that appointment nor the extension were democratic decisions. Turnout in Greater Manchester for the election of the new police and crime commissioner in 2012 stood at just 14%. That shows that the public either did not want a police and crime commissioner or that they were not given enough information to be politically engaged. It is therefore even more important for the Government to ensure that the public are properly included in and informed about the plans we are debating. Will the Minister further explain the basis on which the electoral term was extended from four years to five?
Another concern is whether the public know that a Mayor who is also a police and crime commissioner may also appoint a deputy police and crime commissioner mayor who is separate from the deputy Mayor. That person can take on most of the Mayor’s PCC functions—a non-democratically-elected person selected by the Mayor alone can carry out most of those functions. That becomes more worrying when we consider that the Government intend to enable PCCs to take on responsibility for the fire and rescue services in their area. Can the Minister give us assurances that that will not be used as a smokescreen for further cuts to the fire service? I am curious to know how confident he is that police and crime commissioners will have the knowledge to take on responsibility for fire and rescue services. Can he explain how he envisages the Mayor and their self-appointed deputy being held properly to account?
This is a brand-new post, involving an individual being responsible for a huge brief with complex divisions of responsibility.
Yvonne Fovargue (Makerfield) (Lab)
Does my hon. Friend agree that one of the concerns of the residents of the combined authorities is that this is power without money following it? That was demonstrated in the settlement with the extra £300 million. Very little—almost none at all, in fact—went to the northern authorities and towns that needed it.
Mrs Lewell-Buck
My hon. Friend raises an important point that I have heard others mention. To exercise power, money is needed. If the Government are going to continue taking money away from local authorities, how can those authorities fully exercise their power?
Finally, the Minister needs to explain how he will take some responsibility for ensuring that the changes are communicated in a clear way to the public. Can he guarantee that we will not hear a repetition of the mantra that that is up to local areas and local areas alone? After all, he surely understands as the Minister in charge that he has a role and responsibility here. I do not wish to detain the Committee further, and I look forward to his response.
James Wharton
The shadow Minister raised a number of areas of specific interest on which I will comment. Overall, however, it is right to welcome the broad statement with which she opened. Across the political divide, there is a general consensus that we want to see devolution delivered. We recognise that devolution can bring significant benefits to our communities. We may have differences about how that should be done, but none the less, I think there is agreement on the core principle that devolution is something that we want to pursue. That was demonstrated by the shadow Minister’s comments. We may have differences about how that should be done, but none the less there is agreement on the core principle that devolution is something that we want to pursue. That was demonstrated by the shadow Minister’s comments.
The shadow Minister raised specific issues. She asked why the police and crime commissioner’s term in Greater Manchester is to be extended from four years to five. It is so that we do not have a costly election for a position that will no longer exist only one year later. We have made the change in agreement with local partners, including the police and crime commissioner, the combined authority and local leaders. For similar reasons, the first term of the elected metro Mayor will be set at three years so that future elections will be in line with the local election cycle in Greater Manchester. That will reduce costs and, hopefully, further expand the opportunities for democratic engagement, as other elections are held at the same time.
The shadow Minister asked about the deputy PCC mayor. Of course, police and crime commissioners already have the power to appoint a deputy who can do many of the things that she mentioned, so it is not a departure from the current system. Similarly, on fire and rescue services, we are working to enable local areas to facilitate work across our emergency services to find areas and functions where we can bring together different services and different parts of government, in whatever field they might be, to deliver a better service to the people we represent and the residents we serve. We made it clear in our manifesto that we would enable fire and police services to work together more closely, and that we would develop the role of accountable police and crime commissioners and, in this case, the greater Mayors who take on that role.
A consultation was undertaken in September 2015 on a range of proposals, and there were more than 300 responses. The Government published their response on 26 January 2016. The intention throughout with Greater Manchester, and in those other areas with which we are talking about devolution, is to do things for which those areas ask. Our intention is to do things in conjunction with local representatives, who are best placed to understand the needs of their communities and the opportunities that exist in their local economies, to improve life for the residents they serve. That is reflected both in the content of the deals that have been reached with Greater Manchester and in the way those deals have come about. A number of deals have evolved over time, and we have worked jointly with local representatives to reach broad cross-party agreement on the right way forward.
Mrs Lewell-Buck
I hear what the Minister is saying about discussions with local authority leaders, but does he understand that there is a lot of unrest out there? A lot of people are saying that they simply do not know what is happening. The message is not filtering through; it is not being communicated to the very communities that rely on these services, as borne out by a recent Select Committee report and many other reports. What will the Government do about that?
James Wharton
I understand the shadow Minister’s concern about the extent to which the changes that are taking place are broadly understood by the people in those communities that we hope will benefit. The truth is that, in line with the basic principles of devolution, we have allowed local areas and local authority leaders to consult as they see appropriate before approving devolution deals.
There has been extensive coverage in local media, with debates on both sides of these arguments. There have been many debates in this place, but I recognise that there is—indeed, there always is in democracy—more to be done to continue engaging, to continue explaining and to continue showing why what we are doing is important and why we believe that it will bring benefits.
In part, we are talking about the election of a Greater Manchester metro Mayor in May 2017, and, as we head towards the election, the debate will become more acutely obvious to residents living in Greater Manchester. The candidates, from whatever party and of whatever view, will want to set out their stalls for that election and explain the powers that the Mayor will have and what they want to do with those powers for the communities that they want to represent. That will be true not only in Greater Manchester but more broadly across those areas that have agreed such deals and that will have Mayors in the first tranche of devolution.
I always want to do more to spread the good word of the great works that the Government are doing. I would welcome the shadow Minister’s assistance, wherever possible, in doing that, but I have no doubt that this debate will not only continue but become louder, more obvious and more specific as we head towards the mayoral elections. It is for those reasons that I commend the draft order; I am pleased that the shadow Minister said she does not intend to divide the Committee.
Today marks a significant milestone along the path of delivering the agenda that we are pursuing. It will make a real difference to communities across the UK, particularly in the north of England, where we want to build and deliver on the northern powerhouse and unlock the huge economic potential that we know exists in the economies of the north, in the communities of the north and, most fundamentally, thanks to the people who live in the north of this great country.
Question put and agreed to.
Draft Occupational Pension Schemes (Scheme Administration) (Amendment) Regulations 2016
(8 years, 9 months ago)
General CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Parliamentary Under-Secretary of State for Work and Pensions (Mr Shailesh Vara)
I beg to move,
That the Committee has considered the draft Occupational Pension Schemes (Scheme Administration) (Amendment) Regulations 2016.
As always, it is a great pleasure to serve under your chairmanship, Mr Bone. The draft regulations, which were laid before the House on 1 February, respond to stakeholders and interested parties and clarify the Government’s requirements to ensure that regulations work as intended. From April 2015, new governance requirements were introduced in the Occupational Pension Schemes (Charges and Governance) Regulations 2015 for occupational pension schemes providing money purchase benefits. They include: annual statements regarding governance; certain requirements for processing financial transactions; appointing a chair of trustees responsible for signing the annual statement; and further requirements relating to the default arrangement. Additional requirements were imposed on relevant multi-employer schemes to strengthen the independent oversight of schemes used by multiple employers.
Relevant multi-employer schemes must have at least three trustees and a majority of all trustees, including the chair, must be independent of providers of services to the scheme. Trustees must be appointed for limited terms through open and transparent recruitment processes. Those requirements do not apply when the employers are part of the same corporate group, as we consider such schemes to be closer in nature to single employer schemes and thus less likely to require such additional member protections.
We also made a temporary exemption from the additional requirements, until April this year, for schemes set up by statute. That was to enable us to carry out further work on their existing governance requirements before deciding whether the exemption should continue. The National Employment Savings Trust, known as NEST, is also exempt from the additional requirements as it already has rigorous governance requirements set by law.
The governance measures cover occupational schemes offering money purchase benefits regardless of whether they are used for automatic enrolment or not. They also exclude schemes where the only money purchase benefits offered are additional voluntary contributions.
Since those regulations came into force last April, we have received representations that the definition of “relevant multi-employer scheme” had unintended consequences by bringing some corporate group schemes within the scope of the additional governance requirements. The draft regulations will amend the definition of a multi-employer scheme to ensure that normal corporate activity does not bring a corporate group scheme within the additional requirements unless it promotes itself as open to unconnected employers.
The draft regulations will not extend the temporary exemption for multi-employer schemes set up by statute. On balance, we considered that there was no significant reason to provide a further exemption from good governance standards. However, we will give such schemes up to six months to comply with the requirements for the appointment of independent trustees.
The draft regulations will make other minor changes to ease the practical application of the governance standards. They will remove the requirement for the chair of NEST to be appointed within a three-month timeframe, as that appointment is already covered by other statutory requirements. NEST has to comply with the public appointments process. The draft regulations also allow a person or deputy chair appointed by the trustees to sign the annual statement if there is no chair in place—for example, if the chair resigns or is removed.
For some schemes, certain provisions governing the appointment of trustees are set out in their trust deeds and rules, which may conflict with the governance requirements regarding the appointment of independent trustees. To make it easier for those schemes to comply, the draft regulations will apply a statutory override where provisions in trust deeds and rules conflict with the requirements for the appointment of independent trustees in multi-employment schemes. The draft regulations also correct a typographical error in the definition of “default arrangement” in the 2015 regulations, which were inserted into the Occupational Pension Schemes (Investment) Regulations 2005.
Consideration has also been given to the Small Business, Enterprise and Employment Act 2015, so the regulations include a review clause. The review’s conclusions will be set out in a report, to be published within five years after the regulations come into force. Subsequent reports will be published at intervals not exceeding five years. The review will cover both the original governance requirements and the amendments in this instrument. The draft regulations will make important changes to clarify the scope of the governance requirements and will ensure that they are practicable for occupational pension schemes.
Angela Rayner (Ashton-under-Lyne) (Lab)
It is a pleasure to face the Minister again under your chairmanship, Mr Bone. It is rather unfortunate that, as I think one of the Guardian columnists has said, as soon as people see “pensions” in the title of anything in the media today, they glaze over. However, I hope that the Minister will not glaze over during my contribution today, because although the Opposition will not oppose these measures, we want to touch on several important concerns that are related to these regulations.
To put the measure into context, employers have a choice about the kind of pension they make available for their employees, with some choosing to use schemes based on a trust with trustees. Others choose schemes provided by insurance companies, which result in contracts between the providers and the employees. Such schemes include personal pension schemes and stakeholder pension schemes, which employers use for auto-enrolment or otherwise make available to their employees. There is no board of trustees and no fiduciary duty to the scheme member.
The market for multi-employer schemes, known as master trusts, is relatively new and has undergone rapid expansion in the last couple of years. The major players have been open for business only since 2011 and barriers to entry have historically been low. While no official list of providers exists, Professional Pensions sought to compile a definitive list in August 2015 and identified 57, but there could be as many as 70 or even 80 master trust providers in the UK. Employers have to try to distinguish between many offerings of varying quality, and there are concerns across the sector about regulation and governance.
In its evidence to the Select Committee on Work and Pensions’ current enquiry on auto-enrolment, the Association of British Insurers made the point that trust-based schemes, including master trusts, are not
“subject to the same stringent regulatory standards as contract-based schemes, which are regulated by the FCA.”
Instead, master trusts are supervised from a distance by the Pensions Regulator, which does not have the power to check how the pensions are sold or to shut down companies that fall short of basic standards. The Pensions Regulator highlighted the issue to the Work and Pensions Committee:
“94% of employers who chose a trust-based scheme opted for a master trust. Due to their scale, commercial purpose and design for use by multiple employers, master trusts represent different risks to members and consumer protection when compared to other occupational schemes. Unlike pension providers regulated by the FCA, the master trusts themselves are not authorised prior to market entry and the regulatory framework is not designed for similar levels of ongoing supervision. As a way of mitigating this risk, we introduced the master trust assurance (MTA) in May 2014, developed in partnership with the Institute of Chartered Accountants in England and Wales (ICAEW). However, it is a voluntary arrangement”.
Only five master trusts are part of the master trust assurance framework, meaning that they are independently audited.
Andrew Warwick-Thompson, executive director for regulatory policy at the Pensions Regulator, warned that some of the other schemes were too small and had no safeguards protecting their members. Alarmingly, he added:
“There is a risk of these schemes falling over; there is a risk that members might lose their money.”
He went on to warn that the lack of requirements for qualifications or assets meant that some master trusts
“may not be run by competent people”.
The so-called fit and proper person test appears to be even less stringent than that applied by the Football League. HMRC’s guidance suggests that it will automatically assume that anyone who applies is fit and proper. Perhaps the Minister will tell us whether the Government have any plans to change HMRC’s practice or guidance in that regard. Even when directors are qualified, providers do not always make it clear where the savings are invested and who owns the schemes.
The BBC programme, “The World Tonight”, also discovered that at least one master trust seemed to be providing misleading information online. The website, myworkplacepension.com, claims to have £50 million of pensions under management managed by the City firm, Old Mutual. When the BBC scrutinised the whereabouts of that money, myworkplacepension.com admitted it had no such assets. Subsequently, Old Mutual denied handling the company’s account and asked for its name to be removed from its publicity.
According to Companies House records, My WorkPlace Pension Ltd is 50% owned by Gavin McCloskey, who, with an associate, Anthony Okeke, was previously a director of a firm that sold sports fashion clothing. Incredibly, its trading name was Wide-Boys R Us.
Angela Rayner
We may laugh, but it will hardly be amusing to someone who finds their employer has invested their pension with a dubious scheme and without safeguards. Alarmingly, the programme also cited one industry expert who suggested that only around 10 existing master trust schemes could be considered completely safe and reliable. There is a view, therefore, that strengthening the requirements to enter the market, such as with authorisation or licensing, should filter out the least desirable operators. We would like to know more about the regulatory framework within which the Minister envisages today’s regulations will sit.
This issue was raised by my hon. Friend the Member for Wolverhampton South West (Rob Marris), who, as shadow Financial Secretary to the Treasury, represented the Opposition during the Committee stage of the Bank of England and Financial Services Bill. The Economic Secretary to the Treasury responded that the Government would bring forward regulations as soon as practically possible. Can the Minister tell us today what discussions the Department for Work and Pensions has had with the Treasury about that legislation and give us an update? Perhaps he will tell us how such legislation relates to the comments of his colleague, the Minister of State for Pensions, in the press on 1 March. She complained that the Government would not give the Department parliamentary time for pensions legislation specifically in relation to master trusts. She said:
“We need legislation and have been bidding for a bill, a pensions bill but it has been refused. It was refused at the end of last year and it has still not happened…I am hoping we will get one because we can’t do anything properly without it.”
We seem to be in the extraordinary position of the Minister for Pensions admitting that she cannot do anything properly on this issue because she cannot get parliamentary time from her own Government, whose legislative agenda is hardly full. However, this seems to be flatly contradicted by the remarks of the Economic Secretary, so is the Treasury more up to date on pensions policy than the Minister for Pensions, or is that just where the power lies in this Government? Perhaps none of them knows what is going on.
If the Minister knows anything about his own Department’s legislative agenda, perhaps he would clarify whether we can expect a Bill and, if so, when. There are a number of questions about the regulatory framework on which it would also be helpful to hear his views.
Chris Philp (Croydon South) (Con)
With great respect to the hon. Lady, whose comments are interesting, we seem to have strayed a long way from the regulations before us. Does she plan to get back to the matter at hand in the near future?
The Chair
Order. If the hon. Lady had been out of order, I would have said so. I do not need any help from the hon. Gentleman, thank you.
Angela Rayner
I thank the hon. Gentleman for his comments. This is not just interesting; it is alarming for people with pension provision, who want to know that things are being done to ensure that their pensions are protected, so I will carry on.
It may be that some of these issues I am raising could be addressed in the legislation, but I hope the Minister can enlighten us. To start with an obvious point, master trusts are exactly that: trusts. A trustee board sounds friendlier than a governance committee, but there are no requirements for at least one third of the trustee board to be member nominated. Some voices in the sector are calling for a level as high as 50%. Will the Minister give us his view on that?
Master trusts are cheap to join. Currently, large master trusts are subsidising the installation costs from reserves, which gives them a competitive edge in the market. However, like credit cards, master trusts are for life, not just for their initial rates. Does the Minister believe there is any cause for concern there?
The regulations that apply to retail funds do not apply to master trusts, nor does the Financial Conduct Authority have jurisdiction over them. Given the Government’s pension freedoms agenda and the arrival of 1.3 million small and micro-employers, the traditional boundaries between institutional and retail are blurring. That brings us back to the question of who the appropriate regulator is. Are the Government considering giving the FCA regulatory powers or changing the powers of the Pensions Regulator, as the Minister with responsibility for pensions reform seemed to suggest in the media earlier this week?
Unlike insurance arrangements, master trusts are not subject to solvency II and do not even have to undergo the capital adequacy test needed to run an advisory firm. In theory, that makes them nimble and cheap to run, but in practice it means they have little margin for error. If the controls in the master trust assurance framework are not adopted, can the Minister assure us they are as safe as contract-based arrangements? If not, what steps will he take to protect members from failure?
Members of master trusts are not protected by the Financial Services Compensation Scheme or the Pension Protection Fund. Have the Government given any thought to changing that or providing another failure regime? As I said earlier, the Minister with responsibility for pensions reform suggested in the press this week that a compulsory insurance scheme is her preferred solution and that she wants to introduce one in a pensions Bill. Can the Minister confirm whether that was a statement of Government policy?
Similarly, master trusts are not subject to permitted links regulations, which restrict where insurers may invest. That gives master trusts more flexibility, but could make them an ideal vehicle for pension scams. What assurances can the Minister give us that the Government are dealing with that risk?
It has been suggested that employers could use master trusts to de-risk unwanted liabilities from defined contribution schemes. They are taken to be a safe haven for employers but, contrary to what employers may suppose, they cannot just offload their company’s pensioners into somebody else’s master trust and wash their hands of the liability. They remain a participating employer of the master trust for as long as their former members are in it. Is the Minister confident that this issue is being addressed? Master trusts may be being used for auto-enrolment, to de-risk existing schemes, or even as a template for collective DC, but they are not a universal solution and should surely be subject to the same scrutiny as other structures.
As a result of master trusts’ unusual structure, certain practical challenges have emerged with no easy solutions. Given the scale of the operations and the sheer number of employers and members involved, is it not uncommon for contributions to be paid late or in error, or not paid at all? However, the obligation to report late contributions is the same, as are the trustees’ legal obligations to chase up late payments. Is the Minister confident that those obligations are being fulfilled?
Some master trusts have no mechanism to bulk transfer-out members once they are in if the scheme does not perform as expected. Does that issue need regulatory action? The default fund for an employer may not be chosen by trustees who are familiar with their membership. Indeed, how can it be possible for a default fund to be appropriate for more than 1 million members from diverse industries, of different ages and with different earning capacities? In short, can one size fit all? I would welcome the Minister’s observations and any answers to how that fundamental question can be addressed.
Rapid growth in the last four years has been fuelled by a steadily increasing market of employers who need providers. That will likely dry up in 2018, once auto-enrolment has been rolled out fully. After that, only acquisition will fuel growth, and we can expect consolidation, which makes the question about size all the more important, while also raising concern at the other end of the market about any weaker performers who may be too small for safety while not presenting an appealing target for acquisition. In the battle for market space, both the contract providers and the master trusts are in danger of cutting corners and taking risks that will compromise scheme members.
Given that DC scheme members should be the beneficial owners of their assets, the Government have left too many pension futures in doubt without a clear plan to deal with the issues. On top of that, we are in a situation in which no scheme member can know the true costs. How much someone pays to invest has a huge impact on the net returns they receive when they retire. Indeed, some analyses suggest that, after costs, only a small minority of managers actually deliver any value at all, and just 25 out of more than 200 fund houses have signed up to a statement of principles, introduced by the Investment Association, that included a commitment to put the interests of clients ahead of their own.
The Government, the IA and the FCA have been talking about transparency for some time, but when can we expect action? What steps are the Government taking to protect the security and fiduciary interests of scheme members in both master trusts and contract-based schemes? Does the Minister agree that DC schemes should have boards of trustees in which scheme member representatives should be in the majority and that they should be chosen by the scheme members themselves? That would be one way to give scheme members assurances that their money and their assets were being looked after in their interests. That is vital to the people who are listening to this.
In contract-based DC schemes, there are no requirements for trustees to act in the fiduciary interests of members, and in his recent written answers the Minister fell short of pledging any action to rectify this. Given the history of financial services scandals, is that not one way in which we could prevent the abuse of scheme members’ money? The Government have also failed to legislate for cost transparency for pension scheme members. In DC schemes, all costs are borne by the individual member. Will the Minister encourage the Investment Association to provide the data sets needed for transparency and say where he stands on new legislation?
Finally, as a former Unison shop steward in local government, I note that the Minister’s colleagues in the Department for Communities and Local Government have moved to require scale and cost transparency in the local government pension scheme, so will the Department for Work and Pensions act to provide the same protection for other savers? The measure before us today is technical, and we do not intend to oppose it, but the wider context of these regulations is of far greater concern. I hope the Minister can address those concerns for us all now.
Mr Vara
Those who take the trouble to look at the regulations before us will find that they are specific and narrow. I intend to address the issue before us, rather than go into a general debate on pensions.
The revisions proposed today are a specific response to stakeholders and interested parties, and they are intended to improve the system that exists at the moment. I like to think that the public will welcome them, given that we are responding to the points made by them.
Mark Field (Cities of London and Westminster) (Con)
A relevant point was brought up by the Opposition spokesman in relation to a “fit and proper person”. Although I appreciate that the Minister wants to go on to a specific area, it would be useful for the Committee to be aware of some of the potential concerns. I suspect that whatever the Government are doing in this regard will be rather more robust than it is for the Football Association, for whom “fit and proper person” seems an almost meaningless phrase. None the less, given the large sums of money being held on trust for many of our constituents, it is important that at least some thought is put into that, so I look forward to hearing the Minister’s views on the matter.
Mr Vara
My right hon. Friend makes a good point, and I did intend to touch briefly on the governance of master trusts and fit and proper individuals. The hon. Member for Ashton-under-Lyne spoke at length about master trusts and raised several concerns, so I assure her that master trusts already have to meet a number of governance requirements under the current law. A voluntary master trust assurance framework has been developed by the Institute of Chartered Accountants in England and Wales in partnership with the Pensions Regulator. It is designed to help trustees to assess the quality of their scheme against an industry-wide quality benchmark. It also helps employers to find a well run pension scheme that can be used to comply with their automatic enrolment duties. The Department for Work and Pensions and the Pensions Regulator are exploring whether additional protections would be appropriate for the future regulation of this part of the market.
Well run master trusts can and do offer good deals for consumers and employers, and we are keen that the market develops in the right way. We are aware that potential issues have been suggested and we are working with the Pensions Regulator to ensure that the right protection is in place. Once the measures are firmed up, we will inform the public.
Angela Rayner
Does the Minister know how many master trusts have signed up to the voluntary arrangement and how many are yet to do so?
Mr Vara
I do not have a specific figure to hand. The hon. Lady suggested a number of figures, but I want to be careful before I commit myself to any specific number—[Interruption]—although it is my understanding that it may be five. That is my present assumption.
The Government agree that it is important that members’ interests are represented and their views considered. Requirements from April 2015 ensure that independent governance committees and multi-employer scheme boards have arrangements in place to ensure that members’ views are directly represented. Annual chair statements must also include the details of those arrangements. As for contributions paid, the Pensions Regulator works with the industry to monitor the ongoing payment of contributions.
I am grateful for Members’ contributions this morning. The regulations that we have put forward will improve the management of the pensions industry generally. Good governance is fundamental in securing good outcomes for members, and the regulations will help ensure that schemes are well run in members’ interests.
Question put and agreed to.