Pension Schemes Bill [HL]

(Limited Text - Ministerial Extracts only)

Committee: 1st sitting (Hansard - continued): House of Lords
Monday 21st November 2016 Lords Chamber

[Lord Flight (Con)]

My Lords, Amendment 29 and 40 are amendments to opposition Amendments 28 and 39. They would both add after “members’ funds”,

“, beyond the normal capped pension scheme charges,”.

The point is really very simple: without this change, the opposition amendments would have the undesirable —and I think unintended—effect of hampering the orderly exit of the sponsor. I am sure that is not the intention behind them.

[The Minister of State, Department for Work and Pensions (Lord Freud) (Con)]

My Lords, Amendment 27 would require information on any charge cap to be included in a master trust’s continuity strategy. I am grateful to the noble Baroness, Lady Drake, for making it clear that this is a series of probing amendments. I think it makes sense for me to go through what the process is on the continuity strategy.

One of the criteria for a master trust to be authorised by the Pensions Regulator is that it must have an adequate continuity strategy. That strategy is then kept under review on an ongoing basis. A continuity strategy is a document that addresses how the interests of the scheme members will be protected if, in the future, the scheme experiences a triggering event—an event that could put the scheme at risk. The strategy must include a section on the scheme’s levels of administration charges in a manner that will be specified in regulations in due course, as well as any such other information as may be set out in those regulations. Our intention is that the regulations will set out the detail and manner of the information to be provided on the administration charges in the strategy. We want schemes to provide information such as the charge levels per arrangement or fund, any discounts they apply to charge levels and on what basis these discounts are made.

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[Baroness Drake]

I thank the Minister for his detailed reply. I should be honest and say that I do not think that I have absorbed all the detail that he presented, and I will read the Hansard in detail to follow it through. In my defence, as one would expect in preparation for a Bill such as this, I spoke to pension lawyers, and there was a clear view that the parameters and restrictions on the use of members’ funds to meet the costs when a master trust fails were unclear and needed to be set out more clearly, so I am not alone in not understanding exactly how the prohibition clause works, and therefore what quality of protection is afforded. I simply say that others are unclear what the Bill provides.

I took one or two things from what the Minister said. The information charges provided on the implementation strategy are key. They are the driver against which it is assessed. It is on additional charges that one applies the prohibition; it identifies the charges in the implementation strategy which it is prohibited from exceeding. That needs some reflection.

I was a little confused by one point in the Minister’s response. He referred to default funds. Of course, the cap on default funds is 75 basis points, but the nature of his reply was that if the scheme was running a default fund on 50 basis points, one could rise to the cap to fund the administration charges. Reassurance on that point would be really helpful.

[Lord Freud]

I hope that I made it absolutely clear that we will look back at what was actually being charged to ensure that it was an annual effective rate of 0.5%. There is no space to try to get the next 0.25% once a triggering event has happened. You are left at the level at which you have been charging historically, and there will be a way of assessing that rate, which means that both the original amendment and my noble friend’s amendment to it fall away, because there is another method of maintaining the level of charges.

[Baroness Drake]

I thank the Minister for that clarity; that is quite reassuring in respect of one point, but I think that my noble friend and I will probably want to reflect on the detail of the Minister’s statement. It is also helpful that he has confirmed that the implementation strategy information charges are key in deciding the charges and the prohibition that applies. We will reflect on what is in Hansard, but I beg leave to withdraw my amendment.

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[Lord McKenzie of Luton]

My Lords, I shall speak also against Clause 16 standing part of the Bill. The amendment is an alternative formulation that requires the affirmative procedure to operate for the regulations. We touched on this issue earlier this evening. The clause imposes a duty on a range of persons involved in running a master trust to give notice of the fact that a “significant event” has occurred. Civil penalties can be applied to anybody failing to comply. The only hint of what might constitute a significant event is what the Secretary of State sets out in regulations. No hint is given in the Explanatory Notes to the Bill. The information provided to the Delegated Powers Committee simply refers to a significant event being one that might affect the ability of the scheme to meet the authorisation criteria, such as a change of trustee or scheme administrator.

As the Delegated Powers and Regulatory Reform Committee pointed out, the delegated power confirmed by Clause 16(3) is a very wide one. It emphasised that the definition of what constitutes a significant event is fundamental to determining the duty imposed by Clause 16. It says that the width of the power appears to be needed because the Government have not yet decided on the policy or purposes for which the power is to be used. Its conclusion is that the power is inappropriate in the absence of any convincing reasons to justify its scope. We agree that as things stand the Government have more work to do to justify the change in the clause. I beg to move.

[Lord Freud]

I will begin by explaining why it is important that the clause stands part of the Bill, and then I shall set out my thoughts on the proposed change in the parliamentary scrutiny procedure.

Clause 16 addresses one of the requirements that will be placed on a master trust scheme once it has been authorised. One of the great strengths of the authorisation regime is that it is an ongoing system. This means that, in order to continue operating in the market, the Pensions Regulator must remain satisfied that the master trust continues to meet the authorisation criteria. This makes it particularly important for the Pensions Regulator to remain informed about the scheme. Indeed, I hark back to our discussion a little earlier about whether there should be someone to compensate as a last resort. It is really important that we make sure that the Pensions Regulator knows what is happening in schemes. That is one of the key ways in which to make that happen.

The regulator will collect information from authorised master trust schemes on a regular basis through a combination of existing requirements on occupational pension schemes and new requirements on authorised master trust schemes, introduced as part of the Bill. For example, all occupational pension schemes are already required to submit an annual scheme return to the Pensions Regulator and, under Clause 15, master trusts will be required to submit a supervisory return as well. In addition, Clause 14 introduces a requirement on the trustees of master trust schemes to submit the scheme’s annual accounts, and on the scheme funder to submit its accounts to the Pensions Regulator. These returns allow the Pensions Regulator to collect information from schemes on a regular basis in order to determine whether they still meet the authorisation criteria.

This clause provides that the Pensions Regulator must be notified in writing if significant events occur in relation to an authorised master trust scheme. The Secretary of State, following consultation with the industry, will set out in regulations what constitutes “significant events” for the purposes of this clause. These might include, for example, change of scheme trustee, change of scheme administrator, changes to the continuity strategy or changes to the business plan. The Government intend that the events which will be prescribed as significant events will be events of the type which the regulator would need to be made aware of promptly due to the potential impact on the scheme’s authorised status or because they are indicators that support or intervention may be required.

To be clear, the occurrence of a significant event in a master trust scheme will not necessarily affect the ability of the scheme to meet the authorisation criteria. It just may have such an effect or it may be a warning sign. For example, a scheme may have a change of trustee. As the fitness and propriety of a trustee is linked to the authorisation criteria, the Pensions Regulator must be informed of this change so that the new trustee may be assessed against the relevant standards. The new trustee may well meet the required standards, in which case the scheme’s authorisation status will not be affected—but there could be an impact. A civil penalty will apply to a person who fails to comply with this reporting requirement. For that reason, it is important to be as clear as possible about who will be subject to this requirement in the Bill. This clause therefore lists the persons subject to this requirement in subsection (2). Further persons may be listed in regulations.

There is a precedent for this requirement. Section 69 of the Pensions Act 2004 provides that key persons involved in the running of defined benefit occupational pension schemes must report the occurrence of certain events to the Pensions Regulator. That provision was made to warn the Pensions Regulator that such a scheme may require the support of the Pension Protection Fund. The provision in this Bill is made to warn the Pensions Regulator that an authorised master trust scheme may need support or intervention or be at risk of not meeting the authorisation criteria. This provision will protect scheme members and it will assist the Pensions Regulator to carry out its functions. That is why it is important that this clause stands part of the Bill.

Amendment 35 concerns the affirmative as opposed to the negative procedure. We have discussed that and we will also consider it in this context. On that basis, I hope that the noble Lord will see fit to withdraw both his opposition to the clause and his amendment. I hope that I have provided clarity on the wider purpose of Clause 16 and I commend it to the Committee.

[Lord McKenzie of Luton]

I thank the Minister for that response. I think we understand what the intent of this provision is. Obviously, the persons to whom this obligation applies are listed in detail in the Bill. Why, therefore, is it not possible to list at least some examples in the Bill—for example, a change of scheme trustees—as one of the significant events which might require action? There is silence on that side of the equation. However, there is a list of persons who are subject to this provision.

[Lord Freud]

I think the reason is that it is pretty odd to have a hybrid approach to a list of requirements some of which are in the Bill and some in regulations. We are looking to put them all together in a coherent way in regulations, which we will consider how best to introduce to the House.

[Lord Kirkwood of Kirkhope (LD)]

My Lords, has any consideration been given to a right of appeal against a civil penalty of this kind, which looks like a substantial potential fine? Who is to judge this? For example, whose duty is it to say that the trustees have changed? It could be any of the other trustees and the administrative fine could be imposed on any one of them at random. There needs to be some kind of due process about substantial fees of this kind landing out of the blue on people who may not bear the main brunt of the significant event over which they are being arraigned.

[Lord Freud]

The noble Lord has opened himself up to a letter from me.

[Lord McKenzie of Luton]

My Lords, I think we need to read the record. In the meantime, I beg leave to withdraw the amendment.