Pension Schemes Bill [HL]

Baroness Altmann Excerpts

Ping Pong (Hansard): House of Lords
Wednesday 5th April 2017 Lords Chamber

[Baroness Drake (Lab)]

My Lords, the Bill, in strengthening the regulation of master trusts, is indeed welcome. I noted that a recent release by the ONS on funded pensions and insurance in the UK national accounts referred to the significance of the establishment of DC master trusts, so in general there is increasing recognition of the importance of having fit-for-purpose regulation of master trusts. However, the government amendments in this group raise certain questions that I would like to put to the Minister.

Amendment 2 to Clause 9 simply deletes the provision for a funder of last resort. That is disappointing. Will the Minister update the House on what further action the Government have taken since the Bill was last considered by this House to address the protection of scheme member benefits in the event of a master trust winding up with insufficient resources to meet the cost of complying with and obligations under the Bill? The noble Lord, Lord Freud, implied that there was ongoing work and discussions with the industry, so it would be helpful to know what actions have been taken.

The other government amendments in this group, to Clauses 25 and 34, addressed the issue of allowing, in a wind-up on failure, the transfer of scheme members and their benefits to a receiving scheme that is not a master trust—for example, a group personal pension. While not wanting to disagree in principle with widening the pool of schemes to which transfers can be made, I think that that change to the Bill raises some questions. Given that the Pensions Regulator will be authorising a transfer to a scheme that has not been subject to the master trust authorisation regime, how will it satisfy itself that the receiving scheme on transfer is both sustainable and well governed?

The Bill provides under Clause 34 for a prohibition on increasing or imposing new charges on members by either the transferring or the receiving scheme in order to meet the cost of resolving failure. As a non-master trust receiving scheme will not have been subject to the authorisation regime and the continuity and implementation strategy requirements in the Bill, how will the Pensions Regulator apply the prohibition on increasing charges and police it after the transfer of members to a non-master trust, given that the receiving scheme will not be in its regulatory jurisdiction?

Government Amendment 13 provides for regulations to allow for transfers from a master trust to a contract-based scheme. Given that the transfer will be from a trust to a contract arrangement, do the Government consider that there are any special considerations that the regulations will need to address? If so, what are they?

[Baroness Altmann (Con)]

My Lords, I welcome much of the thrust of the Bill. I am also delighted to see Amendments 3 and 4, which, I hope, ensure that insured master trusts will not be forced to separate from their insurance parent, which would have forced them to face higher costs and reduced the security of their members. I am very grateful to my noble friend for taking on board the comments made during the Bill’s passage through this House.

It strikes me that Amendment 2 should be considered separately from those to which it has been joined. I reiterate my strong concern—notwithstanding the reassurances from my noble friend—about leaving out Clause 9. I understand that there is a view that it is unnecessary and that the new regime will ensure that master trusts have sufficient resources, are financially sustainable and have capital adequacy in place. However, even with new schemes and the best will in the world, capital adequacy tests may prove inadequate. No provision in the Bill would cover members of a very large pension scheme that suffered a catastrophic computer failure and lost member records. The cost of restoring that could be well above the capital adequacy put in place, and nothing in the Bill explains where the cost of restoring those records would be covered. The only place might be the members’ pots themselves, which is not supposed to happen.

I vividly recall assurances given by Ministers on defined benefit schemes during the 1990s, when the minimum funding requirement was supposed to ensure that schemes would always have enough money to pay pensions. No one foresaw the problems evident in the early 2000s, when schemes that had met MFR legislation wound up and ended up without enough money to pay any money to some members on the pensions that they were owed.

Even more concerning than that is that the Bill is being introduced when 80 or so master trusts are already in existence in the market with a huge number of members across the country already saving in a pension. These trusts have not been subject to the capital adequacy test or other tests that the Bill will rightly introduce. What is the protection for members of existing schemes who are saving in good faith? They are not protected at all. That was why I was very pleased that we passed the amendment concerning the scheme funder of last resort. I echo the question of the noble Baroness, Lady Drake: what discussions have taken place with the industry to find a solution to cover the eventuality—we do not expect it and it is, I admit, a small probability—that an existing master trust winds up without enough funding to cover the costs of administration to sort out its records and transfer them over to another scheme? I should be grateful for some information from my noble friend about whether there are ongoing discussions and how the department sees that eventuality being covered: where would the money be found?

On Amendments 5 to 19, I share some of the reservations mentioned by the noble Baroness, Lady Drake, such as the regulatory disparity between a master trust, which would be regulated by the Pensions Regulator—and therefore under its control, if you like —and a master trust transferred under the amendments to a pension scheme regulated by the Financial Conduct Authority. How would the regulatory systems work together when they are under different legislation?

I have other concerns, but I may raise them under the next group.

[Lord McKenzie of Luton]

My Lords, let me start by expressing our regret that the requirement for there to be a funder of last resort—successfully pressed by my noble friend Lady Drake on Report—has been deleted from the Bill. That concern was also expressed by the noble Baroness, Lady Altmann. We of course accept that the whole purpose of the Bill—its protections, including capital adequacy, financial sustainability, systems requirements, scheme funder and transfer regime—is to secure people’s pension pots, militate against scheme failure, and ensure good order when difficulties arise. But as my noble friend asserted on Report, notwithstanding this, it cannot be guaranteed that a master trust will not fail and when it does there will be an available master trust to step into the breach so that members’ funds are protected. The noble Baroness, Lady Altmann, has just expressed similar concerns with vivid potential examples.

In seeking to resist the funder of last resort proposition, the noble Lord, Lord Freud, claimed that it would be costly and a disproportional response to the issue and with moral hazard implications—arguments deployed by the Parliamentary Under-Secretary of State for Pensions in the other place. We remain unconvinced of these arguments when put in the balance against the importance of protecting people’s savings. Nevertheless, we need to examine how the Commons amendments to Clauses 25 and 34 contribute to ameliorating this risk, which at least potentially they do.

We acknowledge the amendments to Clauses 25 and 34 which potentially widen the scope of continuity option 1 and expand the prohibition on increasing administration charges or imposing new administration charges. In particular, they raise the prospect of the accrued rights and benefits under a master trust scheme being transferred to an alternative pension scheme which is not a master trust. No detail is offered in the amendment about the likely characteristics of an alternative pension, other than the fact that it must be a pension scheme under the 1993 Act. This of course will include both personal and occupational pension schemes. Regulations will spell out the circumstances when the alternative might be available, and the characteristics of an alternative scheme. Regulations will also spell out how such an option is to be pursued.

While we can see the benefits of a potentially wider pool of pension schemes which could be available in the event of a master trust failure, it begs a number of questions about how any alternative scheme would be regulated and what protection it would offer members. My noble friend Lady Drake, in particular, as ever has produced some forensic questions to seek at least some clarity on key issues: further actions and discussions that have taken place; whether a receiving alternative scheme is sustainable and well governed; how such a scheme can operate a prohibition on increasing charges and preventing members’ funds from being accessed; and consideration of how bulk transfers would work. The noble Baroness, Lady Altmann, joined in the same sort of inquiry.

It remains to be seen how much these amendments provide a real opportunity to add a layer of protection and whether the market will offer up alternative schemes which can assist. We look forward to the Minister’s reply, but we are not minded to oppose these amendments.

--- Later in debate ---

21: Clause 46, page 31, line 3, leave out subsection (2)

[Baroness Altmann]

My Lords, before the Bill passes through, I will make a couple of observations. Perhaps the Minister, who will not have the answers now, might write to me to allay some of my concerns that I will put on the record about the Bill.

The first regards net pay schemes being used for auto-enrolment as master trusts for low earners, who cannot get tax relief so they end up paying 25% more for their pensions. These low earners, who are probably mostly women, are the ones who surely most need extra money yet are unable to receive it. There is nothing in the master trust framework that will require employers to ensure that low earners are not enrolled into such schemes. Indeed, one pension scheme—NOW: Pensions—is reimbursing members for the tax relief they have lost, which is fine; they are not out of pocket.

The second issue on which my noble friend might be able to write to me is that I remain concerned that during a pause order, members may in fact lose entirely their entitlement to an auto-enrolment pension building up for them—for an indefinite period, because we do not know how long the pause order can last.

[Lord Henley]

My Lords, I am not sure that I have ever spoken on a privilege amendment before, but I have noted what my noble friend had to say and I promise to write to her. I beg to move.