Pensions Regulator Defined Benefit Funding Code of Practice 2024

Baroness Drake Excerpts

Monday 21st October 2024 Grand Committee

[Baroness Drake (Lab)]

My Lords, I declare my interest as a DB pension scheme trustee as recorded in the register. I thank my noble friend Lord Davies for securing this debate. This is an important code, and it should not pass without comment.

As the Explanatory Memorandum and my noble friend observe, while aggregate DB funding levels have improved in recent years, financial markets and economic conditions are changeable and funding positions can quickly deteriorate. There is a dynamic in the pensions world related to economic circumstances, whether fiscal policies, investment returns, gilt yields or the impact of technologies on markets, to name but a few.

An intended purpose of the code is to allow TPR to be more proactive in identifying and mitigating emerging risks in a targeted way. There have been significant instances over the past 30 years of regulatory failure to identify or respond quickly to emerging risks in DB pension provision, some with dreadful consequences. What do the Government believe are the most compelling levers in this code that will materially improve mitigating such emerging risks?

The new code sets two key requirements: planning for the length of the scheme’s journey plan to get to full funding at an appropriate pace of de-risking and assessing current funding positions when carrying out valuations. As part of that planning, the code trustees must set a funding and investment strategy—that is, the journey to getting to the planned endgame for the scheme. The strategy must set out how the trustees will transition from the scheme’s current funding position to low employer dependency funding when the scheme is mature. In making that transition, how risk can be supported by the employer and the strength of the scheme has to be made clear.

During the consultation a lot of concern was expressed that the new code could weaken an important fiduciary power of trustees to make the investment allocation decisions by requiring trustees to invest in line with the investments set out in the funding and investment strategy that must be agreed with the sponsoring employers. In response to those concerns, although changes have been made to the code to clarify that decisions in relation to the scheme’s investment allocation are not constrained by the notional investment allocations in the funding and investment strategy, an inference remains that, in most instances, TPR expects trustees to align their investment strategy with the funding and investment strategy. Will the Minister confirm unequivocally that the code will not remove the power of existing trustees to decide on the scheme’s investment allocation? It is an important power in addressing moral hazard.

The code places a welcome greater emphasis on the strength of the sponsoring employer covenant, which is of fundamental importance but is often lost in debate, when considering funding and investment risk. The level of cash generated by a sponsoring employer and its future prospects will be key determinants of how much investment risk a scheme should take. The strength of an employer covenant can change very quickly following mergers, acquisitions, restructurings et cetera. Such changes may result in changes to the level of debt in a company, dividend policy, free cash flow, covenant and longevity. The code requires any funding deficits to be repaid as quickly as the sponsor can reasonably afford, but trustees will have to consider the impact on the employer’s sustainable growth. Trustees will need to assess such affordability annually; they will also have to provide evidence for their view of what is reasonably affordable and their opinion on the maximum supportable risk that a sponsor employer can bear.

These are potentially significant areas for disagreement between sponsoring employers and trustees, with one seeking to discharge a fiduciary duty to protect its members and another wanting maximum freedom from the liability of funding a pension scheme, but TPR has still to provide its covenant guidance on the main areas that trustees must consider when assessing the employer covenant. In that sense, there is a significant area of this code where an important point of detail is missing. Can the Minister advise when such covenant guidance will be issued?

The code emphasises a flexible and scheme-specific approach to regulation, taking into account the variety of DB schemes. It contains provisions for schemes that remain open to new members and may not be maturing, such as schemes that are now closed. Again, that is quite a controversial issue in the initial iteration and consultation on the development of this code. The considerations around investment strategy and the ability of trustees to choose how to invest now recognise the different characteristics of open schemes compared to closed schemes; the importance to open schemes of long-term planning; and a more flexible approach to assessing investment risk, which is supportable by the covenant and the scheme.

Finally, the Explanatory Memorandum—I shall pick up with brevity a point that my noble friend elaborated on in more detail—states:

“The approach to monitoring this legislation is that there is no requirement to carry out a statutory review of the draft Code”.


However, as we all know, the previous Government were—and, more so, the current Government are—focused on the issue of wider funded pension scheme consolidation and scheme investment strategies. Although I recognise that the Minister cannot comment on the outcome of such considerations or what may flow from the first pension review, if those outcomes had an impact on the provisions of the DB code, what would be the mechanism and consultation for revising the code as a consequence?

[Baroness Altmann (Non-Afl)]

My Lords, I congratulate the noble Lord, Lord Davies, on securing this important debate. I agree with the noble Baroness, Lady Drake: the code is an important document that certainly deserves the attention of this Committee. I apologise to the Minister because this debate may well end up lasting more than the half an hour that was apparently expected; I will try to be as succinct as I can.

The overall aim of the defined benefit code is to protect member benefits. The whole point of the code was that, in the past, there had been a kind of free-for-all where employers and trustees could invest and take as much investment risk as they wished. Given other circumstances in the market, hundreds of thousands of members either lost their benefits or were at significant risk of doing so. I welcome the fact that there is now a stronger regulator, the Pension Protection Fund and this kind of code, which is constantly being revised and updated.

However, I stress that I agree wholeheartedly with the comments of the noble Lord, Lord Davies, that this particular document, like previous documents, is rather too prescriptive, with excessive requirements placed on trustees, who may or may not need them. It seems to attribute spurious accuracy to an inherently uncertain outcome of events. The kind of box-ticking and groupthink approach that needs to be revised within 15 months of each new valuation will be costly to the schemes, and it is not clear what value will be added if the long-term strategy is unchanged or not likely to change.

Some of the issues we are grappling with, in this code and in the defined benefit universe as a whole, are dependent on and the result of the exceptional period of quantitative easing introduced in 2009. It was deliberately designed to drive down government bond yields and, concomitantly, to clearly put a much greater inflation risk on liabilities. That is indeed what happened. Initially, assets did not keep up with liabilities, but the fears of ongoing falls in gilt yields over that subsequent period, as quantitative easing, gilt printing and the driving down of long-term bond yields continued, have made anyone involved in the defined benefit space rather nervous of what are called “non-matching assets”.

We had a reversal of conventional thinking about defined benefit pension schemes. They were supposed to invest to take risk and welcome risk placed judiciously. This thinking became: do not take risk or try to beat the gilt market, because the gilt market may beat you and increase your deficit. So a whole groupthink built up around the idea that defined benefit pension schemes should have as much as possible in so-called matching assets, because you want to match your liabilities. The fact is that, if you want good funding, you need to outperform your liabilities—just matching them is not sufficient—but I am not sure that that is reflected very much in the code for schemes that are not in healthy surplus.

I welcome the Minister’s comments on the fact that we are talking about estimated liabilities based on expected future values, relative to current mark-to-market actual values for the assets, and on whether the risks of attributing that spurious accuracy to the long-term liabilities have been sufficiently considered. In this regard I declare my interests: I work with some defined benefit pension schemes, and have done so in the past, to advise on investment strategy.

It seems to me that part of the thinking going through this defined benefit code is that it is better for all schemes to fail conventionally than for too many schemes to try to do unconventional things that might succeed but incur greater risk. I feel we need more scheme-specific flexibility there, and we need to consider the impact of quantitative tightening and how that will be different for the pension liabilities associated with these schemes.

I welcome the differentiation mentioned by the noble Baroness, Lady Drake, and the noble Lord, Lord Davies, between open and closed schemes. I urge the Government to consider going further in allowing and enabling open schemes to take advantage of investment opportunities from a diversified array of risk assets, even in circumstances where there is, perhaps, some nervousness about the sustainability of the employer.

There is concern about the stability of the gilt market, but there is also an inherent conflict between that desire for stability and the need for outperformance of liabilities that these schemes could be delivering. If capitalism is not at an end—one might argue that it is—then investing in assets of higher risk than government bonds or the supposedly safer assets should, on aggregate and in the long run, deliver better returns. On top of that, we have a Government who rightly want to use more pension assets to boost the economy. There are assets such as infrastructure, small growth companies and equities as a whole, both domestically and internationally, that could deliver that objective, but they entail risk. That is where I hope the funding code may be further refined.

Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024

Baroness Drake Excerpts

Tuesday 26th March 2024 Grand Committee

[Baroness Drake (Lab)]

I thank the Minister for the clarity of his presentation—this is a complex set of regulations—and for the briefing session that he arranged for Peers, where I was able to ask quite a lot of questions. I support these regulations but I want to take this opportunity to ask three questions.

The regulations were preceded by a government consultation on an original draft, which was amended post the LDI crisis and in the wake of the Mansion House productive finance proposals. Importantly, these regulations remove an uncertainty as to whether the DWP would qualify a trustee’s independence to make investment decisions as they make it clear that trustees will retain the power to decide how to invest the scheme’s assets. That is welcome; otherwise, it would have significantly weakened the trustee’s powers to protect scheme members. Is not intervening on a trustee’s independence to make investment decisions now settled policy? Also, is any consideration being given to granting additional powers to the Pensions Regulator to override investment decisions when it is oversighting a scheme’s funding and investment strategy?

Secondly, the regulations now allow greater flexibility in investments and risk-taking than was originally proposed in the first draft, were it supportable. The DWP has made amendments to avoid, to use the Government’s own phrase, things that “inadvertently drive reckless prudence” —that sounds like an oxymoron—“and inappropriate risk aversion”. As the Minister said, it is now explicit that open schemes can take account of new entrants and future accrual when determining when the scheme will reach significant maturity; this gives them greater scope for scheme-specific flexibility.

However, I note that these regulations also no longer require schemes of significant maturity that are making low-dependency investment allocation broadly to match cash flow from investment with schemes’ liabilities. The Government have made it clear that schemes can invest a reasonable amount in a wide range of assets beyond government and corporate bonds, even after significant maturity has been reached—for example, when the scheme’s years to duration of liabilities is around only five to 15. The DWP has explicitly removed the original draft Regulation 5(2)(a), which required in schemes of significant maturity that assets be invested in such a way that cash flow from investments broadly matched the payment of pensions under the scheme.

Why, when a scheme has reached significant maturity, would retaining the requirement that assets be invested in such a way that cash flow from the investments broadly matches the payment of pensions be considered “reckless prudence” or “inappropriate risk aversion”—the premise on which the original draft Regulation 5(2)(a) was withdrawn? When a scheme is in significant maturity, you need prudence and risk aversion because of the need for cash flow. In fact, in many closed DC schemes, the alignment of employers’ desire to remove DB liabilities and volatility from their balance sheets with trustees’ desire to protect benefits over the long term is increasingly leading to investments held broadly matching liabilities, as well as to consideration of a path to buy- out and buy-in for many schemes. It is rather rowing against what is happening in many instances. I fear that greater flexibility of access to surplus may not provide a sufficient incentive for schemes to change their course.

This is my third and final point. The requirement to assess the current and future development and resilience of the employer covenant is now on a legal basis and has to be embedded in the funding and investment strategy agreed by employers and trustees, which is welcome. It reflects the increasing importance given to covenants by trustees but the assessment of an employer covenant can be contested ground between employer and trustee, particularly where there is a question of whether there has been a material change to the strength of the employer covenant. Given this novel legal territory, which is of itself welcome, what powers does the regulator have to address such disagreements of view between the trustee and employer on the covenant, given that they have to agree them in order to proceed with a funding and investment strategy? How, if there are disagreements—and there could well be—will the regulator address those?

[Lord Davies of Brixton (Lab)]

I need to tell the Committee that I have an interest to declare: I am a fellow of the Institute of Actuaries. However, I should add—with some emphasis—that nothing of what I will say subsequently must be regarded as actuarial advice. It might sound like actuarial advice but I assure noble Lords that it is not. I speak from my experience as a scheme actuary having undertaken scheme valuations, including those under the TPR or previous iterations of where we are.

Unfortunately, I was unable to attend the briefing session due to other business in the House. It might have been better if I had attended because I have reservations about these regulations. They are going to go through and be implemented but, in expressing some doubts, I trust that it will affect the environment in which they are implemented.

In this context, we have to acknowledge the report published today by the House of Commons Work and Pensions Committee—Defined Benefit Pension Scheme, its third report of the 2023-24 Session—which comments in some detail on the role and functioning of the TPR. I want to take this opportunity to highlight some of the report, in which doubts are expressed about the way the TPR operates. For example, Mary Starks undertook an independent review of the TPR and said:

“TPR’s statutory objective to minimise calls on the PPF may drive it to be overly risk averse, particularly given the PPF’s strong funding position”.


I will return to that.

Other comments are that the TPR’s objectives have not changed to reflect the significant changes that there have been in the defined benefit landscape. The concept of excessive prudence is widely held within the pensions industry. The PLSA, the Pensions and Lifetime Savings Association, says that

“it would be helpful to give TPR a greater focus on member outcomes as a whole”,

while the Railways Pension Scheme trustee corporation suggested that an objective should be made explicitly to

“protect and promote the provision of past and future service benefits under occupational pension schemes of, or in respect of, members of such schemes”.

So there is a significant train of thought coming from the industry that the TPR has failed to acknowledge its role in pension provision.

A particular problem highlighted in the first comment is the position of the PPF, the Pension Protection Fund. In giving evidence to the Select Committee, its chief executive, Oliver Morley, said that the objective of the TPR to protect the PPF was

“looking a bit anachronistic now, given the scale of the reserves and the funding level”.

I am not asking the Committee to accept or endorse these comments at the moment but, at the very least, they emphasise that the role of the TPR is a matter of detailed discussion. The regulations before us are firmly within a concept of its role, which many commentators now say is outdated. I have held this view for some time; it is good to see that it is now accepted more widely.

This was the conclusion of the Select Committee:

“TPR’s approach to scheme funding has been driven by its objective to protect the PPF. We agree with those who told us that the objective now looks redundant, given the PPF has £12 billion in reserves”.


As I said, this is at the very least an issue that should be confronted, but it is not confronted by the regulations before us. The regulations are patently too prescriptive. The details that they require are not directed at the objective of protecting members’ benefits but are about establishing a system where box-ticking will take priority over the longer term and broader interests of scheme members.

I have also argued for some time that the TPR misunderstands its role. There is a sort of assumption in its thinking that the calculation of technical provisions represents the best valuation basis. New readers may well find that this is getting into deep water but the point is that the actuary who undertakes the valuation at the request of the trustees must comply with the appropriate professional standard: Technical Actuarial Standard 300. This is the latest version, coming into effect in April.

It is notable that these requirements, which any actuary valuing the solvency of a pension fund should follow, do not mention technical provisions. In essence, the technical provisions are there to trigger action by the regulator; they are not there to substitute for the scheme actuary’s solvency valuation. We have what is in effect a dual basis. The scheme actuary working for the trustees will advise what they believe to be the appropriate contribution rate. Parallel to that, there is the system of technical provisions that, if triggered, require a separate valuation to be undertaken to calculate the recovery plan.

They are quite separate operations but the TPR consistently confuses the two. The end result is that, by overemphasising the role of technical provisions, schemes are being forced into this problem of excessive care, or excessive protection, of the members. It is not at all clear to me that this bureaucratic overweight on the operation of pension schemes ultimately favours the members in any way. In effect, it forces schemes—LPI is just one example—to invest in gilts, which is bad for members; there is no question about that. It is good for the Pension Protection Fund, and good for a Government who are concerned about being held up as not caring about the protection of members, but members’ benefits are drawn from the scheme so the scheme should be funded in accordance with the actuarial solvency standards, as set out by the Financial Reporting Council.

Occupational Pension Schemes (Collective Money Purchase Schemes) (Amendment) Regulations 2023

Baroness Drake Excerpts

Tuesday 13th February 2024 Grand Committee

[Lord Palmer of Childs Hill (LD)]

My Lords, I thank the noble Viscount for his clarification of the papers, which is very welcome—as usual. This is a statutory instrument with a more than usually snappy title, which will probably be more noted than some of the things in the instrument.

This statutory instrument is good news. It helps pave the way, as I understand it, for the introduction of the UK’s first collective defined contribution pension scheme, which I believe is by the Royal Mail. Collective defined contribution schemes in various forms are common in Scandinavia, the Netherlands and Canada. Work on these risk-pooling arrangements started during the coalition years when we, the Liberal Democrats, worked collaboratively with the Labour Front Bench and the Communication Workers Union to get the Royal Mail to implement the first scheme of this sort. I believe that it has not yet gone live, although perhaps the noble Viscount can tell me more about that.

The next developments of CDC, in my view, are, first, the extension of multi-employer or industry-wide CDC—when does the Minister expect to publish the next consultation on this?—and, secondly, the development of retirement-only or decumulation-only CDC schemes, so that a person could take his or her own pot and pool it with other people’s. Any comments on that would be gratefully received.

These regulations tidy up some issues that are causing practical problems. The main part is to do with what happens each year, as the noble Viscount said, when a scheme reviews whether it has enough money to meet its target pension payouts. As things stand, if the scheme is short, it can reduce planned pensions. But what happens if, a year later, it thinks that things are better? What these regulations appear to make clear is that the first thing you do is reduce or eliminate the planned pensions cuts. I think this was covered by the Minister’s comment about “a smoothing mechanism”.

One thing that comes out of this SI is that, as so often, there seems to be a lot more valuation work for actuaries. I am sure they will be very grateful. I am very grateful for the guidance in the papers and the elucidation from the Minister. I think the principles are right and we on these Benches agree with the instrument.

[Baroness Drake (Lab)]

I thank the Minister for setting out the intent of these regulations so clearly and for arranging a briefing session with DWP officials engaged with CDC, who also provided a very helpful briefing document. It probably has reduced the number of questions that my noble friend and I have—although I suspect the Minister will take very little comfort from that observation.

The regulations amend the Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2022, in two key ways. In the first instance, they amend how reductions to members’ benefits in a CDC scheme can be smoothed following a fall in the value of assets held. Given the Government’s opposition to any buffer fund in a collective DC scheme to manage volatility and assets, intergenerational fairness or cuts in benefits, clarity on how the legally permitted smoothing mechanisms operate is indeed important.

--- Later in debate ---

[Viscount Younger of Leckie (Con)]

My Lords, I thank all noble Lords for their helpful contributions to this short debate. Furthermore, I thank some noble Lords for the advance notice of their questions, particularly because this is quite a technical set of regulations, as I think we all understand. Given the incessant rain that we have been suffering over the past weeks, frankly, the drier the better—and that goes for this subject, too.

For an individual member of a CDC scheme, this instrument’s key effect will be to help to ensure that in a period of extreme economic downturn the principles of CDC continue to operate correctly. When, as expected, Royal Mail launches its CDC scheme later this year—I hope that this answers the questions from the noble Baroness, Lady Sherlock and the noble Lord, Lord Palmer—that member and their approximately 115,000 colleagues will be able to have more confidence that their new scheme will provide them with a regular income in retirement, with less exposure to the unexpected market shocks than might otherwise be the case. The noble Baroness, Lady Sherlock, raised a number of questions about the future of CDC schemes and Royal Mail, and I shall attempt to answer them in more detail later in my speech.

Noble Lords raised a number of questions about the multiannual reduction provisions, which I shall attempt to answer. First, the noble Baroness, Lady Sherlock, asked why the weakness in the current drafting was not identified before. It is important that all new legislation is monitored carefully to ensure that it works as we intended it to. It is through this monitoring process that we identified that the current drafting did not meet all of our published policy intention. If CDC schemes are to succeed, it is essential that prospective schemes are clear about those requirements. I hope that answers one of the questions from the noble Baroness.

The noble Baroness, Lady Sherlock, also asked whether approval from the Pensions Regulator was required or needed before any offsetting could be implemented. The decision to implement a multiannual reduction, including any offsetting, rests with the trustees of the scheme. It is based on the most recent actuarial valuation prepared by the scheme actuary and is subject to the scheme rules. Pre-approval is not required, but the Pensions Regulator will have ongoing scrutiny over such decisions in the normal way and the trustees are required to share the actuarial valuation with the regulator, again in the normal way.

The noble Baroness, Lady Sherlock, queried whether the trustees could be penalised if they failed to provide relevant information to the Pensions Regulator. As she may know, the standard civil penalties provided for in legislation, for example up to £5,000 in the case of an individual and up to £50,000 in any other case, can be imposed by the Pensions Regulator if the requirements are not met.

Both the noble Baroness, Lady Sherlock, and the noble Baroness, Lady Drake, asked whether offsetting following a bounce-back in investment performance could be applied retrospectively. Perhaps I can reassure them that it cannot be applied retrospectively because a key principle of this provision is that any bounce-back should smooth outcomes going forward and avoid the need for cuts, where possible, while ensuring that the costs of current and future benefits remain in balance with the value of the scheme’s assets. I think that chimes with some of my opening remarks, and I hope that it answers the question.

The noble Baroness, Lady Drake, asked whether an actuarial threshold was required before the full three years of a multiannual reduction could be deployed. I will answer that. There is no threshold, as it is for the trustees, who are independent and acting in the interests of the members, to decide whether to apply a multiannual reduction based on the information contained in the most recent annual valuation, which is prepared by the scheme actuary. A significant cut to benefits would likely be required only in extreme circumstances, but we would expect the trustees to utilise the multiannual reduction mechanism in this scenario, if it is provided for in the scheme rules. If they did not do this, they would need to explain their reasoning to the Pensions Regulator.

The noble Baronesses, Lady Sherlock and Lady Drake, and the noble Lord, Lord Palmer, all queried the policy intention of Regulation 3(5) and what implications it had for the front-ending or back-ending of the offsetting of the remaining planned reductions of the multiannual reduction. I would argue that this gets to the meat and granularity of the policy. The aim is to ensure that, while a degree of smoothing is allowed over a multiannual reduction, as we know, over three years, cuts are not stored up and deferred by backloading the cuts. That is why the legislation ensures that the reduction applied during each year of a multiannual reduction must not be greater than that applied in the previous year: that is very clear.

The noble Baroness, Lady Drake, asked how a transfer value would incorporate a scenario where the member transferred out before the multiannual reduction was completed or any potential offsetting was applied. Transfer values will be based on the conditions applicable at the time the member requested the transfer and when they actually transferred out of the scheme. Their transfer value will reflect any cuts planned for future years under a multiannual reduction. This means that nobody choosing to leave a CDC scheme will get more or less than the value of their benefits at that particular point.

I move on to the theme of wind-ups, which was raised by the noble Baronesses, Lady Drake and Lady Sherlock, who asked who qualifies as a successor and how you define one. I hope that I helped to answer that in my opening remarks, but perhaps I can go a bit further. Subject to scheme rules, this is an individual nominated by a dependant nominee or another successor to receive benefits following their death. Also, the scheme administrator can nominate a successor when, after that beneficiary’s death, there is no individual or charity nominated by that beneficiary.

I shall go a bit further on the question of transfers, which was raised by the noble Baroness, Lady Drake. The beneficiary has a number of discharge options they can choose from that are set out in the regulations. They include a flexi-access drawdown, which is where, subject to what the pension scheme rules allow, in any year the beneficiary can choose to take no payment of drawdown pension, a regular series of payments, an irregular payment stream or their whole flexi-access drawdown fund as a single payment. So there are a number of options there. Trustees must have completed the transfer process before the wind-up of the scheme can be completed. The value of the accrued rights to benefits transferred would be calculated based on the circumstances at the point of the transfer request.

The noble Baroness, Lady Drake, asked a number of questions about how the Royal Mail CDC scheme will operate. Royal Mail has informed us that it and its unions have agreed that the vast majority of existing employees with more than 12 months’ service will be enrolled into its collective plan at the so-called go live. It has also informed us that eligible new employees who join after go live will not be required to make an active decision unless they decide to opt out of contractual enrolment to the collective plan once they reach at least 12 months’ service with the employer. Which scheme Royal Mail chooses to use as a nursery scheme for its employees’ first 12 months of service is a decision for it and its union, as long as it meets the requirements of automatic enrolment.

The noble Baronesses, Lady Drake and Lady Sherlock, asked about the take-up of CDC in the UK. The Government are proud of the progress that we have made so far. During this Parliament, my officials worked closely with industry stakeholders to develop and bring into force legislation in 2021 to facilitate the introduction of single or connected employer CDC schemes. Over the past 12 months, the Government have announced a comprehensive package of pension reforms to provide better outcomes for savers and better support the UK economy. As part of that, we have been exploring the role that CDC can play in these reforms.

In answer to questions from the noble Lord, Lord Palmer, and the noble Baroness, Lady Drake, I am pleased to say that our consultation on CDC provision for unconnected multi-employer schemes and master trusts demonstrated significant appetite for it. A number of noble Lords mentioned timing; we intend to consult on regulations this spring.

The noble Lord, Lord Palmer, asked when we will extend the CDC provision to unconnected multi-employer schemes, including master trusts. We are committed to facilitating further CDC provision as quickly as possible, but we want to make sure that we get the legislation right to help ensure that the interests of members in these new schemes are generally protected. We engaged extensively with industry during the drafting process to ensure that this will be the case. As was mentioned earlier, we will consult on draft regulations to facilitate whole-life, multi-employer CDC schemes later this year. Subject to parliamentary approval, we intend for them to come into force in 2025.

The noble Lord asked what work is being done to legislate for decumulation-only CDC. The answer is the same: we are keen to facilitate access to CDC schemes where this would provide better outcomes for members, as long as we can ensure the necessary member protections. I come back to that important word, “protections”. Building on our work to develop a whole-life, multi-employer legislative framework, we are working closely with the pensions industry and regulators to explore what will be needed.

I thank all noble Lords for this fairly short but valuable and constructive debate. I also thank noble Lords for giving me their questions in advance. I see that the noble Baroness, Lady Drake, is itching to get up so I will give way.

[Baroness Drake (Lab)]

I did not want to get up too quickly. I do not want to hold up the closure of the debate on these regulations, but I was disconcerted by the Minister’s response on successors. Could he write to formally record what he said about that? For a trustee, a set of tax rules apply when the pension savings go into the estate and inheritance tax and a further set apply when the pension pot is handed over to a nominated beneficiary. Here we are talking about a second tier—a nominated successor to a nominated beneficiary. Trustees have to be very careful under which tax regime and to whom pension pots are being allocated. I struggled to follow what he said on that—because it is complicated, not because he did not explain it. I was thrown by the word “successor” when I read the regulations. It would be helpful if what he said could be written down, if we need to interrogate it further, rather than deal with it now.

[Viscount Younger of Leckie (Con)]

I quite accept what the noble Baroness has raised. She acknowledged that I gave out a lot of detail in defining what we think is right in terms of who would be a successor, cascading along the process if the successor had died and so on. However, if there is more to say—I hope that there might be—I shall write to the noble Baroness and copy in all noble Lords who have taken part in this debate. I thank her for her question.

Pensions Act 2004 and the Equality Act 2010 (Amendment) (Equal Treatment by Occupational Pension Schemes) Regulations 2023

Baroness Drake Excerpts

Tuesday 14th November 2023 Grand Committee

[Lord Palmer of Childs Hill (LD)]

My Lords, I thank the noble Viscount for his complete exposé of all the problems that have existed and how the Government are trying to rectify them. Our Benches agree with these SIs. There is no problem with them. I see other noble Lords have lots of notes; I know from experience that I can be brief knowing that they will deal with the minutiae. This seems to be more rules bringing old EU law into domestic legislation. These SIs raise broader points about discrimination in pensions, which is roughly the scope of the legislation. However, as usual, in bringing old EU laws into place we are missing the opportunity to make pledges to follow the Parliamentary and Health Service Ombudsman’s recommendations. It reports conversations with WASPI—Women Against State Pension Inequality—women. I would appreciate it if the noble Viscount could comment on how that is going to be dealt with.

Will the noble Viscount give the committee an update on the LEAP—legal entitlement and administrative practices—exercise through which the Government are doing a corrections exercise for historic errors and underpayments to women? I understand that these processes are taking place, but I do not know quite how far they have gone or how quickly they are going or when the majority of cases will be dealt with. I hope that the noble Viscount can put a bit of meat on that and give us some timeframe for LEAP and WASPI women, which are two issues close to my heart.

[Baroness Drake (Lab)]

My Lords, I declare my interests set out in the register as a pension scheme trustee. I welcome these statutory instruments and thank the Minister for the clarity of his explanation of their history. The equal treatment by occupational pension scheme regulations before us maintain the protection of the right not to be discriminated against on the grounds of sexual orientation in relation to pension benefits, particularly survivor benefits, which would be lost on 31 December 2023 but for these regulations. That is a pretty compelling reason for welcoming them.

Those protections were originally secured through the EU framework directive for equal treatment and confirmed by our Supreme Court in the Walker case. They apply to occupational pension scheme benefits and to compensation to beneficiaries of pension schemes that enter the Pension Protection Fund.

My first thought was: gosh, the Government are taking things to the wire, time-wise, given that the House rises on 19 December. It does raise worrying concerns about what other pension protections for UK citizens, previously preserved by Section 4 of the European Union (Withdrawal) Act, will be lost because of a failure, whether by intent or neglect, to meet the 31 December 2023 deadline for changes to domestic legislation to be made for them to be retained. What level of confidence can the Minister give the House that all protections of pension benefits for members and beneficiaries preserved by Section 4 of the European Union (Withdrawal) Act are or will be captured in changes to domestic legislation prior to 31 December? Is it intended that some of those protections will not be preserved? If so, which are they?

These regulations also restate retained EU law on the right to equal pay between men and women where discrimination arises from the legislation on guaranteed minimum pensions by amendments to the Equality Act and the Pensions Act 2004, so the right continues to apply to occupational schemes and PPF payments. Very importantly—it is certainly close to my heart—the regulations retain the intent of the 2004 ECJ judgment of Allonby to nullify the requirement for a real-life opposite-sex comparator to demonstrate unequal treatment. Instead, a notional or statistical comparator can be used. That is such an important judgment and it demonstrates the value of the many ECJ judgments that contributed so importantly to progressing gender equality issues. As my noble friend was reflecting, so was I; I was actually a commissioner of the EOC, which supported the Allonby judgment at the time the ECJ pronounced its decision.

Unless the amendments to legislation are made by 31 December, this particular important protection is lost. Again, that is another compelling reason for welcoming these regulations. What level of confidence can the Minister give us that all rights to equal pay between men and women in the payment of pension benefits to members and beneficiaries, previously preserved by Section 4 of the European Union (Withdrawal) Act, are or will be retained in changes to domestic legislation prior to 31 December? While welcoming what we can see, we are nervous about what we cannot see, so we seek assurances on that.

The regulations before us on PPF compensation are also necessary because again, under the Retained EU Law (Revocation and Reform) Act 2023, without them the more generous PPF compensation payment calculations, which flow from the 2018 Hampshire judgment from the European court, would be lost. So too would the effects of the further clarifying 2020 Hughes judgment in the High Court, which was to disapply the then-existing cap on PPF compensation to those below their scheme’s normal retirement age, when the employer became insolvent. The High Court considered that it constituted unlawful age discrimination. For the intent of these judgments to remain, the regulations before us are required by the deadline of 31 December 2023, and of course there is an obvious and compelling reason why they are welcome.

It is very fortunate that the Government decided as policy to retain the effects of these judgments. It would have been a pretty poor show had they not, given the impact on individuals—and particularly so, given that the PPF is currently well funded, so much so that it is reducing its levy. We are very dependent on government to identify those elements of retained EU law to be retained in domestic law. What assurance can the Minister give that every element of retained EU law that impinges on the eligibility of pension scheme members for PPF compensation and the level and value of that compensation will be retained in domestic law after December 2023?

--- Later in debate ---

I think I have covered almost all the questions, but I suspect that there may be some more. As ever, I will need to read Hansard carefully, not least to be sure that I pick up the questions from the noble Baronesses, Lady Drake and Lady Sherlock.

[Baroness Drake (Lab)]

I will need to read very carefully what the Minister said—hopefully it will cover all of the points, but, if not, I will drop him a note.

[Baroness Sherlock (Lab)]

On that last point, the Minister mentioned the Private Member’s Bill, but my question was actually about when the Government were planning to implement its provisions—perhaps he could give me a steer on that. I would be grateful if he would read Hansard because, if he thinks that he has answered the questions, I perhaps did not shape them as precisely as I had intended. Could he have a look at that and then come back to me?

Pensions (Extension of Automatic Enrolment) (No. 2) Bill

Baroness Drake Excerpts

2nd reading
Friday 14th July 2023 Lords Chamber

[Baroness Drake (Lab)]

My Lords, I congratulate the noble Baroness, Lady Altmann, on sponsoring this Bill. It is in very capable hands. We have heard from her a powerful assembly of the arguments in support of the Bill, which I think people would struggle to second-guess in any way, so I congratulate her.

I welcome the powers that the Bill gives to the Secretary of State to extend the coverage of auto-enrolment to younger people and to remove the lower-earnings limit from the qualifying earnings band. The Secretary of State retains the discretion as to when and to what extent to reduce the lower age limit and the extent to which and over what time period it will reduce or repeal the lower earnings level threshold.

The Government have indicated that they are supportive of this Bill. Can I therefore push the Minister a little to give an indication of when they will implement changes? Presumably it is not intended that the powers given to the Secretary of State will sit and gather dust. It is, after all, six years since the review of automatic enrolment and we are only 18 months away from the mid-2020s—the date by which the Government committed to introducing changes, including the changes provided for in this Bill.

The Bill provides for the Secretary of State to carry out a consultation. I therefore take the opportunity to highlight a few issues relating to younger people and extending auto-enrolment to people below the age of 22. The regulator has been very active and effective in identifying and addressing negligent employers who seek to avoid their employer duties. However, in lowering the age for auto-enrolment, the regulator will have to monitor that the change is working to the benefit of most young people. Many young workers aged 18 to 21 may, because of training, higher or further education commitments, or the types of work available to them, be working irregular hours, part-time or earning more flexible incomes. There is a significant rise in students working out of economic necessity, and younger people from lower socioeconomic groups may be in less secure employment; we saw their vulnerability in this regard during the pandemic

Employers have up to three months from commencement of employment to enrol a qualifying worker. Even then, for those who work irregular hours or earn flexible incomes they need not be auto-enrolled until the first time that they earn over the earnings trigger, which is currently £192 a week or £833 per month. It will be important to monitor for any emerging labour market behaviours that could undermine the intent of this Bill to benefit young people, such as restricting the earnings or hours of younger workers so they do not qualify for auto-enrolment; not paying younger workers through payroll; or pressuring them to opt out.

There is also a need to be sensitive to how the national minimum wage aligns with the £10,000 earnings trigger. Currently, an 18 to 20 year-old on the national minimum wage of £10.18 an hour and working 18 hours net would not qualify for auto-enrolment. That may therefore exclude a very significant number of young workers being targeted by this Bill. A 20 year-old young mum on the national minimum wage and working 18 hours a week would not qualify for auto-enrolment if it were operating today. With the removal of the lower earnings limit from the band of earnings and access to tax relief, it means that she would lose £900 going into her pension scheme in that year. So there is therefore a sensitivity around that link between hours on national minimum wage and the auto-enrolment of younger people.

The Chancellor’s estimates for improved returns over the working life of pension savers, from greater investment in illiquids and private equity, were predicated on the assumption of saving from 18. That is four years more of saving than is currently provided for under auto-enrolment. There need to be reforms made by this Government before the Chancellor can rely on estimates based on such an early age as 18.

Eligible workers, contrary to everybody’s expectations, have a lower opt-out rate than older workers, so it will be important to monitor the opt-out rates for 18 to 21 year-olds to ensure that that positive trend we are currently seeing is not undermined—that trend being the high number of 22 year-olds remaining in when they are auto-enrolled.

Finally, ONS recent figures reveal that just over 15% of young workers change jobs, compared with 5.1% of employees aged between 35 and 49, so the Government need to push ahead with their small pots solution, because for young people that solution will be very important to the efficiency of managing their savings and for it to benefit them over their working lifetime. I hope the Government will push ahead with the better deal for young people that the Bill—again, I congratulate the noble Baroness, Lady Altmann—will provide.

--- Later in debate ---

[The Parliamentary Under-Secretary of State, Department for Work and Pensions (Viscount Younger of Leckie) (Con)]

My Lords, I am pleased to add my support to my noble friend Lady Altmann’s Bill. This legislation would bring into workplace pensions more younger people, women and those in part-time work, including workers not already benefiting from an employer pension contribution. My noble friend eloquently set out further detail of the Bill, its benefits and its beneficiaries.

The Government are committed to building on the success of automatic enrolment to date with a stronger, more inclusive savings culture for younger people. The noble Baroness, Lady Sherlock, was right to remind us of some of the historical context. My noble friend’s Bill would expand the automatic enrolment framework, which was one of the most radical reforms to the pensions landscape since Lloyd George enacted the first state pension nearly 120 years ago. This Bill builds on the undoubted success of workplace pensions and sits firmly within the political consensus established by the independent Turner commission, on which the noble Baroness, Lady Drake, served, as has been mentioned, and which set out the road map for these reforms in 2005. I add my name to those who have paid tribute to the noble Baroness in this respect.

I want to move straight on to the subject of small pots, which was raised by the noble Lord, Lord Davies. I hope that I can help in providing some answers because I agree—he is right to raise this issue—that the growth of deferred small pots is a huge challenge for the workplace pension market. We know that it acts as a burden on providers, reducing the value for money that pension schemes can provide and negatively impacting retirement outcomes for their members.

I assure the noble Lord and the House that the Government are taking decisive action to address this issue. We are consulting now on our ambition to deliver a framework for a default consolidator approach, which will enable a small number of authorised schemes to act as consolidators for deferred small pots in order to provide greater value for money for their members. In this way, we are working to address the current and future stock of deferred small pots. I note the comments made by the noble Lord today in this respect; we would very much welcome his contribution to the consultation if he has not already given his views, as I suspect he may well have done.

I turn to some of the points made by my noble friend Lady Altmann and the noble Baroness, Lady Sherlock. We had an interesting, brief debate on the lowering of the age limit, which we reckon is about right at 18. The Bill provides for regulation-making powers to reduce the age for AE, rather than setting a specific number. This has been done to avoid pre-empting the statutory consultation. We do not wish to close off our ability to respond openly and thoughtfully to stakeholder proposals.

The 2017 review found 18 to be the appropriate minimum age for automatic enrolment. The current minimum of 22 has failed to keep pace with changes elsewhere, such as to the national minimum wage. The lower age also aligns with the entitlement to social security benefits, such as universal credit. Moving to 18 is seen as an effective way to embed the habit of workplace pension saving for young people as they start work for the first time. Indeed, the Government’s commitment for young people below the age of 18 in England and Wales to remain in education or receive training and employment through apprenticeships has resulted in a decrease in 16 and 17 year-olds in the labour market. Workers aged 16 and over will still be entitled to opt in to AE and receive an employer contribution if they choose to save into a workplace pension.

I also want to touch on pension tax relief. The Government recognise the different impacts of the two systems of paying pension tax relief on pension contributions for workers earning below the income tax personal allowance. This picks up on some points raised by my noble friend Lady Altmann. We have announced a new system that will make top-up payments to low earners in net pay schemes, many of whom are women—I think that she made this point—to address the net pay relief at source anomaly. The Treasury has confirmed that this will be introduced for contributions from 2024-25 onwards. In 2025-26, we estimate that up to 1.2 million individuals, 75% of whom are women, could benefit from top-ups worth on average around £50 each year. The Office for Budget Responsibility assesses that the cost to the Exchequer could be between £10 million and £15 million per year.

My noble friend Lady Altmann also raised the issue of low earners, as did one or two other Peers. The AE framework has an earnings trigger that is set at a level that aims to bring those individuals for whom it pays to save into pension saving automatically. The Secretary of State must review this trigger each year to help to make sure that it remains appropriate. As my noble friend mentioned, currently the trigger is set at £10,000. However, if an eligible worker earns below this amount, they can still choose to opt in to a workplace pension if they want to save, as mentioned earlier. The Bill is the essential first step to allow the expansion of AE. The Government are clear that these measures are the best route to enabling low and medium earners to save more, with more workers benefiting from the employer contribution to help them to build their retirement savings.

I will now move on to a few general comments about pensions and, indeed, the state pension, which was alluded to by the noble Lord, Lord Davies. I hope that I am not going too far in terms of his remarks, but hopefully this will set the scene a bit. I reassure the House that we believe that the state pension remains the foundation of the UK pension system. In April 2023, the state pension saw its biggest ever cash increase, rising by 10.1%, so that the full yearly amount of the basic state pension will be over £3,050 higher in cash terms than in 2010.

Workplace pensions sit on top of that foundation, helping to maximise individual retirement saving. This is an approach guided by the work of the independent Pensions Commission, which made clear the importance of reinvigorated private saving to help individuals to achieve their retirement aspirations. The Government continue to support the success of automatic enrolment, which has seen 10.9 million workers enrolled into a workplace pension since 2012, with an additional £33 billion saved in real terms in 2021 compared to 2012.

I move on to a more substantive point raised by the noble Lord, Lord Davies—I think that he mentioned it twice—which is what we are doing to reduce the gender pensions gap. As he will know, the pensions gap is a complex issue tied to the labour market, the pensions system and demographic differences, but one that the Government take seriously. We remain committed to implementing the 2017 review measures, which will disproportionately benefit lower earners, including people working in multiple jobs, who are predominantly women.

Going back to the basic concept of automatic enrolment, AE came along at a time when the UK was towards the very bottom of the OECD league tables on retirement saving. A radical reversal has taken place in the past decade putting us close to the top, with the UK now having the largest pension market in Europe. I pay tribute to those, some of whom are in the House today, for their efforts to make this happen.

In the private sector, workplace pension participation for eligible employees has increased from 42% in 2012 to 86% in 2021, representing a 44 percentage point increase. As my noble friend Lady Altmann said, it has been especially transformative for women, low-earners and young people. Her Bill would enable the Government to build on that success and deliver the expansion of AE.

There are a couple of other questions I want to answer—actually, about three—particularly from the noble Baroness, Lady Drake, from the noble Lord, Lord Davies, and from the noble Baroness, Lady Sherlock, on timing, which is a very fair question. The Government are committed to making progress in implementing the 2017 review measures, including lowering the age for being automatically enrolled and reducing the lower earnings limit so that pensions contributions are payable from the first pound of earnings, in the mid-2020s. We have always been clear that implementation of these measures and the timing must be done in a way and at a time which is affordable, balancing the needs of savers, employers and taxpayers, with a suitable lead-in time for implementation. I am afraid that that is as far as I can go on that, but as soon as I have any further detail I will certainly let the House know.

The noble Baronesses, Lady Drake and Lady Sherlock, are right that we need to look at any opt-out rate with great care in monitoring, and I reassure the House in that respect. The noble Baroness, Lady Drake, raised a very important point about AE enforcement. The regulator has a statutory duty to enforce compliance with employer AE duties. Employers must provide information about AE to each eligible employee, including their right to an employer contribution. If a worker has concerns about whether their employer is complying with the law, they can report their concerns to the regulator in confidence—as I suspect noble Lords will be aware.

[Baroness Drake (Lab)]

My point was that the regulator is doing a good job on enforcement, but very young people are quite vulnerable, and I was just saying that it needs a new lens brought to enforcement activity.

[Viscount Younger of Leckie (Con)]

Absolutely. Again, I provide reassurance that we are very much alert to the issue and we shall be sure that we monitor it and keep the House updated.

The noble Lord, Lord Davies, raised the important subject of carers, and I have a couple of brief answers for him. The Government recognise the valuable role of carers and that they are disproportionately women. Where carers are working, if eligible, they will be automatically enrolled into a workplace pension, or they can opt in. The expansion of AE will see all those participating get an employer contribution from their first pound of earnings, and that will help to improve the incentive to save for those who are in lower-paid or part-time work, including carers.

Finally, to touch on consultation, which was raised by the noble Lord, Lord Davies, and others, the use of the Bill’s powers would be subject to a statutory consultation requirement and the affirmative procedure in both Houses to gain consensus on the implementation approach and timetable, so that the measures can be introduced in a way that is affordable for all parties, as mentioned earlier. This is a crucial point. While we are all rightly keen to build on the success of AE—and many Peers call for more and faster change, hence the questions on timing—the approach needs fully to take account of the impact of these measures on employers, workers and the Exchequer in a way that makes the changes both beneficial and affordable for all. To clarify, we intend to consult in the autumn with employers, payroll and delivery partners throughout the supply chain to get the implementation approach and timetable right before changes are introduced.

I again thank my noble friend Lady Altmann for taking the Bill through and for helping more people gain the benefits of retirement saving. I judge from the mood in the House that it shares my view of the importance of the Bill and the positive and sensible way in which it would allow for the future expansion of automatic enrolment, which I believe is an ambition we all share.

Pensions Dashboards (Amendment) Regulations 2023

Baroness Drake Excerpts

Wednesday 12th July 2023 Grand Committee

[Lord Vaux of Harrowden (CB)]

My Lords, it is obviously deeply regrettable that the pensions dashboard has been delayed—again, I should probably say. If it is not ready, a delay to the connection is obviously necessary, so there is not an awful lot to be said about the regulations themselves. As we have just heard, the Explanatory Memorandum is less than fulsome on the reasons or the implications, as the Secondary Legislation Scrutiny Committee pointed out in its rather critical report, so I want to ask a few questions. I have not been able to attend some of the briefing sessions that the Minister has organised, so I apologise if I am covering what was said at some of those, but it might be worth having it on the record anyway.

What is the reason for the delay? The Explanatory Memorandum and the Minister talked about insufficient testing,

“more work … to set up adequate support for industry … and … to finalise … supporting guidance and standards”.

However, those are not reasons; they are not what has caused the delay. Delays of this nature are typically caused by inadequate scoping at the outset—we got it wrong at the beginning—by changes to the scope along the way, or by some combination of the two. Which is it? Who is responsible? What action has been taken to make those responsible for the delays accountable? If the team needs to be strengthened, has that happened?

The other possibility is simply that the dashboard was overcomplicated from the outset, which I think was what the Secondary Legislation Scrutiny Committee may have been alluding to. Are we sure that we are not gold-plating it? Are we reinventing the wheel here? For example, have we taken advantage of the experience of open banking? We could have piggybacked on that.

Is a third-party supplier involved? If so, who and what responsibility does it have for the delay? Are there penalty clauses in the contract? If a third-party supplier is not involved, is it sensible for us to try to do a project of this size entirely in-house?

The EM is very quiet on the cost implications. What was the forecast development cost? I am talking about not the overall costs of the dashboard over 10 years but the development cost. What is it now? How much has it cost to date? How much is still to be spent? Who will cover any increase—industry, government, taxpayer? How will that work?

When large software projects of this nature go wrong, they tend to keep going wrong. I come from a software world, so I have experience here. What comfort can the Minister provide that this really will be the final delay and that we are now properly on top of the project?

At the time of the Act that enabled the dashboard, we had a lot of debate about the creation of other, privately created dashboards, and there was a lot of agreement around the Room at the time that the Money and Pensions Service dashboard should be the first to be run. I agreed with that but, given the delays, perhaps we want to think about it again. What other dashboards is the Minister aware of being developed? Are any at a sufficient stage of development that it might be quicker or cheaper for the Money and Pensions Service to consider partnering with them?

Finally, can the Minister provide any forecast of when the dashboard will become available to the public?

[Baroness Drake (Lab)]

I thank the Minister for so clearly setting out the purpose of the regulations. I enjoyed the reference of the noble Lord, Lord Young, to his previous contribution in the debate on this issue, which was well made. My position is that it is not disappointing that the Government’s enthusiasm for such an early launch has been tempered; I always considered that it would be a very complex project and I am delighted that there is now a much greater focus on the complexities and ensuring what is delivered. I never really wanted it delivered two years ago because I did not think that it would be well delivered then. It needs to be well delivered, because of the scale that it covers.

These regulations replace the pension schemes staging profile, staging deadlines and connection window with a single common deadline for connection of 31 October 2026. I want to reflect on the guidance to schemes on a new connection staging timetable.

The DWP’s description of the purpose of that guidance has varied according to which document is read—there is not an absolute consistency. The documentation ranges between encouraging schemes to meet the new timetable to threats of a breach of the regulations if they do not, and “having regard to” the guidance is a concept that is a little unclear. Can the Minister clarify what exactly is the status of that guidance and when a breach—and a breach of what in regulation terms—would be triggered?

I will move on to an issue that we probably have not debated a great deal in previous discussions of the dashboard. The Explanatory Memorandum refers to the monitoring and review of this legislation, saying that the approach to be adopted is

“to put in place a multi-strand evaluation strategy, the details of which are being explored”.

This strategy will

“ensure the critical success factors can be successfully tested with learning helping to further develop dashboards over time”.

The plans include research into dashboard usage, outcomes from that usage and information provided by providers. However, I cannot see any reference to key pensions public policy outcomes in those critical success factors. I did not see them when the previous regulations came with the Explanatory Memorandum and I cannot see them now.

To take it at its most basic, if, for example, as a result of dashboard usage, greater numbers of people took out more of their pension savings in their 50s or early 60s, is that a success because they have engaged, or undesirable because more people will have a lower income when they get to state retirement age? We have to be very clear what are the public policy aspirations we are seeking from that greater usage. Clearly, it is not set out, as far as I can see, in the critical success factors and the multistranded evaluation strategy—although I recognise that that is work in progress. Will any of those critical success factors identified in the Explanatory Memorandum be benchmarked against desired public policy outcomes over the long term?

Staying with that concept, what long term do we want as the outcome—not only from dashboards but a whole range of other things, although dashboards are before us today? Yesterday we saw eight papers on pensions, including analysis, consultations and consultation responses, all published in one go. I cannot let that moment pass without asking the simple question of the Minister: was any consideration given to how those eight papers and sets of proposals would impact on the multistrand evaluation strategy for the dashboard? I appreciate that the Minister may not be able to answer that today but it is an important question that needs answering.

For me, the decision by the department and the FCA to proceed with a gross investment performance metric in the proposed VFM framework, as announced yesterday, rather than net of all costs and charges, together with the continued dithering by the FCA over the transparency of costs and charges value reporting in decumulation products, is a backward step which does not resonate with the pension savers’ interest and informed decision-making. That was a deeply disappointing element of that VFM framework to read. We know from the FCA’s own findings that a wide range of charges are applied in the decumulation market, which should be rigorously assessed in a joint FCA/DWP/VFM framework. That has just been sidestepped.

Yesterday, the Chancellor referred positively to the Australian supers, but I point out that they have a tough regulatory requirement to report investment returns net of fees. If the Government are going to promote private market investment, where charges are higher, transparency of returns net of fees is essential if the saver is not to end up paying back the excess returns to the industry. The link to the evaluation strategy and the dashboard is: what information will be provided, what influences on behaviour are we expecting and how will that produce better outcomes? I must admit that, when I read that VFM framework, I thought it disappointing and rather contradicted the idea that members using the dashboard will make more informed decisions. I did not want the moment to pass without making that point.

[Baroness Altmann (Con)]

My Lords, I, too, thank my noble friend for his clear exposition of the regulations. I am very supportive of them and I think they have general support around the Committee. Indeed, they are pretty essential, as my noble friend described. If we do not pass them, there is a danger that schemes currently required to load data to the dashboard by the end of August will be in breach, and there will be nothing they can do.

Replacing the statutory staging timetable with a single end date of October 2026 is understandable. It is also welcome that the reference date for the dashboard requirements of pension schemes is being moved to 2023-24 so that it can include some of the newer pension schemes, which will then have to go on to the dashboard. However, I would be grateful if my noble friend could help me with a few questions. It is fine if he would like to write to me; I do not expect him necessarily to have all the answers, although he may not be surprised by the questions.

My first question relates to the Government’s intention to publish a new timetable in the form of guidance. When will it be published? Also, my noble friend said that it will not be mandatory, although trustees must, as the noble Baroness, Lady Drake, said, have regard to the guidance and will get at least six months’ notice. What is the penalty for non-compliance with the guidance, if it is not mandatory? If it is struggling, a scheme may simply say, “We’re not going to do it because the amount of money we need to spend to get on the dashboard is not worth our while”. The customers and members of those organisations would then not benefit from the dashboard.

My second question relates to the vital issue of data accuracy, which is essential for dashboards. I hear what my noble friend said about accuracy requirements in the GDPR. Following our briefing meetings, I was grateful to him and his officials for a follow-up letter that clearly explained that the Pensions Regulator has set out in guidance expectations on data quality, record-keeping, measuring data once a year and trustees ensuring that processes and controls are in place so that data standards are of good quality. Master trusts are supposed to have processes for rectifying errors they have identified and then reconciling them. This is all in place and is most welcome, but I have to ask my noble friend: where does responsibility lie for checking the data, ensuring its accuracy and then correcting and reporting back that those data have been assessed and corrected? If that does not happen, on whom would penalties fall? To whom can members and the dashboard turn to ask, “Are you sure these data are correct?” Who is ultimately responsible for signing off on that or carrying responsibility for penalties if that does not happen?

I have another question, in the light of the comments from the noble Baroness, Lady Drake, about the number of releases we have just had from the DWP. I admire the work that has been done by the department—it has clearly been extremely busy—and a lot of it is really useful. However, how will the dashboard dovetail with the reforms proposed for small pots? The Government rightly want to help people—as is part of the intention of the dashboard—to merge pots and not leave small amounts of money in legacy schemes. What are the plans for integrating the dashboard rollout with the small pots reforms?

Pension Protection Fund and Occupational Pension Schemes (Levy Ceiling) (No. 2) Order 2023

Baroness Drake Excerpts

Wednesday 26th April 2023 Grand Committee

[Lord Davies of Brixton (Lab)]

My Lords, this order is routine and has little practical impact on the PPF. The levy that is currently payable is only 16% of the cap set by the order. However, having it before us provides an opportunity to discuss the operation of what is becoming—a bit under the radar—one of the country’s biggest financial institutions.

I have a particular interest as I like to think that the PPF, or at least the name, was my idea. Back in 1995, following the Maxwell scandal, I drafted a paper for the TUC that proposed, among other things, that there should be a central discontinuance fund that should be called—wait for it—the Pensions Protection Fund, or PPF. Of course, the proposal was not accepted at that time, but it was introduced subsequently in the Pensions Act 2004.

Before getting to the focus of my speech, I have a couple of questions. First, the Minister should provide the Committee with some explanation of the error that was made with this order. I am not trying to embarrass anyone, but it surely suggests excessive pressure on DWP staff, so the question is: has the situation been rectified?

Secondly, as was raised in the 30th report from the Secondary Legislation Scrutiny Committee, can the Minister tell us where we have got to in following the recommendations in the departmental review? I will highlight two recommendations from the review. First, recommendation 2 is that

“the DWP and the PPF work together to understand the implications of the PPF’s funding position in light of expected future developments in the population of Defined Benefit (DB) pension schemes and plan well ahead for any legislative changes that might be needed; for example, to address what happens to any funding which is surplus to requirements”.

It is worth noting that the current legislation says nothing about what should happen to any assets that, in the event, are not needed to pay members’ benefits. Given the PPF’s policy of building up a substantial buffer that, even on its own figures, is unlikely to be needed, the question needs to be addressed.

Any money that is left over cannot go back to the employers, because things will have moved on and employers will have moved on. It also seems wrong that it should go to the Government. The only just solution is for it to be used, as far as possible, to provide benefits for members. In practice, this means that the buffer should not be excessive. In these circumstances, where there is no residual legatee, bigger is not necessarily better. It might be unjust, and its level therefore becomes not just a technical issue but an issue of fairness to members.

Recommendation 6 states:

“The PPF should consider how the Board could hear more directly about the member perspective to inform its deliberations”.


It should be a matter of concern that currently there is no formal procedure to reflect the interests of members. So what thought are the Government giving specifically to these two recommendations in the context of the review?

These two recommendations also bring me to focus on the central issue of my remarks: the impact of high rates of inflation on pensions in payment from the PPF and the scope for the fund’s assets to be used to protect their real value. The problem is that the limits on annual pension increases are severe in current circumstances: none at all for benefits accrued before 1997 and only 2.5% per annum for benefits accrued thereafter. Until recently, the PPF operated in a period of relatively low inflation. The problem of inflation has always been there, but it has become more salient now we have moved into a period of materially higher rates of inflation—most obviously in the current year, but the issue is not going to go away.

The net effect of these limits is that the real value of members’ pensions has been cut significantly. Pre-1997 benefits have already been cut by up to one-third, while benefits accrued after that date have fallen by up to one-sixth. It is important to understand that these are reductions so far; they are going to continue. There is bound to be another cut next January, which will be based on the level of inflation this coming May. It is potentially another 7% if we believe the OBR’s forecasts. In the longer term, I am a relative pessimist about inflation —but even optimists do not expect a return to CPI increases of 0% or even 2.5%. So the need to protect the real value of members’ benefits will only increase.

The reductions in the real value of members’ benefits must be seen in context: the funding position of the PPF, in its own words, is “strong”. As a result, the PPF levy has, quite rightly, been reduced and there are plans to reduce it further. I have no problem with that. According to the PPF’s latest annual report and accounts, the scheme held £39 billion in assets as at 31 March 2022. At that point, the PPF estimated that, of that figure, £11.7 billion—almost £12 billion—was in excess of what it needed to pay every current member and their dependants their compensation for life. This represented a funding ratio of 137.9%. I think that would be broadly recognised as going a bit beyond “strong”.

Given the experience of the last 12 months, it is likely that the position this March will be materially stronger. It also needs to be understood that these figures are already being calculated—I presume—on a prudent basis. The general practice is to undertake these valuations on a prudent basis. Unless the PPF advises me otherwise, I assume that this is the case here, so we have prudence placed on top of prudence.

The problem with all this is that PPF members have not shared the benefits of this strong funding position. Indeed, it is the reduction in the real value of their benefits that has been one of the contributing factors to the strong position. This situation is wrong and should be remedied as soon as possible. This will probably require legislation because the board of the PPF has limited ability to pay compensation over the levels set in the Pensions Act. The lack of increases for compensation in respect of pre-1997 service is devastating for the members who are affected, especially during the current cost of living crisis.

As well as the size of the impact, it is also important to appreciate the differential effect on various groups of members. Information released to the trade union Prospect through a freedom of information request shows that the lack of inflation protection for pre-1997 service disproportionately impacts women and older members. There is no rational justification for this discriminatory treatment. Ministers have sought to justify the discrimination by saying that there was no statutory right to increases before 1997—true, but there was no statutory right to have an occupational pension at all. The idea that the initial pension is the real benefit and the increases are an optional extra is fundamentally wrong.

In practice, the majority of pre-1997 scheme members were either accruing benefits to which they were entitled through RPI increases, typically capped at 5%, or were in the many schemes funded on the basis that such increases were going to be provided and members had a reasonable expectation of receiving them. In other words, such increases were part and parcel of the package of scheme benefits, and their effective exclusion from protection must be open to legal challenge. Such a challenge becomes more likely as higher rates of inflation persist. So we should, first, provide higher rates of protection to better reflect modern rates of inflation and, secondly, eliminate the arbitrary and unfair difference in treatment for compensation in respect of pre-1997 and post-1997 service.

On a Brexit note, it is a matter of much regret that the Retained EU Law (Revocation and Reform) Bill does not provide for the retention of the minimum levels of compensation established in the Hampshire and Bauer cases. When that Bill was debated in the Commons, a Minister even went so far as to state that the Hampshire case

“is a clear example of where an EU judgment conflicts with the United Kingdom Government’s policies”.—[Official Report, Commons, Retained EU Law (Revocation and Reform) Bill Committee, 22/11/22; col. 169.]

To conclude, is it the Government’s intention to cut the potential benefits that members might receive from the PPF to below the level to which they are entitled at present? I beg to move.

[Baroness Drake (Lab)]

My Lords, the PPF provides real support to some 295,000 pension scheme members who have entered it, including through the £1.1 billion paid out in compensation each year. It provides security to those in current DB schemes who may need to call on it in future. Add to those figures the Financial Assistance Scheme, which covers a further 150,000 members and, following the Pensions Act 2004, is administered by but not funded through the PPF, and we are providing a blanket of considerable security to heading for half a million people.

It is very important to remember that, before the 2004 Act, members could lose all or much of their pension savings when employers became insolvent or simply walked away from their liabilities. When the Labour Government created the PPF, there were many doomsayers who predicted that it would not be sustainable. In fact, the PPF has defied those doubters: it is financially resilient, has been well run, and has weathered the various economic storms that have occurred over the past 15 years.

--- Later in debate ---

The noble Baroness, Lady Drake, asked about DWP’s plans for improving transparency of the PPF’s funding and indeed the levy. The PPF publishes its annual report and accounts and consults on the basis on which it collects the levy. That is the answer I have, and I will consider that and look at Hansard later and see whether I can expand on it.

[Baroness Drake (Lab)]

I appreciate that there is a lot out there, but there are three elements: the scope for raising the levy, the compensation levels and the resilience of the PPF over time. Clearly, there is a sort of inflection point for revisiting and managing that. It was just about understanding that and getting more transparency around it.

[Viscount Younger of Leckie (Con)]

Absolutely. That plays well into what I said in that I will reflect on what I and the noble Baroness have said, and there may well be a letter coming to add to the one that I will send to my noble friend.

I will address a couple more questions before I wind up finally. The noble Baroness, Lady Drake, and indeed the noble Baroness, Lady Sherlock, asked whether the PPF is right to build reserves at a slower pace than it has been doing. It is a fair question but that is, as the noble Baroness will expect me to say, very much a matter for the PPF board.

On whether there will be an update on the levy discussions, I may have alluded to this earlier—it was raised not only by the noble Baroness, Lady Drake, but by my noble friend Lady Altmann and indeed the noble Baroness, Lady Sherlock. I will certainly happily make inquiries, and that will be an addition to the letter which is growing bigger by the moment. There may be some other questions that I have not answered, but I will certainly look very closely with my team at Hansard.

To conclude, again I thank the noble Lord, Lord Davies, for providing us with this opportunity to discuss the UK’s flexible and robust regime for funding and protecting defined benefit pensions, which, as was mentioned, is an important subject. This regime has enabled most schemes to weather the severe economic downturns following the crash in 2007-08—the financial crisis, I should better call it—and the Covid pandemic, as well as the prolonged period of historically low interest rates. In fact, the aggregate scheme funding position on a Pension Protection Fund basis improved from 83.4% on 31 March 2012 to 113.1% on 31 March 2022 —an interesting statistic to reflect on. These improvements to scheme funding mean that fewer and fewer members of DB schemes will require the safety net of the PPF. That is of course good news for members, who are increasingly likely to receive their full pension entitlement. This is progress indeed but there is more to do, although of course we cannot eliminate all risk. When employers become insolvent, the PPF continues to stand by as a well-funded and responsibly managed safety net.

Occupational Pension Schemes (Administration, Investment, Charges and Governance) and Pensions Dashboards (Amendment) Regulations 2023

Baroness Drake Excerpts

Tuesday 28th March 2023 Grand Committee

[Baroness Drake (Lab)]

My Lords, I hold pension trustee positions, and refer to my interests as set out in the register.

These pension scheme regulations are being introduced for two reasons. First, the Government believe that they will facilitate greater investment by pension schemes into private markets, securing better returns for savers. Secondly, the Government want to increase DC pension fund investments in UK start-ups, infrastructure, green investment and illiquid asset classes in private markets.

Of course, this is to be welcomed if beneficial alignment is achieved between the best interests of the ordinary citizen and their pension pot, and investments that benefit the UK economy to achieve the win-win. However, there are barriers to be addressed in getting there. The problem with these regulations is that the exclusion of performance fees from the DC charge cap will not be the driver of significant changes of investment in illiquid asset classes, but consumer protections will be weakened where money is invested without the security of that cap. The charge cap was introduced to protect millions of people investing through inertia under auto-enrolment. To achieve the diversification of investments which would benefit the UK economy, the complexities of other barriers to investment in private markets need to be addressed. Overreliance on removing consumer protections from pension savers will not do it.

I will reflect on some of those complexities. The pension regulatory environment, which is in perpetual change, is driven by endless policy initiatives without certainty as to the Government’s underpinning strategy. Recent regulation enabled performance fees to be smoothed over a five-year period, but before even testing the efficacy of those changes the Government proposed reversing them in favour of these. Trustees need greater consistency when considering long-term investment decisions—consistency between not only one Government and the next but one Minister and the next. Also, the complexity of regulation means that government contradicts itself. For example, the Government asked the Productive Finance Working Group to make recommendations on increasing private market investments, while TPR was consulting on prohibiting the schemes from holding more than 20% of assets in unregulated investments.

There is also the need to strengthen confidence in government economic policy and governance, a sentiment captured by the noble Baroness, Lady Lane-Fox of Soho, president of the British Chambers of Commerce, in the FT yesterday, where she warned policymakers that

“businesses are holding off making big investment decisions given the UK’s recent political and economic upheaval”

and that,

“People just don’t feel like taking risks”

in the UK.

Inefficiencies from pension freedoms are weakening the long-term private pension system and the approach to illiquid assets. For example, as savers get to 55 or 57, they can take their pots as cash in a series of lump sums and draw down funds in any combination of timing and amount that they choose. Small pots are growing exponentially. People change jobs more frequently. Pension transfers are increasing, including out of workplace schemes. Trustees have to implement these freedoms, which in turn impact on investment decisions.

Higher costs incurred with illiquid assets need to be borne fairly across the members of the scheme, as they would impact members differently. Those close to retirement or who choose to exit the scheme are at greater risk of paying higher fees without the additional returns.

Then we come to the issue of how to ensure value for members and higher returns when performance fees are outside the charge cap and inert citizens directly bear the investment risk. Achieving that higher value will be very challenging, as will measuring it for the Government to see it, as it is with securing standardised disclosure of performance fees. There is a lot of history here about making fees and charges work effectively for ordinary savers.

Ensuring that fees are payable only for realised outperformance is to rest on a tighter definition of performance fees and the discipline of negotiated agreements between trustees and asset managers. Those are the two big levers that are relied on. The Explanatory Memorandum states that excluding pension fees will encourage innovation on fees, but where is the evidence? It is an assertion, and lots of people assert it in their submissions, but it is difficult to find hard evidence. Exclusion of performance fees might set a precedent for removing other charges. Having removed that hard-fought security for consumers, the gate is open. It can disincentivise innovation because the cap has been removed. It can inhibit the evolution of fee structures and private market products that better accommodate DC pensions to the benefit of the UK economy.

Testing the impact of negotiated agreements between trustees and asset managers needs to be assessed much further before weakening the charge cap, given the challenge of achieving member fairness on performance fees. It is an assertion that those negotiated agreements will produce that beneficial result, but that should be really tested before such a critical consumer protection is removed.

The Government have set up a long-term asset fund, the Productive Finance Working Group is considering recommendations and the FCA and TPR have commenced consideration of value for money. This is work in progress, yet the Government push ahead with amending the cap, increasing the risk to the saver.

Investments that help with transition to net zero, environmental protection, housing or infrastructure which support economic growth and savers’ best interest are to be welcomed. Indeed, ESG and TCFD reporting and governance requirements are nudging schemes more and more in that direction. Several pension providers have indicated that they would no longer agree to traditional performance fees but remain committed to investing in private markets. Some large schemes hold illiquid investments within the existing charge cap. Some fund managers are indicating innovating on growth equity funds, and fee and product structures will evolve from the high-growth prospects of the UK automatic enrolment market—agreements achieved through scheme scale, not by weakening consumer protection.

One of the policy options in the impact assessment was government mandating investment in illiquid assets by pension schemes. Although rejected, this is the second hint at mandation after the joint December 2021 letter from the Prime Minister and the Chancellor. These DC savings are citizens’ private assets. Mandation would replace or undermine the fiduciary duty on trustees, require private assets to be harnessed and directed to meet government policy objectives, and probably risk market distortions. It would risk imposing inappropriate risk appetites on savers and increase uncertainty on liability, consumer protection and duty of care. It would certainly weaken employer engagement, and it could seriously risk undermining public confidence in auto-enrolment. Those are big consequences from mandation.

I have four questions to ask the Minister. Can he confirm that the Government have no intention to mandate how pension schemes must invest? How will value for members assessments be altered in light of the new risks arising to pension savers from these regulations? How will the Government ensure that savers close to retirement or who exit a scheme do not pay higher fees without additional returns from illiquid investments? What new measures will be introduced to enhance the availability of charges and cost information on illiquid investments? What new initiatives are the Government expecting the FCA to take to regulate for fairness and consumer duty in all the private markets that these regulations cover? I am sure that the DWP will say that it is not within its remit to know what the FCA is doing, but to make a decision that lifts such a hard-fought-for and fundamental consumer protection on the level of evidence that is before the Government, without knowing, having considered or having discussed with the FCA its approach, is an omission. It would be helpful to leave those questions.

[Baroness Sherlock (Lab)]

My Lords, I thank the Minister for introducing these regulations and those noble Lords who have spoken. As we have heard, these regulations cover two distinct issues—one minor and the other rather less so. I will do the minor one first; it is a change to correct a drafting error in the Pensions Dashboards Regulations 2022, amending the line in Part 1 of Schedule 2 that specifies which master trusts are required to connect to the pension dashboard by 30 September this year. I do not want to kick a project when it is down, but, to me, that is not the most pressing problem attached to the Pensions Dashboards Regulations 2022. In fact, the Minister recently announced that the entire timetable, which is hard-wired into these regulations, is being scrapped, so the regulations will presumably need to be either repealed or amended. Could the Minister tell us whether the intention is to repeal them or if they are simply going to be amended and when we will know more about that?

On the major provisions in the regulations, the objective behind them is clearly to push pension schemes into investing more of their members’ money in illiquid assets. As we have heard, they will use two basic levers to do that. First, they will require all pension schemes with more than 100 members to explain their policy on illiquid assets and to disclose their schemes’ investments in them; and, secondly, they will exclude specified performance-based fees from the list of charges that fall within the 0.75% regulatory charge cap.

Just to be clear, these Benches would like to see greater investment in ways that will help the transition to net zero and in infrastructure projects that support economic growth, but we have heard today some important questions about the detail of these regulations, and I hope the Minister has some answers ready. First, the question of risk was raised. The noble Lord, Lord Sharkey, is right: I could not find a definition of illiquid assets either, but they clearly cover a wide range of investments. They are not just buildings or infrastructure but, as the Secondary Legislation Scrutiny Committee pointed out, could include art or intellectual property. Some illiquids clearly carry significant risk. This legislation also targets venture capital investments, which often have a high failure rate.

The noble Lord, Lord Sharkey, mentioned the 30th report from the Secondary Legislation Scrutiny Committee, which drew these regulations to the special attention of the House. It expressed concern that, without limits on the proportion of illiquid assets in a pension scheme, the scheme may not be able to deliver the returns that members anticipate. It pointed out that many of those members, of course, have been auto-enrolled by their employer and therefore had no involvement in the choice of their pension scheme investments.

As the noble Lord, Lord Sharkey, pointed out, the committee asked two specific questions that it thought Members of the House might like to put to the Minister. One was about how schemes’ exposure to increased risk of lower returns would be monitored, and the other was how trustees would be guided on assessing the risks to the portfolio. I may have missed this in the Minister’s comments—I heard him talk about advice to trustees on charges, but I am not sure that he talked about advice on assessing risks—so it would be helpful if he would address that.

I want now to look briefly at the proposal specifically to exclude certain specified performance-based fees from the list of charges that fall within the regulatory charge cap. As my noble friend Lady Drake has reminded us, the charge cap was introduced to protect the millions of people who are saving and investing through inertia, so surely there must be a compelling case for the Government to do anything that might weaken that. It is worth pausing briefly to remember that, in 2013, DWP research showed the impact of higher fees on pension savings. An individual who saves throughout their working life via a scheme with a 0.5%—50 basis points—annual charge cap on the value of their pot could lose 13% of their savings to charges. Push that to 1% and they could lose almost a quarter; push it to 1.5%, the figure is around a third. These basis points may sound small but their impact on the value of a fund is really quite significant.

--- Later in debate ---

[Viscount Younger of Leckie (Con)]

I hope I can be of some help. I think I should write a letter on this quite detailed question, as it takes us further from the question originally asked by the noble Lord, Lord Sharkey. Part of the answer could be—I will need to follow up with a letter—that we do not want to prescribe our approach too much. As I mentioned earlier, it will be very much up to the trustees and pension funds to decide for themselves. It might not be right to have too much prescription here, but I will go no further than that. The noble Baroness, Lady Drake, may know more than me, as one can go only so far with a definition. I will write to clarify further what we mean.

[Baroness Drake (Lab)]

Trustees cannot make investment decisions now without taking advice. These regulations may be adding a bit of extra detail, but that principle is already there. The department and regulators can mandate trustees to provide more information, and transparency is a great thing; I do not demur from that. The Minister has identified all the other things that need to be done and discussions that are going on.

However, there is an issue about which there is still not a clear answer. Organisations such as the PLSA, which is a trade body representing pension schemes and their administrators, do not think that this is the correct thing to do—and that is not the only one. I do understand why, in the absence of evidence and the presence of many other significant barriers, the Government have chosen to weaken a fundamental consumer protection in the as-yet-unverified belief that it will be a major driver of increased investment in illiquid assets.

That is the bit I cannot find anywhere. I can find assertions of views but the reasoning is, I am afraid, quite weak. What worries me is that this will start encroaching on what was such a fundamental protection. Most schemes come in way below 0.75%—there is so much headroom—and we know that leverage can come from the scale of the scheme master trusts that are coming. So why are you doing this when you cannot yet have confidence—because you have not tested it —that it will actually benefit the saver?

Pension Schemes: Guidance

Baroness Drake Excerpts

Monday 13th March 2023 Lords Chamber

[Viscount Younger of Leckie (Con)]

Well, I do not really agree with the general points my noble friend has made. The main thing is that the regulator has a particularly strong role here, and it plans to publish its findings on what we are doing soon to provide schemes with examples of good practice. The regulator has found so far that most reports were published on time. This is to do with the publishing of reports. Almost all were substantial documents showing trustee engagement. In terms of my noble friend’s point about LDI, he will know that much progress has been made, led largely by the independent Bank of England working closely with the Treasury.

[Baroness Drake (Lab)]

My Lords, I declare my interest in the register as a trustee. The report raises key questions about fiduciary duty. In summary, we need clearer guidance from the Government on three key issues: the extent to which environmental and social factors form a core component of investors’ fiduciary duties; the fact that pension scheme fiduciary duties are not a substitute for what government should do; and the fact that government desire for more pension fund investment in UK productive investment has to align with pension trustee fiduciary duties. Can the Minister confirm that, when issuing more guidance on the fiduciary issue, they will address these particular three issues where the contours of fiduciary duty need clarity?

[Viscount Younger of Leckie (Con)]

As I have said before, it is the case that more progress needs to be made, and the noble Baroness has much experience in this field. Let us start with climate change, which poses major financial risk to pension schemes and savers’ returns, with almost £2 trillion in assets under management. I reassure her that pension schemes in scope of the DWP’s requirements, as I think she will know, must produce the annual TCFD report, which is based on four key pillars: governance, strategy, risk management, and metrics and targets. That might be five, but I think it is four.

Pensions Dashboards Regulations 2022

Baroness Drake Excerpts

Tuesday 15th November 2022 Lords Chamber

[Baroness Drake (Lab)]

My Lords, I declare my interest as a trustee of an early staging large master trust and a sizeable DB scheme, as detailed in the register. I thank the Minister for her very helpful presentation of these complex regulations. I acknowledge the work that has been undertaken to get this programme to this point.

A pensions dashboard is a great concept for the public good; the challenge is delivering it in a way that enables savers to access their pensions data securely so that it meets their needs and improves their outcome. Let us be clear: the information on the pension benefits and amassed assets of millions of citizens, covering trillions of pounds of value, will be made accessible through this dashboard. It is important that the Government get it right. These regulations form an important part of that assurance.

A consistent concern in this House has been the issue of identity verification to ensure that citizens are protected against fraudsters, scammers and others unauthorised to access their data. There are two key points for identity verification: that required for the citizen to access the pension finder service to search for and request information, and that required by schemes to identify whether they have a match to a request and whether to release the data to be viewed.

On the first, the pensions dashboard programme has procured an interim identity service provider while awaiting progress on the Government’s “One Login” solution as a ubiquitous way to sign into any GOV.UK service. On the second, these regulations leave to the trustee the data criteria for identifying a match and releasing value data. However, given the need to minimise the risk to the individual saver and the cybersecurity risk to the dashboard ecosystem as a whole, is it the Government’s intention that the “One Login” solution must be available for use before the Secretary of State announces the date of the dashboards available point, when the service is made available to the public?

The Minister referred to standards. The DWP has published draft standards outlining mandatory requirements for providers on how they must operationally and technically meet their legal duties, and the pensions dashboard programme has consulted on its approach to governance of standards in the future. However, those standards are outside the regulation to allow for flexibility and further development. While that may make sense, given the public interest in data on trillions of pounds of value being accessible through the dashboard, how will Parliament be kept up to date and receive the necessary assurance that the governance of the dashboard ecosystem continues to be fit for purpose?

Design standards matter too. I leave my actuarial noble friend Lord Davies to go into detail on this. Design standards are about presenting information in the way that will best help users to understand it. They are an important element in consumer protection. Inevitably, consultation to date has largely been with the industry, although user testing is undertaken during development and staging. Is it the intention to permanently embed user testing into future reviews and developments of those design standards, and how will that be done?

Compliance with dashboard requirements is being phased in from August 2023. Reflecting on what the Minister has said, it may be earlier. It will start with large DC schemes used for auto-enrolment. Trustees must connect by their staging deadline, with all in-scope schemes having to connect by 31 October 2025, as detailed in Schedule 2. As has been said, the Secretary of State will give six months’ notice before dashboards go live to the public, an increase on the original 90 days proposed. This is a sensible move, given the importance of getting this programme right, notwithstanding the previous Minister’s lack of sympathy for the delay— I think that the right decision has been made.

Regulation 4 states that, before specifying the dashboard available point,

“the Secretary of State must be satisfied that the dashboards ecosystem is ready to support widespread use of qualifying … dashboard services by the general public”.

I take that to mean that enough schemes are on board, the data is good enough and there is no prospect of crashing. What is the minimum extent of progress in implementing the DWP and FCA staging profiles that has to be achieved before a dashboard available point is announced, or is it necessary for the staging profiles to be completed in full before public access can commence?

Schemes will need to be data-ready for the dashboard to minimise the risk of data breaches or not returning a match. These regulations require schemes to provide detailed information to the regulators on find and view requests, the matching process, the number of possible matches, the number of positive matches and much more before the dashboard is publicly available, and subsequently after it is. What confidence level in respect of minimising false positives and false negatives in response to find and view requests must be met before the public announcement about the availability of the dashboard is made? What happens if all public service pension schemes are not ready to stage by September 2024, given the considerable relevance of these schemes to supporting widespread use of the dashboard?

Increasingly, DB schemes are transferring their assets and liabilities to an insurer under buyout. Do such buyouts pose complexity for the operation of the dashboard service, including from any differences in the FCA and the MaPS/TPR rules?

A key policy objective for the dashboard service is to connect individuals with an escalating number of small pots in the hope that people will transfer and consolidate them. The Government have not taken determined action on this problem to date and are clearly hoping that the dashboard will provide the solution. However, evidence shows that information access does not always overcome inertia, so is the dashboard now the Government’s primary policy for addressing the small pots problem? Will the DWP set hard targets for the reduction in small pots in its critical success factors?

Expected benefits to the consumer include the value of increased engagement, increased savings actions and more informed savings decisions, but these have not been monetised because the data is not available to do that. Given the lack of knowledge and understanding that often prevails, the complexity, the barriers of inertia, present bias and the unknown behavioural responses of providers and savers, it will be important to understand what actually is happening so as to understand the extent of the public outcomes or any emerging detriment from the operation of the dashboard. What plans do the DWP have for a programme of research and monitoring of behaviours?

Finally, on the FCA, there are four regulators in the dashboard space, so it is quite crowded. It raises issues of coherence, from the straightforward, such as minimising duplication of information demands on schemes, to the more complex potential for regulatory omission or confusion, as in the case of the steelworkers. These regulations do not cover FCA-regulated personal and stakeholder pensions. The duty placed on the FCA, to quote its policy statement,

“requires that we have regard to the requirements that the Government’s regulations place on the trustees of occupational schemes”—

so there is clearly scope for some differences. There will be closed books, legacy products, and funds where data quality will be poor and charges high. There could be differences in how pension values and costs and charge data are provided. For example, as I saw from the FCA’s own site, some FCA-regulated providers do not have information on costs and charges on certain plans available online. These schemes will be allowed just to explain where the consumer can find the details—but that is hardly a digital experience compliant with the standards that appear to be being set by MaPS.

--- Later in debate ---

The noble Baroness, Lady Bowles, asked whether individuals such as spouses or creditors could conduct searches on behalf of others. The system design does not currently support spouses or creditors having their identity verified through the identity verification service, and carrying out find and view on behalf of any individual member. Only active, deferred or pension credit members can do this. Following ID verification, the system design allows users to give and manage delegated access, and delegates may be either a regulated financial adviser with correct permissions, a MaPS guider or another person whom MaPS considers appropriate. The Government’s register will manage a record to ensure that access can be delegated only to individuals in those roles.

[Baroness Drake (Lab)]

I am sorry to intervene, as I know that the Minister is trying to answer all the questions, but I want to ask a question on the regulated FCA authorised advisers. The whole point is that that system of authorised advisers, which has been changed several times, even on the FCA evidence is not sufficiently protecting people. The fact that it is being offered as a solution is one of our concerns.

[Baroness Stedman-Scott (Con)]

I note the noble Baroness’s point. This is something that we will take back with officials and to the relevant authorities, and it is something else that I shall write about and I hope give her a better answer than she has had to date.

The noble Baroness, Lady Bowles, raised the issue of risk of exploitation of data. Pensions dashboards and the technology behind them are designed to maximise data security. For example, pensions information is sent directly and securely from the scheme to the individual; it is not stored by qualifying pensions dashboard services or by the digital architecture. Individuals will always have control over who has access to their data, and will be able to revoke access at any time.

The noble Lord, Lord Jones, and the noble Baroness, Lady Sherlock, have raised to me individually the issue of British Steel pension schemes. The FCA is responsible for the regulation of the financial advice market and has looked closely at the advice provided to those BSPS members who decided to transfer out of the defined benefit scheme. It found that a very high proportion had received unsuitable advice, as has been said. The FCA has announced that it intends to take forward a scheme to provide compensation for BSPS members who received poor advice; it published a consultation on this scheme on 31 March, which has now closed. I think that the point that the noble Lord and the noble Baroness were making was that it must not happen again, and I am sure that message is understood.

The noble Baroness, Lady Sherlock, asked me to confirm when the data from personal and stakeholder pension schemes will be available to the public through the dashboard. She also asked what the position was with group personal pension plans. As set out in FCA rules, the majority of personal and stakeholder pension schemes are required to stage as part of the first cohort by the end of August 2023. That includes group personal pension plans. Until dashboards are launched to the public, schemes’ data must be available to invited users for testing purposes.

The noble Baroness raised a point about missing pots. Only a very small proportion of occupational pension scheme memberships are out of scope of the obligations to connect in our regulation and FCA rules. We expect that, at the point when dashboards are launched to the public, most individuals can be confident that all their pensions will be available to find via dashboards. When the value data for found pensions has not yet been provided—for example, if the member is new to the scheme, or when the value is still being calculated by the scheme—information to that effect will be displayed on the dashboard.

The noble Baroness asked how confident Ministers were about the quality of the data and whether the work has so far thrown up any concerns. It is critical that savers can trust the information in front of them; trustees and managers have existing legal obligations in respect of data quality, including the accuracy principle under UK GDPR, which requires that organisations ensure that data remains accurate and up to date. The Pensions Regulator set out its expectations on data quality in its record-keeping guidance; this includes that data is measured at least once a year.

The noble Baroness asked why the DWP had not set particular minimum data standards for schemes for matching and releasing data. The regulations allow for the trustees and managers of schemes to set their own matching criteria. We believe that schemes should be given discretion over which data elements they use to suitably search their records for a match. It is important that any scheme’s matching policy is appropriate to the level of confidence that they have in their own data; a uniform approach across all schemes would be likely to result in suboptimal matching.

Just to divert the House for a moment, I am conscious of how long I have been speaking, and I am keeping others from their business, but I am absolutely committed to answering these questions. With the leave of the House, I hope that I can carry on.

The noble Baroness, Lady Sherlock, asked whether I could explain for the record what would happen if the data submitted by a consumer was a partial match with data held by a firm. Schemes have the option of returning a possible match if they believe that they hold a record for an individual but are not certain. When a scheme returns a possible match, an individual will receive a limited form of administrative data that will enable them to contact the scheme to see if the possible match is in fact a match made.

The noble Baroness asked about screen-scraping. The regulations prohibit the storing of dashboards of view data, unless for temporary caching and for the sole purpose of displaying the view data in a single session. Similarly, transactions are not possible through the dashboard ecosystem. Making it possible for consumers to find information about all their pensions in a single place and requiring the consumer to undertake an identity verification check before being able to access that information significantly reduces the consumer appeal or perceived benefit of agreeing to screen-scraping. I have much more that I could say on that issue, so I shall write and place a copy of the letter in the Library of the House.

The noble Baroness, Lady Sherlock, and the noble Lord, Lord Davies, raised the point about complaints and where the liability lies if a customer makes a decision on the basis of view data that later proves to be inaccurate. As set out in our response to the consultation on the draft regulations, trustees or managers are responsible for meeting the requirements, which include receiving fine data, as well as undertaking, matching and returning the correct view data. Trustees or managers are not responsible for verifying the identity of users, and the authorisation of view requests or any processing of view data carried out by dashboards. The question of liability in the event that something goes wrong to the detriment of the individual would have to be considered on a case-by-case basis.

The noble Baroness, Lady Sherlock, raised the issue of liability and risk for trustees. The Government acknowledge that many trustees do an excellent job, often on a voluntary basis. The vast majority of trustees are in schemes with fewer than 99 members, so will be outside the scope of these regulations, unless they connected to pensions dashboards voluntarily. Although we accept that the regulatory requirements on trustees have grown a great deal over the years, this is only right, given what is at stake—we are talking about pension savings for millions of people.

The noble Baroness, Lady Sherlock, raised the issue of handling complaints and where consumers go to make a complaint. The dashboard ecosystem is made up of multiple different parts and, as such, dashboard users would potentially have complaints against a number of different parties. MaPS will therefore provide a central queries and complaints navigation tool, which qualifying pension dashboard services must direct individuals to, to help them understand their issues and know to whom they should direct their query or complaint if things go wrong, and the available routes to redress.

The noble Baroness, Lady Sherlock, raised the issue of scams and hackers and asked whether there is a strategy in place to counter the risk of scams within the system and whether this is being revisited regularly. It is crucial that dashboards give power to consumers and not scammers, which is why the dashboard ecosystem has been designed to ensure that only relevant pension schemes and authorised qualifying pension dashboard services have access. To maximise the effectiveness of the Money and Pensions Service pensions dashboard, users will have access to a retirement planning hub, which will provide onward planning journeys in a single place, supporting good decision-making. The FCA and MaPS will keep their rules and standards under review as dashboards emerge and evolve.