Guaranteed Minimum Pensions Increase Order 2019

Baroness Drake Excerpts

Thursday 14th February 2019 Lords Chamber

Another smaller category has always been overlooked by the Treasury, although not necessarily by the Department for Work and Pensions. Many categories of unfairness and injustice were addressed through civil partnership and same-sex marriage, where a same-sex couple could inherit the pension rights. I put down a marker to my noble friend that a future order such as this should also address this category. It is a particular issue in very sparsely populated rural areas, where families often work the farm. Siblings grow up together, the parents die and the brothers and sisters continue living on the farm. It is often the sister who ends up doing all the cooking, washing and cleaning, while the brother goes out to farm. When one sibling dies, the other is still not allowed to inherit. That is an injustice which I believe should be addressed. If it does not find a place in this order, will my noble friend use her good offices to ensure that this injustice is finally addressed by this Government?

[Baroness Drake (Lab)]

My Lords, I will take the opportunity of the GMP increase order to raise the recent High Court decision in the Lloyds Banking Group case, which now requires trustees to amend their pension schemes to equalise GMP benefits. The inequalities arose because between April 1978 and April 1997 an employer could contract its company scheme out of the second-tier state pension if it provided a guaranteed minimum pension—the GMP component of a member’s company pension. A calculation of the GMP accrual is set in legislation and results in inequalities because GMPs are payable from the age of 65 for men and 60 for women, so they accrue at different rates, with female benefits accruing more quickly.

That is further complicated by different schemes’ normal pension payment ages, which create a result that is sometimes more favourable to men and sometimes more favourable to women. Following the 1990 European court decision, occupational pension schemes “equalised” their retirement ages for men and women, often to 65, but the GMP component continued to apply at 60 for women and 65 for men. Following consultation in 2016, the DWP proposed a GMP equalisation method but did not commit to it being a safe harbour for achieving equalisation.

The High Court decision in the Lloyds Bank case required schemes to implement GMP equalisation from 1990, and identified approaches to achieving it. That decision still left uncertainties—for example, over how previous transfers out and buyouts should be addressed and the position of survivors’ benefits in payment. In March 2017, the DWP advised that it would consider its position in the light of any legal decisions resulting from the Lloyds Bank case. Will the Government press ahead with their planned changes to GMP conversion? Will they make variations to their proposed methods more generally? Are they considering any legislation on GMP equalisation?

The Explanatory Memorandum advises that the Secretary of State’s decision on the values of the qualifying earnings band and trigger for auto-enrolment for the tax year 2019-20 is based on established policy principles: namely, the right people being brought into pensions saving; the appropriate minimum level of saving for people automatically enrolled; and the costs and benefits to individuals and employers being appropriately balanced. I can understand why the Government would hold to the current interpretation of those principles for the 2019-20 tax year. A priority is the phasing to the 8% contribution rate from April 2019 with negligible impact on the opt-out rate. However, we know that the Government want to change the future interpretation of those principles as, following their auto-enrolment review, they announced reforms to lower the age limit for auto-enrolment from 22 to 18, and to remove the lower earnings limit of the qualifying earnings band and calculate the 8% contribution from the first pound earned.

There is no confirmed date for the implementation of these reforms, other than a loose reference to the mid-2020s. The Government could announce a forward date, which would allow time for consultation and legislative change, and give employers good notice. The reforms could bring an extra £3.8 billion into pension saving annually, increasing the pot of the lowest earners by about 80% and the median earner by 40%. When will the Government name the implementation date for these reforms and when do they anticipate bringing forward legislation to give the Secretary of State the necessary powers to implement them?

Finally, the earnings trigger—earning £10,000 or more in one job—is a factor in determining which workers get automatically enrolled into a workplace pension. Some 37% of the eligible population for auto-enrolment is female and 63% male—a glaring example of the lifetime caring penalty that women pay. Predominantly because of caring, millions of working women—some 45%—are in part-time jobs and earning less, which excludes many from auto-enrolment. Although the £10,000 earning trigger is frozen, decreasing in real terms against assumed wage growth, that 37% still rises only to 38%. Yes, once in the eligible population women are saving at the same rate as men—one would expect that; women are not stupid—and they still gain from having their inertia mobilised into savings. It is not getting into the eligible population that excludes many women from the benefits of saving.

The Government’s argument for not lowering that £10,000 is that,

“the predominant impact will be upon people for whom it could make little economic sense”,

to save. Such a sweeping assumption sustains a gender stereotype that is not fair on the women impacted, for several reasons. Many women will be in households with income that would support them as the right people to be brought into pension saving. Some women earn more than £10,000 but will not qualify because they do not earn £10,000 in any one job. Many women work part-time during periods of caring, outside of which they work full-time. For them, the assumption that it would not make economic sense to save is wrong and simply undermines their persistency of saving.

Fully 100% of pension contributions are deducted from employed earnings when calculating entitlement to universal credit and tax credits—an incentive to save for low-income earners. Excluding them from auto-enrolment undermines that incentive. Under pension freedoms people do not need to secure an income stream in retirement, so the concept of replacement rates is more tenuous. Older women on low incomes have lower financial resilience—lack of financial resilience has been reported on copiously in the last year or two—so supporting women during their working life to build up a pot of savings, accessible from age 55, will increase their resilience and mitigate their exposure to debt.

The Government consider that opting in to pensions is the most appropriate option for these people. Their published review of the earnings trigger refers to Institute for Fiscal Studies research showing that the impact of auto-enrolment has also increased pension membership among those earning below £10,000. However, I read that research, and the institute’s researchers observed that “it might be unlikely” that employees ineligible for auto-enrolment asking to opt in to workplace pension “is the major driver” of this increase. They referred to other influences more likely to account for the increase, such as some employers choosing to contractually enrol their workers who earn below £10,000—either from,

“a paternalistic desire to provide”,

low earners with some saving,

“or to reduce the … burden of monitoring whether staff”,

with variable earnings,

“do or do not earn over”,

the earnings trigger during a relevant pay period. So the research quoted does not support the assumption that low-paid women being able to opt in to pensions is translating into them saving more.

I ask the Minister what measures the Government intend to take to address the problem that, even with the changes in this order, still only 37% of the auto-enrolment population is female.

[Baroness Janke (LD)]

I thank the Minister for her introduction of the orders and I am privileged to follow the noble Baroness, Lady Drake, who is such an expert on this matter. I too will raise a few points about how inclusive the scheme is. It has been a success; we all recognise that. It has been a very good example of cross-party working on a crucial issue.

On inclusivity, the latest figures from the department show that 37% of women workers, 33% of workers with a disability and 28% of black and minority-ethnic workers are not eligible for master trust saving through auto-enrolment. Auto-enrolment does not cover the self-employed or workers in the gig economy. Both the noble Baronesses, Lady McIntosh and Lady Drake, mentioned the cumulative earnings of people who work part-time and in more than one job. What plans do the Government have to further extend the scheme to include those groups? How can it be made more accessible to enable those who need it most to benefit from it?

Occupational and Personal Pension Schemes (Amendment etc.) (Northern Ireland) (EU Exit) Regulations 2018

Baroness Drake Excerpts

Tuesday 15th January 2019 Lords Chamber

[The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Buscombe)]

My Lords, Northern Ireland’s occupational and personal pensions legislation broadly mirrors legislation in Great Britain. These regulations, therefore, make analogous minor and technical changes to Northern Ireland legislation as the regulations I have just spoken to. The intent of the regulations is the same: to make sure that Northern Ireland legislation continues to operate effectively once the UK withdraws from the European Union.

Let me explain why we are laying these regulations on behalf of Northern Ireland. The UK Government remain committed to restoring devolution in Northern Ireland. This is particularly important in the context of EU exit, where we want devolved Ministers to take the necessary actions to prepare Northern Ireland for exit. This includes ensuring that the necessary legislative corrections are made to ensure that Northern Ireland’s statute book is ready for exit day. That is consistent with the action being taken at Westminster and the other devolved legislatures.

However, with exit day only a few months away, and in the continued absence of a Northern Ireland Executive, the window to prepare Northern Ireland’s statute book for exit is narrowing. UK government Ministers have therefore decided that, in the interest of legal certainty in Northern Ireland, the UK Government will take through the necessary secondary legislation for Northern Ireland at Westminster. This was done in close consultation with the Northern Ireland Civil Service. This approach is being taken forward across government departments to make separate Northern Ireland statutory instruments which create a separate, transferable body of Northern Ireland legislation made at Westminster in the absence of a functioning Northern Ireland Assembly. This helps to keep a separate body of Northern Ireland law intact for when a functioning Executive and Assembly return.

It is common practice to have mirroring legislation in respect of Northern Ireland when legislating in the area of pensions. This is fundamentally no different. These regulations were developed in close co-operation with the Department for Communities in Northern Ireland, and it has cleared the text of the regulations. This approach is common to that being taken across government departments—that is, to make separate Northern Ireland statutory instruments which create a separate, transferable body of Northern Ireland legislation made at Westminster in the absence of a functioning Northern Ireland Assembly. This helps to keep a separate body of Northern Ireland law intact for when a functioning Executive and Assembly return.

The list of specific legislation that these regulations amend is lengthy, and I would be happy to provide noble Lords with a list of the Northern Ireland legislation that is being changed. We will continue to work closely with the Department for Communities in Northern Ireland, the Pensions Regulator and stakeholders to ensure that all parties are involved in the process where their interests are concerned. I beg to move.

[Baroness Drake (Lab)]

My Lords, I will avoid repetition. In the debate on the previous SI, I logged my concerns about the UK leaving the EU pension cross-border regime, the protection of members’ assets and their movement in cross-border schemes, and the significance of the cross-border issue between Ireland and the UK. That particular problem triggers a concern about a wider issue.

These draft Northern Ireland regulations apply to policy areas which are a transferred matter for Northern Ireland. In the absence of a Northern Ireland Executive, the Government are taking steps to secure a functioning statute book in the event of a no deal. The UK Government are clearly taking through the necessary secondary legislation at Westminster in consultation with Northern Ireland departments. These regulations are a classic example of doing that in the absence of the Northern Ireland Executive. The Government are able to do that through the Section 8 powers in the withdrawal Act and Schedule 3, which relates to Northern Ireland in particular.

I fully appreciate and accept the problems that the Government face in Northern Ireland, but the democratic deficit that exists there, as a consequence of the problems that we face, is even more concerning in a no-deal scenario because the risks and consequences flowing from it are even greater. That will exaggerate the consequences of no deal and having no Northern Ireland Executive to express the opinion or represent the interests of the people of Northern Ireland. Could the Government look at what they can do, even with the withdrawal agreement, to have a strong relationship with the Irish regulator? The Northern Ireland Executive are not here to articulate the significant issue of pensions in Northern Ireland.

[Lord Adonis (Lab)]

Will the Minister tell us more about what consultation there has been with the Irish regulator and stakeholders in Northern Ireland, not just about the technical details of these regulations but also on the wider implications for pensions and pension funds in Northern Ireland if there is no deal? Can she also confirm my reading of the Explanatory Memorandum and the text of the order? It is that this order went through exactly the same process as the previous one and had to be withdrawn because the defective drafting meant that it would not be possible for UK pension funds to invest in certain European assets under the changes that were first proposed. I assume that is because it was drafted in the same way as the first regulation and had to be changed in the same way. Is that the case? Was it the same defect in both regulations that had to be corrected?

Secondly, what further consultation has there been with the pensions industry in Northern Ireland since this new draft regulation has been laid? Does it have concerns similar to those which I quoted in relation to the previous regulation, and might more issues come out of further consultation? As my noble friend Lady Drake has said, there are some concerns about there not being a Northern Ireland Assembly or Executive. This has all been done at two stages removed and, since we have special duties in respect of Northern Ireland, it would be good to have reassurance that these processes have been gone through.

Occupational and Personal Pension Schemes (Amendment etc.) (EU Exit) Regulations 2018

Baroness Drake Excerpts

Tuesday 15th January 2019 Lords Chamber

[Lord McKenzie of Luton (Lab)]

My Lords, I have stayed out of this to date and I propose to do so in the future. I want to make just one point before we lose sight of it. The Minister talked about the change involving just one word. I think that we should recognise that that word is “UK”, which is a pretty substantial one.

[Baroness Drake (Lab)]

My Lords, these draft regulations are part of a suite of instruments intended to plan for the no-deal scenario, necessitating a sweep across the stock of pension law. Such contingency regulations may well amend both primary and secondary legislation, the remit of the Pensions Regulator, the Pension Protection Fund and the Financial Assistance Scheme. What we have not received, however, is a broader assessment of what the pension landscape would look like in a no-deal scenario which sets the context for the consideration of these SIs individually. That is because to call them technical, when we stand back and look at the wider implications of no deal, is not to see some of the serious challenges and loss of member protections that could flow as the consequence of a sudden dropping out of EU legislation in a no-deal scenario.

These particular regulations address cross-border activity where an employer in one member state selects to base its occupational scheme in another member state, but they remove from the Pensions Act 2004 the requirement for occupational pension schemes to obtain authorisation from the Pensions Regulator for cross-border activities. They repeal the cross-border regime.

The UK and Ireland are the two countries between which there is significant cross-border pension provision, which will be another complication in future UK-Ireland relationships. Recent amendments to the Occupational Pension Schemes (Cross-border Activities) Regulations 2005 were made to allow for the IORP II strengthened requirements on cross-border activity which would be revoked if there is no deal. The acronym IORP comes from the EU directive meaning “Institutions for Occupational Retirement Provision”. Thus a new set of regulations that has just been accepted and which puts in place protections for cross-border activity would be revoked. In the event of no deal, the Pensions Regulator would need to provide guidance to those pension schemes which are currently authorised for cross-border activities within the EU. They exist now and they will not cease to exist simply because we may leave with no deal. Can I ask the Minister what would be the effect of substituting existing Pensions Regulator authorisation with a weaker system of Pensions Regulator guidance for cross-border activities? How would the effect of that weaken the level of protection afforded to scheme members in respect of both contributions and the protection of their assets? When will the regulator’s guidance be published so that we can more fully understand the implications of no deal?

Could the Minister advise whether there have been any discussions between the Pensions Regulator in the UK and Ireland on pension cross-border activities in the event of a no-deal scenario? Will the IORP II new authorisation process for schemes wishing to undertake bulk transfers of assets with a separate scheme located in another EEA state include ensuring that the cross-border transfer is approved by a majority of the members and beneficiaries or, where applicable, by a majority of their representatives? What will happen to those protections in a no-deal scenario? I do not know because I cannot find the answers to those questions. There will be UK citizens whose assets are in occupational schemes in other EU states that may be protected by ring-fencing or whatever.

The original draft of these regulations, as has been said on numerous occasions, required pension schemes to invest predominantly in UK-regulated markets. Regulation 29, the one being referred to, has been revised to allow schemes to invest in regulated markets more generally and therefore avoids the unintended consequence of large numbers of occupational pension schemes having to divest themselves of investments in regulated markets outside the UK. It illustrates how the impossible speed and pressure our departments and regulators are expected to work under to prepare simultaneously for a possible no deal and a withdrawal deal can lead to unintended consequences, which worries me. I fear that in retrospect, in the rush to prepare for no deal against a self-imposed deadline of 29 March, we will discover more unintended consequences in the canon of UK law, not simply in pension law. We have seen others, on trademarks or wherever, where people are beginning to identify unintended consequences.

I will not refer to Northern Ireland because we are now taking that separately, but on the broader point of how impact is defined and measured, there is a series of cliff-edge issues that could pose material risk to our financial markets in a no-deal scenario. UK providers will also be unable to rely on current passporting rights, could experience difficulties in servicing cross-border contracts and will not be part of the legal framework for moving data between the EU and the UK. In the absence of regulatory co-operation agreements or memoranda of understanding between the UK and the EU in a no-deal scenario, the operation of pension schemes and the value of members’ pension pots will be negatively impacted.

This takes me back to my opening point that, in considering these statutory instruments individually, the House lacks a broader assessment of what the pension landscape will look like in a no-deal scenario. To argue that somehow there is no need for consultation if the impact of no deal does not result in a change of policy is to completely fail to understand that the effect of no deal in weakening the protectors of members’ rights is a policy choice if one chooses no deal, because it will consequently affect members’ rights. It seems so narrow to argue that you cannot find a change of policy, though really the issue around consultation is not well argued. Although I accept that these regulations deal with the more narrow issue of cross-border activity, they are indicative of the problem of trying to look at any SI on pensions without the context of understanding the impact on pensions generally under no deal. Pension schemes everywhere are sitting and worrying about the consequences of this, particularly in financial markets. There are also UK citizens whose assets are in pension schemes in other EU states. Just walking away from the regime without any understanding, even with the Irish regulator, does not seem to be good preparation.

[Lord Adonis]

My Lords, my noble friend made an extremely powerful argument, which corresponds to a pattern that has emerged to those of us who have spent time in the Grand Committee discussing these regulations. They have all been prepared in a rush to meet an imminent deadline. Because of the rush, the need to meet the deadline and the secrecy inside the departments with which these regulations have been drafted and all no-deal planning has taken place, the pattern that has emerged in the debates in the House and the Grand Committee is that much wider issues have become apparent that could only become apparent through consultation.

The conclusion I can see we are already reaching—my noble friend makes an extremely powerful argument—is that it is not just the technical changes of the regulation and the precise changes in UK law, though clearly those have been very badly handled and have potentially had a dramatic impact on UK pension funds, but the whole wider context in which these funds and the professionals engaged in them will have to operate under no deal that will bring about fundamental changes. That is precisely why one would wish to have a full consultation, which has not taken place.

The noble Viscount opposite asked how long we would wish a consultation to be. There are established Cabinet Office rules on this which, when I was a Minister, we observed as a matter of course for any changes in the law; he will know this better than anyone, having dealt in this area so frequently. The rules say 12-week consultations. That is the norm. In my day, when we had a quality of Government rather higher than the one now engaging in all this helter-skelter planning for no deal, you needed a special exemption based on special emergency requirements not to go down the 12-week route, and that could happen only if the changes concerned were exceptionally minor. In this case, the Government themselves have imposed the deadline and the changes under consideration have a very wide potential impact. It is abundantly clear that the right thing to do in this and other cases is to have a 12-week consultation, with the wider policy environment under consideration being subject to consultation too.

I would like to ask the Minister some other questions about the detail of these regulations. For those of us who are not experts, it is not clear precisely how deep the impact will be. Paragraph 2.5 of the Explanatory Memorandum says that,

“UK occupational pension schemes will no longer need to obtain authorisation from the Pensions Regulator for cross-border activities”.

I take that not to be a minor change in the regulatory regime but a fairly significant one, on which the Pensions Regulator should have been asked to give advice—including to the House—when we were considering these changes. Can the Minister tell us what the impact of that change will be and why the Pensions Regulator was not invited to give us advice?

On the wider issue of no-deal planning, which of course underlies all these regulations, the Government have said that they do not wish to see no deal take place. Last week, when the House of Commons debated no deal and voted that it should not take place, Robert Jenrick, the Exchequer Secretary to the Treasury, said that,

“the Government do not want or expect a no-deal scenario”.—[Official Report, Commons, 8/1/19; col. 269.]

It is entirely within the purview of the Government not to have a no-deal scenario; if they do not want it, they can ensure that it does not take place, not least because of the ruling of the European Court of Justice before Christmas. They could revoke the notice under Article 50 to ensure absolutely that there will not be no deal.

A point was raised perfectly properly by the most reverend Primate the Archbishop of York that one should prepare for contingencies, but these are contingencies entirely of the Government’s making. They are not talking about preparing contingencies for, if I may say so, acts of God or other things that happen for which one cannot be accountable. When I was Secretary of State for Transport, a volcano went off and we had to get planes flying when there were big ash clouds. One should be expected to make contingencies for those kinds of things over which one has no control. In the case of the contingency for which we are discarding all our normal consultation mechanisms, playing fast and loose with a regulatory regime and, as my noble friend said, not taking account of the wider policy context and what may happen as a result of no deal, it is all self-inflicted by the Government because they are sticking to a self-imposed deadline.

The response of noble Lords who have sat in Grand Committee is that this does not sufficiently justify not going through established consultation routes. A whole stream of statutory instruments will be coming from Grand Committee where big concerns have been raised, not least by the noble Lord, Lord Warner, in respect of a set of pharmaceutical-related SIs that we debated yesterday. Key affected partners were not consulted at all; the reason for that, it appears, is that the department did not want to hold a consultation that would have made people aware that no-deal planning was taking place. Indeed, in the debate we held yesterday on one of the key regulations, the only person who we could establish firmly had been consulted was the noble Lord, Lord Warner, himself; he had phoned the relevant public authority that was engaged in the no-deal planning.

--- Later in debate ---

[Baroness Buscombe]

These are pension schemes operating in member states. If they are operating in member states they do not then have to make sure they abide by UK law and the UK Pensions Regulator. If they happen to be operating in the EU, they do not have to abide by UK law if we leave the EU. Does that make sense? I hope it does.

[Baroness Drake]

I did understand what the Minister said, and I completely accept that she always seeks to answer my questions. One of my concerns is that it is impossible. I found it difficult from the SI and the memorandum to understand, in the traffic both ways, how individuals’ assets are protected if the UK is no longer in the IORP regime. I could not trace that. Given the volume of cross-border activity on pensions between Ireland and the UK, what is the realistic prospect, even in a no deal, of getting a memorandum of understanding to address that and to try to have a common regime?

[Baroness Buscombe]

I will be turning to the Northern Ireland regulations shortly. If we leave with no deal it is not possible at that point for our Pensions Regulator to continue to protect assets beyond what will become our borders. That is where there is a great hope that there will be a deal, so that during the implementation period we can make sure that we introduce legislation that will protect our pension assets—the very thing that concerns the noble Baroness. We hope we will be able to bring it before the House prior to the end of the implementation period. Then we could revoke the statutory instruments before your Lordships’ House today.

Benefits: Reductions

Baroness Drake Excerpts

Thursday 1st November 2018 Lords Chamber

[Baroness Drake (Lab)]

My Lords, I too congratulate my noble friend Lord Bassam on securing today’s debate and on his powerful contribution. The debate, with so many excellent contributions, has drawn out very clearly the need to look at social security as a whole and at the impact that it has on the day-to-day life that people and families in the UK lead, not just as a spreadsheet of discrete numbers.

In the recent Public Accounts Committee report on universal credit, some of the most striking criticisms were that the department has “persistently dismissed evidence” and,

“refuses to measure what it does not want to see”.

I am sure that the Minister has listened carefully to every contribution today, even where it has been of a nature that the Government might not wish to hear. Discussing what a system aspires to achieve is but one element; assessing the evidence of actual outcomes is quite another.

Four million children—30%—live in poverty in England according to the Child Poverty Action Group. In Wales, the figure is 200,000. The Institute for Fiscal Studies predicts a further increase of 400,000 by 2021. The Equality and Human Rights Commission estimates a higher number, at 5.5 million children. One can vary the data source, but that does not vary the message: levels of child poverty are rising. Falling state support for those on low incomes, cuts to benefits and tax credits, rising household debt, rising private sector rents, a labour market with more part-time or self-employed workers or workers on insecure contracts are pushing children into poverty. Most of the projected increase in absolute poverty is due to the two-child limit on child benefits.

Child protection inquiries have risen by over 150% and the number of children in care is the highest since the advent of the Children Act 1989. Perhaps I may quote from the Children’s Commissioner briefing, which states that the,

“biggest losers under universal credit are …families with children, especially single parents. The Government have never fully justified this. When presented with … IFS and Resolution Foundation research, the …Secretary of State … said there would be ‘winners and losers’. There is no clear rationale for making children the losers when they already have higher levels of poverty”.

David Cameron, in announcing the family test in August 2014, said that he wanted to introduced a family test,

“as part of the impact assessment for all domestic policies … that means every single domestic policy that government comes up with will be examined for its impact on the family”.

Few family test results have been published.

The Care Crisis Review was facilitated by the Family Rights Group and funded by the Nuffield Foundation. It captures the complex contributions at play and recommends that the DWP and DfE should lead a review into the impact of benefit rules and policies, and the projected effect of benefit changes on children entering or remaining in care. The Child Poverty Action Group calls for a root-and-branch review of universal credit, echoing concerns expressed by the Children’s Commissioner, the Resolution Foundation and many others.

The funding announcement in the Budget this week for some claimants of universal credit is welcome, but it is a kind of recognition by the Government that their flagship scheme is not working in all parts. What is missing is an admission that much more has to change. There are flaws in the design and the delivery of universal credit. Unacceptable and unrealistic waiting times, rent arrears, single household payments and the impact on domestic abuse victims are just a few of the issues that people are facing. This system is causing anxiety and hardship wherever it is rolled out. Can the Minister tell the House what plans the Government have to recognise these issues and overhaul universal credit to make it fit for purpose?

The Budget was a missed opportunity to bring children in from the cold. Child benefit—core money for struggling families in and out of work—will have lost nearly a quarter of its real value by 2020. I agree that jobs and enterprise are important, but increases in employment cannot conceal that two-thirds of poor children have parents in work. The noble Lord, Lord Livermore, demonstrated so ably that higher personal tax allowances are not pro poor children. The increases in the Budget are very small against cuts introduced since 2015 and still to come. The benefit freeze continues. Since 2010, £37 billion of funding has gone from social security.

I would like to take a little time to refer to the 200,000 children in kinship care. The Care Crisis Review concludes that,

“a significant untapped resource … exists for some children in and on the edge of care, namely, their wider family and community … supporting this resource could safely avert more children needing to come into care or could help them thrive in the care system”.

Kinship carers try to provide stable homes with little or no financial support, often giving up their jobs for often traumatised children who would otherwise go into the care system. A recent survey by Family Rights Group and Grandparents Plus found that for 94% of such carers, caring had caused financial hardship, despite keeping children out of care and saving the state millions of pounds; and 41% of those receiving some form of local authority allowance have had it reduced or removed.

Notwithstanding the commitment that children in kinship care would be exempt from the two-child limit on benefits and tax credits, the Government still penalise some kinship carers, including siblings who were raising their younger brothers and sisters and who subsequently had a child of their own. Child Poverty Action Group had to go to the High Court to win the declaration that government policy was perverse and unlawful. The Budget rectifies that unfairness from November 2018, but I ask the Minister whether it will be retrospective to when the two-child limit was introduced.

For some families, exempting kinship care children from the two-child limit provides little relief if the additional benefits are restricted by the benefit cap. Kinship care and adoptive households should be exempt from the benefit cap. In keeping with the Care Crisis Review, the Government should at least discount income received from tax credits and child benefit for kinship care children from the benefit cap and add it to the list of benefits that are not treated as income when the cap is calculated.

Finally, I too wish to pay tribute to the amazing Baroness Hollis, her wonderful achievements and unquenchable commitment to those less well off—from supporting black workers at Selma when a young undergraduate, to winning literary prizes and taking on the Government over cuts in tax credits. My noble friend Lady Sherlock and I were privileged to be her roommates for eight years and to witness her extraordinary mental and physical resilience and generosity of spirit in the face of what became an overwhelming illness. Patricia rooted her contribution in the reality of people’s experience. Her benchmarks always included what it would like to the single mum in Norwich, her beloved city. The single mums of Norwich and across the UK had a doughty fighter in Patricia. O that she were here today to do justice—far more than I can do—to the issues that she cared about. My noble friend Lady Sherlock and I were ringside as she prepared for the battle with George Osborne on the statutory instrument on tax credits. Her determination, eloquence and intellect were awesome, even though she was so unwell. We were proud of her. We had had many private and moving conversations in the sanctuary of our little office. She was an extraordinary woman.

Occupational Pension Schemes (Master Trusts) Regulations 2018

Baroness Drake Excerpts

Wednesday 18th July 2018 Grand Committee

[The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Buscombe) (Con)]

My Lords, subject to Parliament’s approval, the regulations will introduce a new approach to how some occupational pension schemes are regulated. From 1 October, both existing and new master trust pension schemes will be required to be authorised by the Pensions Regulator and will be subject to ongoing supervision by the regulator to ensure that they are maintaining the standards required at authorisation. Any scheme that opts out of applying for authorisation, or which fails to meet the required standards upon application, will be required to wind up and transfer its members to an authorised scheme. These regulations will fully commence the authorisation and supervision regime for master trust schemes under the provisions of the Pension Schemes Act 2017. I am satisfied that the Occupational Pension Schemes (Master Trusts) Regulations 2018 are compatible with the European Convention on Human Rights.

The past eight years have seen a significant growth in the master trust pensions market. Membership has grown from 200,000 in 2010 to approaching 10 million today. This market now accounts for assets of over £16 billion and will continue to grow over the coming years. The rapid increase in both membership and assets is irrefutably linked to the phenomenal success of auto-enrolment. As a result of this success, we are introducing the new authorisation and supervisory regime, which will ensure that these new savers have assurance that they are saving into quality schemes where their money is well managed and protected.

We have always been clear that our expectation is that a significant number of schemes are unlikely to meet these standards and will need to leave the market. The regulator has worked closely with master trusts over the last two years to help them to prepare for these changes, including offering readiness reviews, which have been taken up by 33 schemes. As a result, it has a good understanding of those schemes that are most likely to close. Where this is the case, it is likely to be because they will not meet the quality standards being introduced, for example, because of poor administration or doubts about long-term financial viability.

I know that a number of noble Lords recently met with the regulator and raised concerns about what will happen to the members of those schemes that opt to close. The Pension Schemes Act 2017 introduced some retrospective measures to help to support the market and to protect members through the transition to full authorisation. These applied from the Bill’s introduction in October 2016 and came into effect on Royal Assent in April last year. They require that any scheme which is facing a triggering event, which is one that is likely to lead to it winding up, must immediately report the fact to the regulator, and charges made by schemes to members are fixed at October 2016 rates until the full regime comes into force.

During discussions on the Bill, noble Lords were clear that our expectation is that the market will respond to these changes. The emerging evidence shows that this is the case. The retrospective measures mean that the regulator is currently working closely and effectively with 20 schemes that have already either closed or signalled their intention to leave the market. This includes assisting them with finding appropriate destinations for their members. The introduction of new provisions earlier this year to ease and speed bulk transfers into and out of defined contribution schemes offers further support to members. In addition, where a scheme has started to wind up, the disclosure regulations ensure that members are made aware, allowing them to decide individually whether to accept the trustees’ default destination or make their own arrangements.

We expect that there will continue to be further consolidation of the market as we approach the October deadline. With this in mind, we are already aware of a number schemes that plan to promote their claim as a potential destination of choice for closing schemes by applying for authorisation at the earliest opportunity. In addition to the pull from schemes looking to expand their presence in the market by taking on members from closing schemes, there is a strong push from employers participating in those schemes as, regardless of the decisions made by the scheme, they remain obligated to meet their automatic enrolment responsibilities by ensuring that their employees are actively contributing to a pension scheme. We have always known that there would be a period of flux and change for the market, requiring close and active management by the Pensions Regulator, and the regulator is delivering.

I turn briefly to the policy. My officials have been working closely with both the Pensions Regulator and the industry to develop the detailed policy design for these regulations. This culminated in a public consultation on the draft regulations which was launched by my right honourable friend in another place, the Minister for Pensions and Financial Inclusion, in November last year. The consultation was well received and generated a number of supportive suggestions for technical improvements, which were most welcome. The only real issue of concern at that time was that we were not in a position to confirm the level of the authorisation fee. This was resolved by the time we published our response to the consultation in March this year, where we confirmed that existing schemes would be charged £41,000 and new schemes will pay £23,000. We recognise that this information may have an influence on a scheme’s decision whether to seek authorisation.

Your Lordships will be aware that the regulations have been the subject of scrutiny by the Joint Committee on Statutory Instruments and the Secondary Legislation Scrutiny Committee, neither of which found reason to draw the special attention of your Lordships’ House to these regulations.

I turn to the substance of the regulations. When the Pension Schemes Bill was before the House—ably stewarded by my noble friends Lord Freud, Lord Young and Lord Henley—the scope of the new regime was the subject of considerable debate. Our aim was always to design a regulatory regime that meets the needs of a very diverse market, ranging from long-established schemes, including many not-for-profit organisations, to new schemes set up in the wake of automatic enrolment.

However, during the passage of the Bill we were not able to confirm the details of how the powers to apply the regime to schemes that arguably fall outside the definition set out in the Act and to disapply it to schemes that otherwise would fall within the definition would be used. I can now confirm that the regulations will bring certain types of non-master trusts within scope—for example, what are often known as “cluster schemes” where schemes may have single employers but are run by the same people and are subject to the same rules. They also disapply the authorisation regime to some types of scheme which have specific characteristics that mean they meet the definition but do not face the same risks as master trusts—for example, certain small schemes where all the members are trustees and the majority of the trustees are members of the scheme. The intention remains to provide member protection proportionately.

To bring clarity to the application process, the regulations specify that the scheme must have a business plan approved by the trustees and the scheme funder. This will include detailed information about the ambition and financial strategy of the scheme, as well as providing details relating to the scheme funder, the systems and processes that are used and information on trustees and others in a position of influence over the running of the scheme. In addition, schemes and scheme funders will need to provide their audited accounts and the accounts of any third party funder.

The Act identified the five authorisation criteria that schemes must meet. First, fit and proper: the regulator will need to be satisfied that everyone running a scheme has the appropriate integrity and is competent. Secondly, financially sustainable: the regulator will need to be satisfied that the scheme can fund the operating costs, as well as the additional costs should it get into difficulty and possibly wind up. Thirdly, scheme funder: the regulator also needs to be satisfied that an appropriate entity is standing behind the scheme and is able to meet certain costs. Fourthly, systems and processes: when assessing whether the IT and wider systems and processes are sufficient to ensure that the scheme is run efficiently, the regulator must take account of the scheme’s need to provide an effective service to its members and to deliver the ambitions set out in its business plan. Fifthly, continuity strategy: prepared by the scheme strategist and signed off by the scheme funder, this will need to set out how the scheme plans to respond to and protect the interests of its members in the event of a triggering event. These are circumstances that could lead to the closure of the scheme.

It has always been our intention that once schemes have met the authorisation standard, the regulator’s role will turn to ensuring that standards are maintained. In extremis, the powers in the 2017 Act will enable the regulator to initiate a triggering event and require a scheme to wind up. This is an appropriately robust backstop for the most extreme cases. However, our intention is to avoid such extreme interventions through a supervisory process that supports high standards and encourages schemes to seek support when any difficulties are first identified. The regulator will require schemes to update their business plans regularly, including when significant changes occur, when there is a change to key personnel, or failure to meet a previously declared key milestone, target or planning assumption. The regulator will also be able periodically to request a supervisory return from any scheme. This will inform the regulator’s ongoing risk assessment of schemes and will be based on the five authorisation criteria. While the regulator can only request this return at most once a year, it will have some discretion over how regularly returns are requested, based on an ongoing assessment of the level of risk each scheme is carrying.

The master trust market is growing and vibrant and it is not our intention to interfere in it. We expect schemes to continue to join and exit the market over time. I have set out the process for those entering the market; I now turn to how the regulator will support the members of schemes that exit the market.I have previously described “triggering events”, which are those likely to risk the scheme being closed and wound up. When this occurs, the scheme is required to convert its continuity strategy into an implementation strategy, including setting a clear timetable for either resolving the issue or closing the scheme. The regulator will work with the scheme to ensure that appropriate action is taken at each stage, including notifying employers and members about what has happened and what their options are if the scheme is going to wind up. The financial sustainability requirements will mean that there are sufficient funds to see the scheme through the transition period. Restrictions on charges in the Act mean that additional costs cannot be passed on to members.

In conclusion, we are ensuring that master trust scheme members—particularly members of schemes that are opting to wind up—are protected and supported before the new regime is fully rolled out in October. This new approach is widely accepted and supported by the industry, which in turn is being ably supported in its preparation for the changes by the Pensions Regulator. These regulations introduce a robust new regime for master trust pension schemes that will provide added protection for millions of people saving towards their retirement, most of whom are doing so as a result of automatic enrolment. These changes are necessary, and I commend the regulations to the Committee.

[Baroness Drake (Lab)]

My Lords, I welcome these regulations, and I thank the Pensions Regulator for its courtesy in providing a briefing on master trusts to interested Peers. With approximately 10 million members and £16 billion of assets under management in these trusts—which will increase even further, particularly given the rise in automatic enrolment statutory contribution levels—the need for a robust authorisation, supervision and resolution regime to protect individual savers is compelling. The risks of not having such a regime were fully aired during consideration of the Pensions Act 2017.

These regulations cover the five criteria which authorised master trusts must meet, and I will refer to two in particular. The first criterion is that the scheme is financially sustainable. This requirement expects master trusts to hold sufficient financial resources in sufficiently liquid assets to cover certain costs and is at the heart of protecting individual savers from financial detriment in the event of a triggering event such as scheme failure or wind-up. However, nearly £6 billion of assets is currently held in master trusts which do not even have a voluntary master trust assurance. I also note that the impact assessment assumes one triggering event each year after “steady state” is reached in 2019. This seems high given the regulator’s assumption that only 56 master trusts will be authorised.

The master trust authorisation regime has, understandably, the flexibility to accommodate a wide range of financing requirements and different scheme funders. That also means, however, that the public need a high level of confidence that the financial sustainability requirement will be robust throughout that wide range. In setting the financial sustainability requirement covered in Schedule 2, what assurance—or further assurance—can the Minister give about the level of prudence expected in any estimates and strategy for meeting those relevant costs?

The definition of “prudency” has become somewhat loose in the DB funding regime and the regulator is taking steps to tighten up what is expected, so reassurance on prudency in the master trust financial sustainability regime is welcome. Will the Pension Regulator’s financial sustainability regime be benchmarked, for example against the Prudential Regulation Authority’s regime for capital adequacy? If an authorised master trust subsequently closes to new business but continues to run as a closed scheme, how will that impact on the financial sustainability assessment and will the trust automatically be required to transfer the members to another scheme?

Automatic Workplace Pension Enrolment

Baroness Drake Excerpts

Monday 25th June 2018 Lords Chamber

[Baroness Drake (Lab)]

My Lords, when automatic, direct enrolment was introduced there were real anxieties about capacity, non-compliance, and opt-out rates. Six years on, I recognise the good work that the DWP and the regulator have done. Indeed, the regulator has not been reluctant to use its formal powers. In 2016-17, it made more than 50,000 interventions, including nearly 34,000 compliance notices.

To maintain that confidence, however, we need to see the analysis of the 700,000-plus small and micro-employers whose staging ended in February 2018. It will be some time before the full impact of the phased increases in the statutory contribution rate is known. I note that the Government have identified around 1 million individuals working in atypical ways in less standard forms of employment, and they are liaising with the regulator to ensure sufficient clarity so that automatic enrolment operates effectively. Will the Minister elaborate on that problem, and on what greater clarity may be needed?

It is welcome that the Government decided not to exempt certain employers from auto-enrolment. The proposal to lower the age criteria from 22 to 18 would bring a further 900,000 young people into pension saving, which is welcome. So too, is the proposal that pension contributions would be calculated from the first pound earned, thereby increasing the contributions going into pensions. It is estimated that these proposals would bring an extra £3.8 billion in pension saving annually, and significantly increase the pension pot of lower and median earners.

The Government assert in their review report:

“We want to help lower earners build their resilience for retirement; to support individuals, predominantly women, in multiple part-time jobs”.


But, as my noble friend Lady Primarolo has so clearly articulated, too many women are still excluded from the targeted group of 11 million intended to benefit from auto-enrolment, and 63% of that target group are still men.

Women suffer a caring penalty in pension saving. They are more likely to have single or multiple part-time jobs that pay below the £10,000 earnings trigger. The employment pattern of women reveals periods when they are typically caring for young children, grandchildren or elderly relatives and their paid work reduces. They are penalised by exclusion from automatic enrolment. The proposal that pension contributions will increase—calculated from the first pound earned, so increasing pension contributions—will make the caring penalty even greater, because the loss of contributions for women becomes greater too.

The Government argue that a change to the contribution rules would improve the incentives for those in multiple jobs that each pay at or below £10,000 to opt in to their workplace scheme. Women can choose to opt in, but automatic enrolment is rooted in behaviour assumptions that most men and women will not opt in. It is perverse to assume that opting in will effectively address the pension penalty for those earning £10,000 or less in any one job. Pension freedom of choice has changed the rules of the game. People are no longer obliged to secure a replacement income. Their savings provide a pot to spend as they wish. I see no reason, other than a regressive one, why low-paid women and men should not be auto-enrolled, so that they too can build a savings pot to give them greater financial resilience when they retire.

It was disappointing not to see some new thinking about tackling the caring penalty in pension savings coming out of the review—for example, a state credit of contributions to private pension savings during defined periods of caring. The Government’s ambition is to implement their proposed changes in the mid-2020s—a long way off. They want to develop detailed plans for consultation but does that need to take seven years? The Government recognise,

“that these changes present significant additional costs, in particular for employers and the Exchequer and significant changes for individuals”.

They say that,

“we will seek to better understand the full impacts for all stakeholders as part of the consultation process and will explore cost mitigations and funding options. We plan to do a full impact assessment of the increased costs for businesses”.

There is a lot of conditionality in those sentences: whether the changes to the automatic enrolment rules proposed will be implemented at all, and the trade-offs to be made.

My noble friend Lord McKenzie’s question is most helpful in seeking more certainty. I agree that the immediate priority is to secure the implementation of the phased increases in the statutory contributions without significant increases in opt-out rates. However, the Government intend to carry out further work on the adequacy of retirement income, using the evidence gained to review the level of contributions. I hope they will subject their findings and considerations to the most robust scrutiny and transparency. In recent times, some pension policy decisions have not been preceded by detailed analysis or assessment; long-term impacts have not been fully considered. The coherence of policies on long-term savings and funding social care is unclear.

The boundary between statutory contributions and voluntary additional saving is important. The balance in the allocation of future increases in the statutory contribution between the employer and the worker is integral to ensuring persistency and improving levels of saving. The drivers of higher voluntary contributions are not equally distributed across the labour market. The priority which employers give to pensions varies significantly. Some mechanisms for raising contributions may work with higher paid workers but will not be effective with moderate or less secure ones.

The self-employed are now 15% of the workforce and a large proportion of them have significant and worsening gaps in pension savings. A focus on the self-employed, who would benefit from a nudge into saving, is much needed. The Government have announced an intention to legislate before the end of this Parliament, but it would be helpful if the Minister clarified whether targeted interventions will actually take place in 2018 and when the department expects to publish its evaluation. The position of the self-employed is getting worse as each year passes.

Finally, the review found that an,

“extensive review of the evidence-base tells us that actions aimed at improving engagement will not in themselves materially change savings behaviour ”.

None the less, the Government believe that engagement can reinforce savings behaviour.

The problem is that public policy is now predicated on splitting pension saving into a savings phase and a draw-down phase. At the savings phase, policy recognises the power of inertia in the face of complexity and behavioural biases which inhibit optimal decision-making. Regulated defaults, auto-enrolment and investment funds are applied. At the drawing-down phase, policy assumes behaviours to be dramatically different, with the same individuals fully engaged and bearing the responsibility for making optimal choices. This inconsistency is simply not rational. There needs to be consistency during both phases, with good communications sitting alongside a system of supportive default products and processes, particularly in the light of emerging market failures. That would not contradict individual choice, but it would support securing a stable income in retirement.

Financial Guidance and Claims Bill [HL]

Baroness Drake Excerpts

Ping Pong (Hansard): House of Lords
Tuesday 1st May 2018 Lords Chamber

Amendments 1 and 35 enable transfer schemes under Schedule 2 to transfer staff, property, rights and liabilities from the Money Advice Service to the devolved authorities. This is necessary in view of the fact that the devolved authorities will be responsible for the provision of debt advice in their areas once the single financial guidance body is established. I beg to move.

[Baroness Drake (Lab)]

My Lords, I recognise that the constructive engagement of the Ministers with Members in the House of Commons and noble Lords in this House has resulted in beneficial amendments to the Bill and enthused people about the creation of the new financial guidance body. I accept that we need to move on and let the department get on with building the new body and delivering all the grand things that we want it to achieve. I thank the Minister and the Bill team for the access that was afforded to me personally to raise matters on the Bill.

I welcome the Minister’s clarification that the reference to pension guidance in Amendments 7 and 8 is defined by reference to Section 5 in the Bill, on the new body’s pension guidance function, which itself is a subset of Section 3, which requires that guidance to be free and impartial. I think there was some misunderstanding and it is very helpful that that clarity of link between the sections has been made clear.

If I may make one final observation, a well-founded consensus on matters of high principle supported by legislation can sometimes be undermined in the implementation. Everyone agrees that referring people by default nudging to impartial guidance before they access their pension savings is an integral part of protecting consumers and enabling them to make more informed decisions. However, there are anxieties that the FCA and the Secretary of State, in setting the rules for the process, should not give administrative control to the providers particularly of the opt-out process, given that the providers will not be impartial because they have a direct interest in retaining the consumer as a customer for their product. So any reassurance from the Minister that the Government recognise this concern, and intend that the rules for nudging and defaulting people into impartial guidance will be designed in such a way as to prevent providers from manipulating the process to undermine the referral to guidance, would be welcome.

[Baroness Altmann (Con)]

My Lords, I am grateful to the Minister and officials for their work on the Bill, but significant flaws remain, including a point on which I hope the Minister will be able to offer reassurance relating to pensions guidance.

Along with the noble Lords, Lord Sharkey and Lord McKenzie, Members of this House voted by 283 to 201 in October to add an amendment creating provisions for savers to be defaulted to impartial, independent guidance if they have not already received guidance or regulated advice before they decide when, whether or how to access their pensions. The purpose of those provisions was to address the consistently low take-up level of pensions guidance by harnessing the potent force of inertia.

The amendment passed by this House was supported because there is a wealth of evidence suggesting that people are ill-equipped to make key decisions without such impartial, independent professional support. That was specifically the intention behind setting up the Pension Wise service when the pension freedoms were introduced. I hasten to add that I congratulate the Government once again on introducing those pension freedoms—I think that that was the right thing to do—but fewer than one in 10 are making use of this guidance, despite the fact that so many need it.

At Second Reading in the other place in February, I was pleased to hear assurances from the Pensions Minister that the new clauses would be strengthened—albeit by some fine-tuning. The same assurances were given in evidence to the Work and Pensions Select Committee, yet the Commons amendments show that the promised fine-tuning seems to have been somewhat inadequately applied.

Instead of being strengthened, the default guidance provisions added by noble Lords have been replaced with clauses that merely require pension providers to refer savers to guidance if they have not yet done so. This introduces no new requirement for providers beyond what is already required by FCA rules. The new clauses also leave open the possibility that savers may opt out of guidance by their scheme provider. The FCA’s consumer panel believes that this is inadequate, the noble Baroness, Lady Drake, just expressed similar concerns, and I should be grateful if my noble friend could reassure the House that there will be a separate and impartial opt-out process. There are significant reasons to fear that consumers may not otherwise receive the assistance that they desperately need.

If providers have an interest in not sending people to the guidance service and finding ways in which they can encourage them to call their own helpline or take advantage of their own services, the concerns expressed by Age UK, the Financial Services Consumer Panel and by noble Lords when the Bill was originally passed will, unfortunately, be borne out.

This may seem a small point, but a great deal depends on it for millions of savers. As the Work and Pensions Select Committee pointed out, providers do not usually benefit if there are higher rates of guidance take-up—indeed, it may be to their detriment—so they may well try to find ways round and an opt-out process that is not impartial and, perhaps, take advantage of customers in that way. Therefore, I would be grateful if my noble friend was able to offer reassurances about the opt-out process. I welcome the idea of default guidance, but I hope that regulations will be a lot stronger than the current legislation seems to suggest.

Kinship Carers: Two-child Limit Policy

Baroness Drake Excerpts

Monday 11th December 2017 Lords Chamber

[Baroness Buscombe]

Given her long experience and expertise in this House, the noble Baroness will understand that, as a Lords Minister, my position is somewhat constrained. As I said, my honourable friend in another place is very aware of this case, and this policy is being considered as we speak.

[Baroness Drake (Lab)]

Will the Government honour their promise to this House on 27 January 2016 that children in kinship care should be exempt from the two-child limit on benefits and tax credits? The limit is intended to deter people from having more than two children where they cannot afford them, not to deter or punish kinship carers who take on the care of vulnerable children who might otherwise go into care. That distinction was accepted by the Government. Will they please now implement the commitment that they gave to this House on 27 January 2016, quite explicitly and without reservation?

[Baroness Buscombe]

My Lords, I ought to make it clear that, as the noble Baroness will be aware, there is no punishment. If a family has already had two children of their own, there is nothing to stop them taking on other children as kinship carers. In that case, those children will be exemptions to this rule.

Pension Schemes Act 2015 (Transitional Provisions and Appropriate Independent Advice) (Amendment No. 2) Regulations 2017

Baroness Drake Excerpts

Wednesday 29th November 2017 Grand Committee

[Lord Jones (Lab)]

My Lords, I thank the Minister for her measured exposition. I note that in the Explanatory Note the word “survivor” crops up. Does she have to hand a legal definition of “survivor”?

[Baroness Drake (Lab)]

My Lords, I refer to my interests as set out in the register, in particular that I am a trustee of two occupational pension schemes. The regulations have the effect of removing some individuals—currently estimated at 2,360 per annum—from the need to get regulated advice before accessing those pension pots with a safeguarded flexible benefit, such as a guaranteed annuity rate. This is a consequence of changing the valuation process to determine whether such benefits meet the greater than £30,000 trigger for requiring the individual to take regulated advice.

The term “safeguarded flexible benefits”—the subject matter of these regulations—can feel imprecise, however many times one reads the background paperwork. I appreciate that there are problems with getting data from both contract- and trust-based schemes, but it is not always clear which benefits are included and which are not. I acknowledge that schemes may well need to seek legal opinion to get that clarity so they are sure about how they are applying these regulations to their own schemes.

I thank the DWP officials who quite late into yesterday evening were still answering my various questions. I take this opportunity to ask the Minister two questions about which safeguarded flexible benefits are included. In occupational schemes where members have a right under the scheme rules to convert their AVC saving into scheme defined-benefit benefits, does that provision come under these regulations? Is it possible to give greater clarity on which guaranteed annuity rates in occupational schemes would not be considered money purchase benefits?

Moving on to the risk warning process, I recognise that these regulations sit alongside a new requirement for schemes to send members with safeguarded flexible benefits a tailored risk warning about the guarantees their benefits offer before they proceed to transfer, convert or flexibly access them. Such risk warnings are welcome, but I have a series of linked questions for the Minister on the process around those risk warnings. First, why can the risk warning not be issued immediately following receipt of a member request to transfer, convert or directly access their flexible benefits and before commencing to process the member request? If the warning is received as late as 14 days before any live request completes, evidence suggests that by then individuals are well set on a course of action, inertia takes over and risk warnings are less effective. Some schemes run a system where there are warnings in place: the first thing is the warning, before the full process is triggered.

Secondly, will the risk warning be sent to any other potential beneficiary of the benefits, such as parties involved in a pensions sharing order or, as my noble friend said, possibly survivors? This is a duplicate question, in that sense. Why is the warning restricted to signposting the member to free and impartial guidance? Is this not exactly the type of case where a person should be given almost a default access to the guidance service in line with the recent amendment agreed to the Financial Guidance and Claims Bill? Just a written reference to signposting can often get lost in the detail of the information sent to members, and we are talking about safeguarded benefits.

[Lord McKenzie of Luton (Lab)]

My Lords, I thank the Minister for the introduction and explanation of the regulations. As ever, I am delighted to have the expertise of my noble friend Lady Drake alongside me on these occasions.

The regulations derive, as we have heard, from Section 48 of Pension Schemes Act 2015 and are an integral part of the pension freedoms introduced with effect from April 2015. They focus on the requirements on trustees or managers of a pension scheme in Great Britain to ensure that appropriate independent advice has been received before safeguarded benefits can be converted, one way or another, to flexible benefits.

These regulations, as we have heard, sit alongside other regulations, of the negative variety, which concern requirements for schemes to provide risk warnings where members have the benefit of a GAR—guaranteed annuity rate—which they might otherwise be in danger of relinquishing. Together with the transitional provisions for the advice requirements, these are described in the Explanatory Memorandum as a package and we comment on them on that basis.

The requirement to get regulated advice currently operates when an individual’s safeguarded benefits are valued at more than £30,000. It is suggested that the detail of this requires amendment because the basis of calculation is unduly complicated in some circumstances and can lead to situations where the calculation of the advice threshold exceeds £30,000 but the pension pot size is different. Having two different valuations is said to be confusing, and we understand that point.

The impact assessment explains that these complications exist because the valuation regulations currently applied were previously used only by occupational DB schemes and that the circumstances in which they now have to be applied do not generally have standardised processes in place to value GAR benefits in terms of the current value of the future income they offer. As we have heard, the solution offered by these regulations is to adopt the transfer value of the pot in the calculations determining whether the £30,000 threshold for getting regulated advice is reached.

On an ongoing basis, this will save individuals with safeguarded flexible benefits some £11 million per year in advice fees. As we have heard, it will remove some 12,000 people per year from the need to get advice before they access pension pots, although they will be brought within the risk warning arrangements. This seems to be taking matters in the wrong direction. Changing the basis of calculation might be administratively or arithmetically convenient, but what assessment have the Government undertaken of the appropriateness of removing so many people from the benefit of advice?

It is accepted that individuals will no longer have to meet the cost of advice, but they will not be getting the benefit of that advice either. Of course, fewer requirements for regulated advice means fewer fees paid by individuals, but will the Minister remind us about the circumstances in which individuals can access their pension pot to pay for advice, the limits and the tax treatment? Do the Government have any information about the extent to which this is used?

The Explanatory Memorandum makes reference to the potential for inconsistent treatment of members regarding when advice is required when schemes can exercise more generous transfers. Will the Minister tell us how this issue is to be dealt with? We support the concept of risk warnings and the principle of informing members of their safeguarded flexible benefits. This should be the responsibility of ceding schemes and should happen before proceeding to transfer, convert or flexibly access scheme benefits. It should apply to survivors with safeguarded benefits.

We agree that those already required to take advice should be included in the risk warnings. We support there being no de minimis exemption on the basis of pot size. On timing, which my noble friend raised, it is proposed that the risk warning should be sent at least 14 days before any live request completes. Why can the warning not be sent, as my noble friend asked, as soon as a member request to transfer or access the flexible benefits is received?

The Government’s response to the consultation on these matters has confirmed the approach to the content of the risk warning and the inclusion of two comparable pension illustrations tailored to the member’s age, pot size and contribution rate and with details of guarantees available.

Paragraph 44 states that the Government are not convinced of the need to explain the difference between personalised tax warnings and the statutory money purchase illustrations. Will the Minister expand on the rationale for this position?

Can the Minister also confirm that she is confident that there should be no confusion arising from obligations in respect of retirement wake-up packs and personalised risk warnings? The written element of the risk warning is, according to the impact assessment, to include the signposting to free and impartial guidance—Pension Wise currently or SFGB, or whatever it is going to be called, in due course. As my noble friend has said, this is about the weakest indication of support, bearing in mind that many would previously have had to take advice. As my noble friend proposes, is this not the type of situation now potentially covered by amendments to the Financial Guidance and Claims Bill where individuals can be defaulted to the guidance service with an obligation to demonstrate that they have received guidance before proceeding?

We will not oppose these regulations, although in some respects we consider them a missed opportunity. However, they illustrate the complexity of aspects of our pensions system and the importance of ensuring that individuals are fully supported to understand the value of their pension entitlements.

Financial Guidance and Claims Bill [HL]

Baroness Drake Excerpts

Report: 2nd sitting (Hansard): House of Lords
Tuesday 31st October 2017 Lords Chamber

[Baroness Buscombe]

My Lords, during our debates at Second Reading and in Committee, the noble Baroness, Lady Drake, raised a concern about the Financial Conduct Authority’s focus in approving the service standards for the body. The noble Baroness and other Members of the House stressed the need for the body’s standards to be focused on supporting and safeguarding members of the public. The Government agree that it is important that the standards should be designed with the needs of the public in mind. People’s needs should be at the heart of how services are delivered by the body and its delivery partners.

For example, users of the body’s service will need a variety of delivery channels to be available. They will need the people giving guidance or advice to have the required skills to do so, and they will need information to be presented in a clear and fair way that is not misleading. Members of the public should expect needs such as these to be met by the service, and we expect the standards to be designed to make sure that the body’s services meet those needs.

This amendment makes it clear that the FCA, in undertaking its role to approve the body’s standards, must consider the needs that members of the public have in accessing information, guidance and debt advice through the body. This includes not only people who are using the body’s services, but those who are likely to need information, guidance or advice provided by the body in future. I have already stressed the benefits of including the FCA in the standard-setting process for the body. The FCA currently sets the standards for the Pension Wise service. Figures published last week show a 94% customer satisfaction rating, and these standards are firmly centred on customer needs.

For example, Pension Wise standards include that a guidance provider must have the skills, knowledge and expertise necessary for the discharge of the responsibilities allocated to it; people using the service must be able to change to a different delivery channel; the service must be accessible to people under relevant equalities legislation; and the delivery of the service must be consistent across all delivery channels. These are a few among many Pension Wise standards which are focused on ensuring the service meets the needs of the people who use or will use Pension Wise guidance.

This amendment places a clear obligation on the FCA to have regard to the needs of members of the public when approving the single financial guidance body’s standards. By making this explicit, I trust that noble Lords will agree that this addresses any concerns they may have that the FCA would not take seriously people’s needs when approving the body’s service standards.

I shall turn briefly, if I may, to Amendment 26 in this group. As noble Lords will be aware, the activities of the single financial guidance body are funded by a levy which the Financial Conduct Authority collects from sections of the financial services industry. One part of that industry involves a payment service provider. Clause 10(11) defines a “payment service provider” by reference to the Payments Services Regulations 2009. Since the Bill was introduced into your Lordships’ House, those regulations have been replaced by the Payment Services Regulations 2017. This amendment therefore seeks to update that reference so that it refers to the new regulations.

I hope noble Lords will agree that we should keep the Bill up to date and with this minor amendment we will do so. For this reason, I hope that noble Lords will be willing to accept this amendment. I beg to move.

[Baroness Drake (Lab)]

My Lords, I support government Amendment 25, and thank the Minister for her reflections on the issues raised in Committee. The amendment is a very helpful addition to the Bill because it makes it clear that the FCA, which is an economic regulator, authorises the standards of the new financial guidance body and ensures that they are complementary to the objectives of that body—to improve consumers’ financial ability and their ability to make informed decisions. I support the amendment and thank the Minister.

Amendment 25 agreed.

--- Later in debate ---

[Baroness Buscombe]

My Lords, at Second Reading and in Committee, the noble Baroness, Lady Drake, highlighted the importance of protecting the public and the integrity of the single financial guidance body. I am grateful to her for raising those issues and have considered them carefully. It is essential that people know that they can trust the single financial guidance body, so that they make steps to get the help that they need to make effective financial decisions.

The amendments will make it a criminal offence for someone to hold themselves out as providing information, guidance or advice on behalf of the single financial guidance body when that is not the case. It will prohibit the impersonation of the body itself, in phone calls or via webpages, and of the body’s delivery partners if the impersonator claims to be providing services on behalf of the body. The provisions are designed to make it easier to prosecute individual members of organisations where the offence is committed by an organisation. As with the existing offence for Pension Wise, the new offence is summary only. It proposes a maximum sentence of 51 weeks in England and Wales although, until the commencement of Section 281(5) of the Criminal Justice Act 2003, the maximum sentence is six months. The maximum sentence in Scotland will be 12 months and in Northern Ireland six months. The offence also allows the courts to impose fines—an unlimited fine in England and Wales, and a maximum fine of £5,000 in Scotland and Northern Ireland. Criminal justice is a devolved matter in Scotland and Northern Ireland; that is the reason for the differences in sentences and fines.

The new offence will provide an additional deterrent to existing criminal offences such as fraud. It will send out a strong message that impersonating the new body is illegal and carries significant penalties. In practical terms, the offence will make prosecutions of offenders more likely, because the evidential burden of proving that a person or organisation impersonated the new body is likely to be lower than that required to prove that fraud had been committed. Unlike fraud, there is no need to prove intent to make a gain or to cause a loss for this offence. However, where scams and fraud are particularly serious, the offence does not limit in any way the ability to prosecute the criminals with offences that attract higher sentences—for example, fraud, which carries a maximum custodial sentence of 10 years.

Noble Lords will be interested to know whether the offence will also protect the branding of the existing service providers. The noble Baroness, Lady Drake, suggested in our previous debate that people might continue to recollect the brand names of Pension Wise, TPAS and MAS—the Money Advice Service—before they began to recognise and remember the name of the new body. I reassure noble Lords that we anticipate a controlled transition between the existing services and the new body. The intellectual property of the existing services will transfer to the new body. That will include the brands and website domains of the existing services.

If people search for or telephone the existing services, we expect that they will be automatically transferred to the new service and, where existing brand names are to be discontinued, that would occur only when the new brand had gained sufficient recognition. That will ensure minimal drop-off from people looking for government-sponsored guidance but being unable to find the correct website or telephone number. Ensuring that customer traffic is not lost will be important throughout the transition period.

In that way, the opportunity for scammers to exploit public recognition of the branding of the existing services will be minimised. The protection that the new offence offers extends to the brands that the body uses. If fraudsters and scammers pretended to be MAS, TPAS or Pension Wise and the body was still using those brands to market its services, that would also be an offence under the amendment. This provision therefore ensures that the legacy names of the existing services are protected for as long as those brands are actively used by the new body.

The offence will apply to all the services offered by the new body. I trust that noble Lords agree that the amendments provide comprehensive protection for the body and the public. I beg to move.

[Baroness Drake]

My Lords, I support government Amendments 27 and 28, and thank the Minister for her personal efforts on this matter, which are appreciated because it is very important. The amendments are welcome in making it clear that it is a criminal offence for organisations falsely to present themselves as providing a service on behalf of the new guidance body. They are thorough in addressing the actions of the corporate body and the individual officers in those guilty organisations. I particularly welcome the Minister’s reassurance about handling the TPAS, MAS and Pension Wise brands. That is an excellent statement, which I was not expecting. I compliment the department on having thought through in such detail how it can protect those names—so thank you for that.

However, I shall spend a little time on the issue. Spelling out in the Bill that it is a crime to mimic will act as a powerful deterrent, and a deterrent is certainly needed because of the potential human cost of such fraudulent activity. That is illustrated even now by existing cases, such as the person who received a letter with their details on it, which had not come from their pension administrator, claiming that they wished to leave the company pension scheme. The letter asked them to choose whether to withdraw, transfer or take out the paid-up option and to return all policy documents. The website of the company sending the letter advised that it was legitimate and said to be aware that scammers were imitating it. Then, there was the lady who reported the actual Pensions Advisory Service to the Information Commissioner’s office as she believed that it had rung her and she was registered with the Telephone Preference Service. The number was traced to a company bearing a near identical name to TPAS. There are numerous other cases of people being contacted by companies mimicking the public pension advisory services, offering a pension review and persistently pressing individuals to sign to transfer a DC pot; or offering a free pension review and sending a courier round to collect the documents; or claiming to be part of a post-Brexit government-sponsored pensions review.

These impersonators are ingenious in their hunt to claim fresh victims. The documented work of several government agencies, be they police, the Revenue or the regulators, reveals the extent of organisations implying that they are regulated when they are not, some falsely carrying warning messages against scams. A mechanism designed to protect consumers is now being used to dupe them. The Financial Services Compensation Scheme, further to previous public warnings about fake emails from fraudsters promising compensation payments, has issued a new warning about a scam website using the logos of the FCA and the Prudential Regulation Authority to give it false credibility. The Pensions Regulator has just put out a further release advising that it has launched new online warning messages, using animation, circulated via Facebook, Twitter and YouTube, urging consumers to keep their eyes and ears open for scams.

The new financial guidance body will have a substantial remit and a considerable reach out to the public. The damage that can be done to the body and the interests of consumers by those falsely claiming to be providing its services, be they on finance, debt or pensions, could be considerable if not controlled. I support these amendments, which provide a welcome strengthening of the Bill, and thank the Minister for bringing them forward.

Amendment 27 agreed.

--- Later in debate ---

[Lord Sharkey]

I will speak very briefly to Amendment 29A in this group. I am very grateful for the support of the noble Baroness, Lady Altmann, the noble Lord, Lord McKenzie of Luton, and the noble Earl, Lord Kinnoull, who have added their names to it.

As the Minister said, the amendment would add to government Amendment 29, the case for which she put eloquently and convincingly. If I may paraphrase, Amendment 29 deals essentially with the provision of information about the availability of financial guidance. It is an amendment about signposting, as I think the Minister said. Subsection (1) requires the FCA to,

“make general rules requiring specified authorised persons to provide information about the availability of financial guidance”,

to persons whose descriptions are “specified in the rules”. Actually, the wording says that such information must be provided to the,

“descriptions of persons specified in the rules”.

I am not sure that you can provide information to a description of a person—but the intent is clear even if the wording is rather odd.

Subsection (2) allows the FCA to decide when a duty to provide the information set out in subsection (1) actually applies. We agree with those provisions, but we believe that they should be extended beyond simple signposting. They should be extended to allow the FCA to require persons of a specified description to be referred for financial guidance and so that the FCA has the power to decide in what circumstances and how this duty of referral should apply.

The government amendment deals only with information about the availability of guidance; our amendment has the power to refer for guidance. In both cases the powers are given to the FCA, which has unfettered discretion in deciding how, when and to whom these powers are to be applied, both as to providers and as to customers of these providers. There is no requirement in either case that the FCA acts universally across providers and across customers. Both Amendments 29 and 29A, taken together, require the FCA to make rules requiring the provision of information about the availability of financial guidance and rules requiring specified providers to refer specified customers for financial guidance. How all this might happen is left to the FCA to decide.

The first part—the government part—is a requirement to signpost. The second part—our part—is a requirement to refer. It seems sensible to have both weapons in the armoury. Signposting is a good idea in principle, even if it has a somewhat chequered and contested success rate or even effective compliance rate. Successful reference for guidance is, we know, likely to produce an effect. All the Pension Wise service evaluation data, which we have discussed several times in this House, shows that to be the case. In both cases—signposting and referral—the FCA may, at its discretion, decide which providers and which customers should signpost or refer, or be signposted or be referred.

It has been a constant theme in our debates on the Bill that in this country people are not financially well educated and do not have confidence in their own ability to handle financial matters, and that dangerous financial ignorance and misunderstandings are widespread. Amendments 29 and 29A, taken together, will allow the FCA to make decisive interventions about signposting and referral among groups it sees as most needing this kind of help. I had hoped that the Minister would see that her amendment was complemented and strengthened by ours and would be able to accept it in the spirit in which it was offered. Having listened carefully to the Minister, I now sense that that may be unlikely.

[Baroness Drake]

My Lords, obviously, I welcomed government Amendment 29, because it addresses an issue that I raised in Committee. However, I am also persuaded by the arguments used in Amendment 29A, which gives to the FCA the discretion to define the circumstances in which providers would be required to refer people to the impartial single financial guidance body—a reference probably driven by the characteristics of a vulnerable group at risk of making a poor decision. The FCA would define those circumstances. Because under this amendment it can and does, it would not create a blizzard effect of referrals for financial guidance which overreaches the function of the new body, nor need it undermine the new body’s ability to focus on those most in need of guidance. This amendment clearly gives the FCA the duty and the statutory authority to nudge or default people into impartial financial guidance in those circumstances which the FCA specifies. In specifying the circumstances, it will have consulted with the single financial guidance body.

The recent FCA Financial Lives Survey identified that 50% of adults—25.6 million people—are financially vulnerable on one or more characteristics. The single financial guidance body cannot possibly solve a systemic problem of that scale, nor should we take the risk of trying to overload it so that it cannot effectively discharge its key remit. But it can make a material difference by improving the financial capability of those most in need of support. However, to do that, those most in need of support need to use the guidance, and this amendment would give the FCA the complementary authority to enable those most in need of the guidance to be referred to it.

I know that it is possible to list a whole series of regulatory requirements on information and disclosure but the ever-increasing evidence is that they simply do not work when it comes to protecting vulnerable consumers. They need more—they need guidance or other levels of protection.