Pension Schemes Bill [HL]
Baroness Drake ExcerptsWednesday 4th March 2020
(5 years, 4 months ago)
Grand CommitteeRead Full debate Pension Schemes Act 2021 View all Pension Schemes Act 2021 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 4-IV Fourth marshalled list for Grand Committee - (2 Mar 2020)
Baroness Drake (Lab)
My Lords, I shall speak to Amendments 90 and 91, which carry further the spirit of Amendment 96, which was tabled by the noble Baroness, Lady Janke. My amendments call on the Secretary of State, within six months of the passage of the Bill, to conduct two reviews: on how legislation could provide for people to receive a contribution towards auto-enrolment pension savings when they are relevant carers—what is now popularly called the carers’ top up—and on the sex equality impacts of auto-enrolment in workplace schemes and how legislation and policy could correct any inequalities identified.
I start by giving recognition to the DWP and the Pensions Regulator for the successful rollout of auto-enrolment. It is true that many more people, including women, are now saving, but various sources of data evidence show a persisting gender pensions gap. The message, whatever the source of the data, is the same. The gap arises from design features in the pension system and as a consequence of the systemic problems that too many women and carers face. In summary, carers are subject to a financial penalty in their income and pension because they are undertaking caring responsibilities, which is reinforced by stereotyping, cultural norms and employer behaviour.
Some newly published research on pensions by the Pensions Policy Institute, which was sponsored by the master trust Now: Pensions, puts the case for further reforms and reveals that on average, women have 55% lower pension income than men. The average annual private pension income for men aged 55 plus is £8,620; for women, it is £3,920—a considerable gap. Despite the record number of women in employment—now 72.4%—many will reach retirement age with significantly less. The figures vary, but they are in the same ballpark of £100,000 less saved than men. Women are more likely to work part-time or take time out of work while caring for children or, further down the line, to care for elderly or ill relatives, leaving them with interrupted pension contributions and limited earnings opportunities. Inequalities experienced during working-age life deliver lower incomes in retirement. Even when women work full-time, they still, on average, earn almost £6,000 less than men.
There are compelling figures here: 36% of women in the labour force work part-time. Of the 13.4 million employed women in the UK, around 3 million—23%—fall below the qualifying earnings threshold of £10,000 in any given job to get access to the benefits of auto-enrolment. Only about 37% of the population eligible for auto-enrolment are women.
The noble Baroness, Lady Altmann, is campaigning on how the tax system disadvantages a significant number of low-paid women and men, consequently reducing their pension pots. Millions of people at some point in their lives will have given up work or worked part-time to care, most of them being women. Carers’ savings pots are not only smaller, but evidence shows they are often used to cover the cost of the caring they are undertaking. The economic contribution of carers is still insufficiently recognised in UK public policy.
We need women to have children. If they did not, the economic consequences would soon become apparent. We need carers to take responsibility for kinship children, saving the taxpayer considerable cost. If carers did not look after their elderly or disabled relatives, the health and social care cost borne by the state would rise exponentially. In fact, Carers UK estimates that the economic value of the contribution made by carers in the UK is £132 billion a year.
Caring responsibilities impact carers’ participation in the labour market, but they also damage their long-term earnings potential—it just carries on through. It is estimated that for each year out of employment, the hourly wages of women decrease by approximately 2% for women with A-levels or above, and 4% for women with fewer qualifications. Amendment 90 is directed at a reform whereby a carer’s financial credit is paid through the social security system towards their private pension. I will take a little time on this because there is quite a big community out there which believes that this is an important issue and really wants Parliament to hear its strength of feeling on it.
Prior to the introduction of the flat-rate new state pension in 2016, carers were credited with entitlements in both the first-tier basic state pension and the second-tier state earnings-related pension. However, now that the earnings-related system has transferred out of the state to the workplace pension provision through auto-enrolment, that second-tier carer’s pension has been lost, It has just gone; it sort of fell through the crack in the totality of reforms. We had a hard-fought victory for women to secure the public policy principle that caring was an economic contribution for which pension credits were given in both tiers of the pension system—the basic tier and the earnings-related tier. Until that principle was restored, carers had been relatively disadvantaged, adding to the pensions gap. I am a bit reluctant to start in 1902, but if we start with the fight to get women these carer’s credits in both the pension systems, when the earnings-related system was introduced in 1975, something called the home responsibilities protection was introduced, It was not as good as a full carer’s credit but it was a start, although it applied only to the basic state pension. Then in the Conservatives’ Social Security Act 1986 they planned to extend that home responsibilities protection to the second-tier earnings-related pension but they never laid the regulation, so it never happened.
Rowing forward, we had the Child Support, Pensions and Social Security Act 2000, which introduced the second state pension to replace the existing SERPS earning-related element. It provided for carer’s credit for the second earnings-related pension in addition to the state pension. That was a victory. A lot of hard work went into winning that principle, and it applied to carers who looked after a disabled person for more than 35 hours a week or a child under six, but still people argued that it should be improved again beyond that. In the Pensions Act 2007, which, importantly, brought in a major part of the state and auto-enrolment reforms, carer’s credits and how they operated for the basic state pension and the earnings-related element were improved considerably for carers of children up to the age of 12 and the qualifying threshold for carer’s credits for caring for disabled people was lowered to 20 hours.
Those principles, that you credit carers because it is an economic activity—it is a real contribution to the economy—and that you do it in both the basic state pension and the earnings-related pension, were a victory that people thought they had banked, but suddenly, as a consequence of the reforms, that crediting is only in the basic state pension—it no longer exists through auto-enrolment and workplace pensions. The Fawcett Society, along with an increasing number of other organisations—there is quite a build-up of consensus around this—supports the introduction of a carers’ top-up, re-establishing the principle that people thought had been achieved and consolidated in 2007.
A seminal report from Insuring Women’s Futures, the product of a voluntary market-led programme under the Chartered Insurance Institute, looked at improving women’s financial resilience. It has brought in a range of people—business leaders, policy experts, regulation experts, academics and so on—and looks at the root causes of women’s lack of financial resilience.
I am probably using a lot of words to say it, but the report basically says that more needs to be done to allow all women access to pensions, to support women in attaining an adequate pension—reflecting their whole contribution to society and the economy—and to allow them to enjoy pensions parity in the workplace. It also says that the complexity of pensions, together with the wider financial risks in life that have an impact on women’s pensions journey, means that women need differentiated support and guidance at moments that matter, such as when they step out from or step down in their engagement with the labour market because they are doing the economically important job of caring.
Much was achieved by auto-enrolment—it is tempting to say that I would say that—and the Government were right to focus their energies on its successful implementation. I never argued with a Conservative Minister who said, “That is the priority and that is what we must do”; that was right. However, this gap in the pension position of many women relative to men persists, and there is a growing consensus—it is not just a few arbitrary voices—saying that the issue needs fresh attention.
A principle embedded in the reform of state and private pensions is that women should accrue retirement income in their own right. That is reflected in the fact that, since 2016, women no longer accrue state pension rights through their spouse’s entitlement and that, in a DC world and with pension freedoms, women’s hopes of depending on their partner’s accrued long-term savings are much weaker. The environmental factors shout out that the Government have been successful in consolidating auto-enrolment. However, this is an area of outstanding weakness and needs a new look because, in summary, women make a huge economic contribution by caring, for which they face financial penalties. There is an expectation that they will accrue pensions in their own right, but the support given to them to achieve that still has significant weaknesses.
My amendment and that of the noble Baroness, Lady Janke, ask the Government to review and report on the nature of the pensions gap and on further measures to address it, because the demographics clearly show that the one thing that the state depends on is that women will be carers—even more so going forward. However, as a consequence, they end up with reduced financial resilience when they come to retirement.
I am conscious of there being competing issues on Report; there are some very important issues in this Bill that noble Lords wish to return to. I am trying to take that into account. There is, however, a growing consensus. It is not aggressive; it is just saying—as I saw when I ran through the history of how we built up the carer’s credit—that the Government need to give this attention. There is consolidated auto-enrolment and a range of areas where the Government are reviewing what they can do, but they have not put centre stage how efficiently this is working for carers; they need to look at that.
Again, conscious of the competing demands on Report, I urge the Government to respond to the noble Baroness, Lady Janke, and myself as positively as they can to show those communities that are building up together—the gender alliance can be quite formidable when it gets truly organised—that there is a responsiveness that says, “Yes, we will review these issues.” I have loads of emails that say, “I am so glad you are raising this”, and, “Say this and say that.” I have probably overindulged and not covered half the list of things that people want to say. They will, however, be listening to the Government’s response because they want the Government at least to accept that they should give some attention to this issue again.
Baroness Drake
I want to take the first opportunity to come back on this because I am conscious that a lot of people are interested in this debate.
I am a little disappointed that the major part of the Minister’s contribution was a bit of a push-back, saying that the Government are all over this and that this is fine when evidence for that is not there. He did become more conciliatory at the end; I hope that the department find a way to bring together an eclectic group of people.
I simply disagree with some of the things that the Minister said. In reference to the small pots, the DWP did a great deal of work on the earnings threshold. It was set at a much lower level based on the DWP’s work, though perhaps not under the current Administration. In the review that led to that threshold going up—originally, it would have gone up to as high as £12,500 if a stroppy group of Peers had not turned up every time automatic enrolment earnings threshold regulations came before the House; in the end, somebody waved the white flag and said, “Oh, freeze it, we can’t face that lot every year”—the reason given, which is on the record, is that if you take it lower than £10,000, it produces small pots, which are inefficient to the industry. Well, that is irrelevant. This is a piece of public policy for mass coverage. That is what made me so angry. It was not based on a gender analysis; it was based on inefficiency in the industry. I invite noble Lords to go back to the report that gave the reason for raising that earnings trigger. There is evidence there. It may be that more modelling or more debate about the behavioural impact of coming significantly below the trigger is needed, but that work was done by the DWP. It may have a different view now but its view a few years—perhaps 10 years—back presented the evidence in a different way.
I do not disagree with the Minister that automatic enrolment has had a real benefit for women—if they are in the eligible population. If they are not, they cannot be among the people gaining from the upside of auto-enrolment. Many carers are precisely the people who are not in the eligible population.
I entirely accept that for a lot of women, an absolute improvement arose as a result of the new state pension, but the pension gap—the pay gap—is about relativity. If you give a man a pay rise of £10 and you give a woman a rise of £5, you can stand up and assert, “The woman is £5 better off: let us celebrate!”. What you have missed is that the pay gap has increased, because the man got £10. The benefits of the single state pension improve the relative position of a lot of people, not just the low-paid but huge numbers of people right across the public sector in DB schemes and generous DC schemes who, for a most modest increase in their national insurance, got that improvement in the state second pension together with the benefits of auto-enrolment or their defined benefit pension system as well. Therefore the relative position of carers was disadvantaged. Yes, their absolute position over a certain period—or after a certain period, although that is not the case—has improved, but the relative relationship did not, because everybody had that benefit from the reform to the state second pension.
I do not want to dwell on that, but there is a community out there who, if I did not do them justice and push back, would say, “Jeannie, why did you just accept those arguments?” I take the Minister’s final remarks about working for the Government. There are groups out there in industry, employers, academics and gender groups who want to work this out with the Government. I hope that the Government can find a way fairly soon to bring together a working group, or whatever. There is a feeling, “How does one communicate to the Government the growing feeling on the gender pension gap?” I felt that I had to push back, because there was a slightly dismissive approach that there was no gender pension gap problem, and there is.
Earl Howe
I hope that the noble Baroness will not go away with that impression. We are aware that there is a gap to be bridged. The key point I would ask her to reflect on is that, despite the desire to go faster in this area, there is a risk in doing so. We have learned lessons from the phased approach that we have already adopted. It was the right approach. The gradual approach brought everybody on side. We gathered evidence in the process; we are still gathering that evidence, and the evidence-based approach is the other watchword to bear in mind.
Pension Schemes Bill [HL]
Baroness Drake ExcerptsWednesday 26th February 2020
(5 years, 4 months ago)
Grand CommitteeRead Full debate Pension Schemes Act 2021 View all Pension Schemes Act 2021 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 4-II Second marshalled list for Grand Committee - (24 Feb 2020)
Baroness Neville-Rolfe (Con)
My Lords, I look forward to hearing what my noble friend the Minister says about this and whether the sort of concerns that have been expressed are already dealt with somewhere else. A very good point has been made.
I want to ask a question on Amendment 27, in the name of the noble Lord, Lord Vaux. He talks about the value of the assets of the scheme, and my noble friend Lady Altmann made this point; there is a big difference between an actuarial valuation and an insurance valuation in a scheme. If you were to base this on an insurance valuation, you would catch quite a lot of pension schemes, including those which probably could pay some dividends. I was a little concerned about that, and I would like some clarification when we come to wind up on what is intended.
Baroness Drake (Lab)
My Lords, I support the principle behind Amendment 27, in the name of the noble Lord, Lord Vaux, but equally I have sympathy with the comments of the noble Lord, Lord Flight. When it comes to dividends, the mischief may be done regarding money leaving the sponsoring employer’s company before the regulator can mobilise its full armoury of powers. This is particularly true where the dividends are paid to parent companies overseas, where pursuing a legal route by the regulator may be difficult, even more so if we leave the EU, because jurisdictions will change—except possibly foreign-owned UK banks, where in fact the PRA has the power to intrude pre-emptively on dividends going over to the parent company. To that extent, there is an element of precedent, and the PRA would take into account the debt in the pension fund in considering the sustainability issue when it strikes a view on dividends paid to the parent company.
I give credit to the proactive approach that the regulator is now taking to red flag where there is a kind of big ratio between dividends and deficit payment. However, that must be retrospective. The issue is capturing that mischief at the point when the money leaves the company; I am particularly concerned about where it is a foreign-owned company. Therefore, if some way could be found—perhaps by the regulator working with the department—to embrace dividends in some way in the notifiable events regime, that would be helpful. It is a problem, and once the money is gone, it is difficult to chase it, particularly when you have to go to jurisdictions where the power of TPR may not be strong.
Baroness Sherlock (Lab)
My Lords, the Committee should thank the noble Lords, Lord Vaux and Lord Balfe, for having enabled this debate. One gets a high quality of debate on pension Bills; it is very well informed indeed.
We have been left with three questions. Is there a problem? Is it getting worse? And what are we going to do about it? I think there is a pretty much unanimous view around the Committee that we have a problem and that it is not going to disappear. As more DB schemes close, they will pay out more in pensioner payments, leaving them less to invest and reap returns, so they will start de-risking their remaining investments. This is the moment we have to address that.
We know that there is a problem. As my noble friend Lady Drake said at Second Reading, the Work and Pensions Select Committee report highlighted that half of FTSE 350 companies paid out 10 times more to shareholders than to their DB pension schemes. However, in some ways the key issue is the ratio, which was touched on by a couple of noble Lords. TPR certainly mentioned it in its annual funding statement, and it drilled down in its Tranche 14 Analysis for DB pension schemes, published last May. It looked at the FTSE 350 companies that sponsor DB schemes as the main or primary sponsoring employer and said that it found that
“The median ratio of dividends to DRCs”—
deficit repair contributions—
“has increased from 9.2:1 in 2012 to 14.2:1”,
in the latest figures available, so it has gone from nine to 14 between 2012 and last year. Clearly, this is going in the wrong direction. It noted:
“This is mainly driven by the significant increase in aggregate dividends over the period, without a similar increase in contributions.”
Therefore we have a problem. The regulator itself said in its last funding statement that it remains
“concerned about the disparity between dividend growth and stable DRCs”,
and it highlighted recent corporate failures. If the regulator is concerned, then the Minister should be concerned.
The Minister’s argument may be that the regulator already runs an internal control system, where it flags high dividend payments. A number of noble Lords, however, made the point that it is retrospective and that, depending on the valuation, it may not pick up all the areas where there is a problem. Noble Lords also cited TPR’s funding statement, which set out the key principles behind its expectations about what should happen when an employer is weak, the ratio is high, or the employer cannot support the scheme.
Can the Minister assure us that there are not more cases coming in with high ratios and long recovery plans? The TPR says it is going to stop that. Is it not a problem anymore, or is there a target for when it will not be? TPR could refuse to agree a funding strategy for a scheme in various ways but, as my noble friend Lady Drake pointed out so clearly, that is, first, retrospective; secondly, what happens if the money goes overseas? I would be grateful if the Minister could pick that up.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Stedman-Scott) (Con)
I thank the noble Lords for tabling these amendments and all noble Lords for their contributions to this debate. It would be helpful to consider these amendments together, as they seek to address the payment of dividends when a defined benefit pension scheme is in deficit. One amendment seeks to prevent the payment of a dividend unless signed off by the trustees and the regulator; the other would require the sponsoring employers of pension schemes to submit a notice and accompanying statement to the regulator and to trustees when the employer declares a dividend in certain circumstances.
I do not think that the amendment to the Companies Act would have the effect that I believe is intended, as there are various technical problems with it. I will not go into these now, as it is more important to address the principles. The Government agree that defined benefit pension schemes in deficit should get a fair proportion of the resources available to employers.
The Government believe that they are taking a proportionate approach. The problem is not the payment of dividends; it is that some companies do not pay enough into their defined benefit pension schemes as part of the recovery plan when the scheme is in deficit. We believe we can address this problem proportionately without inhibiting reasonable dividend payments, which are a legitimate and essential part of normal business activity. We inhibit investment in UK business at our peril. A strong, profitable employer is the best possible protection for pension scheme members.
In addition, I should point out that pension schemes are also major investors. They receive significant dividends, and inhibiting or blocking these payments would impact their income and funding position.
The Pensions Regulator can, and does, take action to ensure that sponsors treat their schemes fairly. For example, in one case, a defined benefit scheme is now better funded after an upfront payment of £10 million, a reduction in the recovery plan length from 13 to seven years, annual deficit recovery payments of £3.7 million and a commitment to stop dividend payments for six years.
Information about dividends paid by these companies may be needed, but this is already available for public companies and can be obtained for private ones. The regulator takes this into consideration when it is looking at risks to a pension scheme. It would be disproportionate and unnecessary to require the sponsoring employers of pension schemes to submit a notice and accompanying statement to the regulator when the employer declares a dividend. Provided that a suitable recovery plan is in place, and the employer has the resources to pay the additional deficit repair contributions agreed, the company should be able to choose what it does with the remainder of the distributable reserves—it is rightly subject to business priorities.
But we do need to do more to ensure that the regulator can take a tough line where needed. That is why we are taking a power in this Bill to set out more clearly in secondary legislation what is required for an appropriate recovery plan. The secondary legislation will be informed by the regulator’s consultation on its revised funding code, and will work in tandem with it. The code will set clear expectations on what is an acceptable recovery plan, include guidelines on recovery plan length and structure, and support the regulator in enforcing these standards.
I turn now to some of the specific questions raised. The noble Lord, Lord Vaux, asked why the requirement under new Section 69A for a notice and accompanying statement cannot be included the Bill. New Section 69A is intended to give the Pensions Regulator information about events that pose greatest risk to pension schemes. The range of events for which a notice and accompanying statement must be given will be varied and will likely change in time. As such, the Government consider this to be a matter that is appropriate for secondary legislation. By setting out the range of events that are subject to the notification requirement in regulations, this enables new events to be added, or existing events to be removed, in order to keep pace with changing business practices.
The noble Lord, Lord Vaux, asked: why do we not propose to require a notice and accompanying statement when a dividend is paid? Dividends paid by companies with a pension scheme surplus, or those where an appropriate recovery plan is in place and deficit repair contributions are being paid, are unlikely to have adverse impact on the scheme or require any mitigations. A notice and accompanying statement about dividend payments by these companies would be unnecessary, and handling this information would be an ineffective use of the Pensions Regulator’s resources. Instead, the regulator will focus on companies where schemes are in deficit and where an appropriate recovery plan is not in place. Information about dividends paid by these companies may be needed, but this is already available for public companies and can be obtained by private ones.
The noble Lord, Lord Vaux, asked: if dividends are not limited, is there not a risk that all the money will be gone before the needs of the scheme are considered? The trustee and sponsoring employer agree an appropriate funding target and deficit repair contributions to eliminate any deficit over an appropriate period. If an appropriate recovery plan is not in place, the regulator has powers to impose a schedule of contributions. Provided that an appropriate recovery plan is in place and the agreed deficit repair contributions are being paid, it is right that how other resources are used is a matter of business priorities. It would not be helpful or proportionate for the payment of dividends to be notified to the regulator.
Of course, there is a risk that excessive dividend payments could be made, which could result in the sponsor being unable to meet its obligations to make payments as part of the recovery plan, but this is very much the exception rather than the rule. We think that intervention to prevent dividend payments in some circumstances poses a greater risk of inhibiting investment in UK business and that our approach can deter inappropriate dividend payments and put things right if that happens.
The noble Lord, Lord Sharkey, requested information about the regulator’s success in engaging with employers, and we will write to the noble Lord with that information.
Baroness Drake
Does the Minister accept that a regime for notifying dividends is not necessarily the same as stopping the payment of dividends?
Baroness Stedman-Scott
I will carry on and answer the question from the noble Lord, Lord Flight, and then I will answer the question asked by the noble Baroness, Lady Drake.
The noble Lord, Lord Flight, asked what the Government are doing to reform the UK’s dividend regime. The Department for Business, Energy and Industrial Strategy is considering the case for requiring companies to disclose information about their distributable reserves from which dividends are paid. The Institute of Chartered Accountants in England and Wales has been asked to provide technical advice and options for doing so. It is expected to report shortly. Sir Donald Brydon’s recent independent review into the quality and effectiveness of audit recommended that directors make a statement that the proposed dividends would not threaten the existence of the company and are within known distributable reserves, and, in some circumstances, that the distributable reserves should be subject to audit. Further consultation on this is expected later this year. The department has welcomed the Investment Association’s recommendation to companies that they should publish a dividend policy setting out the board’s long-term approach to making decisions on the amount and timing of return to shareholders.
In answer to the question asked by the noble Baroness, Lady Drake, yes, notifying is different from stopping. We do not want to stop them; we want to focus on ensuring that an appropriate recovery plan is in place. Things can be put right.
The noble Baroness, Lady Bowles, asked how the Pensions Regulator knows what resources the employer has and whether a recovery plan is appropriate. In assessing the appropriateness of a recovery plan, the Pensions Regulator looks at the strength of the employer covenant, which is a measure of the ability of a scheme’s employer to support the scheme now and in future. The regulator takes account of a range of employer-specific information, including underlying trading strength and trajectory, profits, cash flows, debt structure, market risks and opportunities, asset strength, and insolvency risk. This can come from a range of sources including statutory accounts, publicly available information such as credit ratings, market analysts’ views, sectoral analysis and analysis performed by the trustees, the employer or its adviser. The regulator will also focus on how a company uses the cash flow it generates to assess whether a scheme is receiving an appropriate and fair share of these amounts. Greater clarity will be provided through the provisions we are proposing in the Bill, and the regulator intends to set clearer guidelines on recovery plan length and structures for schemes in different circumstances. This will help to improve regulatory grip and make enforcement easier.
The noble Baroness, Lady Bowles, also asked how we will ensure that companies with significant available resources address defined benefit pension scheme funding shortfalls more quickly. Most employers do the right thing and treat their schemes fairly, but we know that this best practice is not universal and that some employers are not devoting a fair proportion of available resources to paying down deficits. We are determined to do something about this.
Baroness Stedman-Scott
The last word I would use to describe the noble Baroness is simple; that is not the case. She and other noble Lords have raised some interesting, valid and appropriate points on this issue. I believe that the best way that we can delve down into this and, I hope, give the comfort that they are looking for, is to meet to discuss it outside the Committee, which we are happy to do.
Baroness Drake
I would just say that my argument is not with the noble Baroness personally; she will be provided with the arguments to answer the points we are asking. The argument she put was that the recovery plan would be the route through which one would deal with an excessive payout of dividend, but the recovery plan is also based on an assumption about the strength of the sponsoring employer covenant. If, after that recovery plan is settled, there is a huge dividend payout—particularly to an overseas parent—which impacts the strength of that covenant, I cannot believe that the regulator would sit there and say, “We will wait until the next actuarial valuation and the new recovery plan before we act”. It would act: it has a range of powers to act straightaway. If there is a material change in the constituent elements that went into the recovery plan, the regulator has to act. A major excess of dividend payment from the sponsoring employer could materially impact the covenant strength. That is already in legislation. We just want to capture the impact of the high levels of dividend payment.
Baroness Stedman-Scott
I thank the noble Baroness for the points she has made. I think we should put this into the conversation that we will have to try to give answers which give noble Lords the comfort they need. My officials will call a meeting, and we will look at Hansard and try our very best to answer all the specific questions and allow further debate to resolve these issues.
Baroness Drake
Baroness Drake
My Lords, I shall speak to Amendments 37, 47, 48, 60 and 61. Amendments 37, 47 and 60 place in the Bill that there can and will be a publicly owned pensions dashboard. The Minister may give ministerial assurances that it is intended that there will be a public dashboard; unfortunately, ministerial Statements have currency only until the next occupant. There is no requirement in this Bill as drafted that would require a future Secretary of State to make such a provision.
The amendments require that the dashboard ecosystem will include a publicly owned dashboard. The Government’s current policy,
“supports the coordination of an industry-led dashboard”—
leading—
“to the creation of a dashboard service designed, developed and owned by industry”.
The whole of the UK’s second-tier pension system will be mandated to participate in dashboards owned in the industry, giving rise to major public good considerations, yet nowhere in that wording is there a requirement to set up a publicly owned dashboard, nor is there one in the Bill.
The DWP feasibility study launched at the end of 2018 set out a clear direction of travel towards a single non-commercial dashboard before moving towards multiple dashboards. By April 2019, in responding to the consultation on their study, the Government had shifted their view to commencing with the simultaneous testing of commercial dashboards. Of the 125 replies to the consultation, 15 were from individual citizens and according to my calculation, nearly 60% were from financial service providers and associated trade bodies and six were from consumer bodies. By late 2019, in a previous version of this Bill, and in this Bill and its impact assessment for this version, commitment to a publicly owned dashboard has faded further.
Amendments 48 and 61 do not prevent commercial dashboards being authorised. They seek to ensure that the Government secure a level of confidence in operational delivery, security, consumer protection and insights into customer behaviour by commencing with a publicly owned pension dashboard for at least a year, and that the Secretary of State should lay before each House of Parliament a review of that service before commercial dashboards enter the market. A year is not a long time, given the scale of the consumer interest. If the Secretary of State believes that there is good reason for taking longer than a year, then my noble friend Lady Sherlock and I will be guilty only of prescience.
Baroness Drake
My Lords, this is the first chance Parliament has had to scrutinise this major project. I am not asking for the project to be rushed. I am the last person who would want to set up MaPS or the DWP to fail. I wish them well and to succeed. I do not have a negative view, but I want this project to work.
The Minister gave assurances that there will be a public dashboard, but it is not in the Bill. I could cite various previous occasions when Ministers made assurances about things but they did not materialise. If we accept, which I do, the sincerity with which the Minister has committed to there being a publicly owned dashboard, I see no reason why a little amendment to the Bill could not capture that assurance, so that the next Secretary of State does not change their mind.
On the ownership of the dashboard, I was actually rather worried—not reassured—by one comment the Minister made. He said that ownership in the long term, with a whole series of unknowns about how things will develop, is something that will need to be considered. That may be true; however, given those unknowns and that we do not know how policy will develop, the delegated powers in this Bill should not take to themselves the ability to make fundamental changes to the ownership of the dashboard. Because it is of such significance, that issue should come back to Parliament. Does the Minister accept that point?
Earl Howe
I believe I am right in saying that while your Lordships’ Delegated Powers Committee had some trenchant things to say about the delegated powers in the rest of the Bill, it felt pretty relaxed about the powers in Part 4, because it recognised that it was absolutely necessary to have the kind of flexibility I referred to. We must take it that the committee looked at these matters in some depth. Clearly, it did not feel constrained in criticising the nature of the powers in other parts of the Bill. I think the delegated powers here are necessary. I do not think we should be frightened of them, but I can see that the accumulation of them might appear off-putting to noble Lords.
Baroness Drake
I am conscious that I was a member of the Constitution Committee. The issue is not that simply the Government do or do not want flexibility. The issue is that such extensive delegated powers are being taken in the absence of significant areas of policy being settled. That is not the correct way to approach legislation.
Earl Howe
I hear what the noble Baroness says. It is not that the policy is not settled but that the implementation of the policy is not settled. We know broadly what we want to achieve but the detail has yet to be worked through; including the functionality and the way that the liability model will form. We do not know all the answers; we know some of the answers, but not all of them. I do not accept that the policy as such is a blank sheet of paper.
Pension Schemes Bill [HL]
Baroness Drake ExcerptsTuesday 28th January 2020
(5 years, 5 months ago)
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Baroness Drake (Lab)
My Lords, I draw attention to my interests in the register. I too welcome this Bill, but I believe that parts need strengthening.
The Pensions Regulator protects pensions from the moral hazard of employers avoiding their responsibilities, but the BHS and Carillion cases raise two questions of public interest to tackle today: is the regulator deploying its existing powers in an effective and timely manner, and are the powers in the regulator’s armoury sufficient to prevent employers avoiding their responsibilities?
The regulator’s recent activities have focused on using and testing the full range of existing powers. This Bill strengthens them—which is welcome—extending when an employer can be required to contribute money into a scheme, and enhancing powers to collect information and sanctioning those that mislead on corporate activities.
During the Work and Pensions Select Committee inquiry into BHS, documents from the regulator revealed that on 9 March 2015 the chair of trustees advised the regulator that they were still awaiting from the company information needed to make the moral hazard assessment. Two days later the company was sold.
Clause 107 introduces new civil and criminal sanctions. I welcome the Government’s intention to address what they describe as plundering by “reckless bosses”. But concerns have been expressed, including by the Association of Pension Lawyers, that a power designed to prevent future BHS and Carillion-type situations has been drawn incredibly widely, such that it could criminalise minor actions or ordinary business activities and expose third parties such as banks and even trade unions to sanctions, giving rise to consequences not properly considered. I certainly support stiffer sanctions, but these concerns should be probed, given the range and credibility of the people expressing them. Will the Government give consideration to the concerns expressed?
Part 5 provides for more enforceable scheme funding standards. One important supporting amendment—referenced by the noble Lord, Lord Vaux—was also captured well by the Government Actuary in evidence to the Work and Pensions Select Committee. The committee’s report said that
“the average ratio of deficit recovery contributions to dividends has declined”
over the last five years for FTSE 350 companies, meaning that more than half of these companies paid out
“Ten times more … to shareholders”
than to their DB pension scheme—largely due to the significant increase in dividends over the period, without a similar increase in contributions.
Financial technology can deliver a pensions dashboard and make a real difference to savers, finding their lost pots and allowing them to see in one place their total pensions savings, state and private, to assist them in making important decisions. A finder service could search the records of all schemes to identify data matched to an individual, which could be presented to the individual to view, transforming accessibility for more than 22 million people. But public good cannot be traded off against commercial interests. Notwithstanding future government decisions on commercial dashboards, there must be a public good dashboard, the governance, control and ownership of which must be with a public body.
The CEO of the Pensions Regulator appeared to be with me in that view, and he emphasised to the Work and Pensions Select Committee on 25 June 2019 that
“there must be a public dashboard.”
It would be extraordinary if the Government compelled all private, public and state schemes to release the data of over 22 million individuals and £7.6 trillion of pensions assets, when individuals can access their own data only in the commercial marketplace because the Government have denied them access to a safe space in a public good dashboard.
The public are with me on this. Surveys of public attitudes conducted by the Money Advice Service, the DWP, the ABI, ComRes and others all found that the public wanted an accessible public good dashboard, publicly owned, which they would trust more than a commercial dashboard. The DWP feasibility study on dashboards in December 2018 stated that
“evidence would suggest that starting with a single, non-commercial dashboard … is likely to reduce the potential for confusion and help to establish consumer trust.”
In April 2019, in response to the consultation, the Government altered their view and referred to simultaneous testing of commercial dashboards and an openness to further functionality, taking multiple dashboards beyond their initial find and view purpose. The impact assessment states:
“Option 2: Government to legislate: (the preferred option). Government supports the coordination of an industry-led dashboard … This will lead to the creation of dashboard service designed, developed and owned by industry, facilitated by Government”.
This is a remarkable statement. There is no public dashboard mentioned, only a commercially owned pensions “dashboard ecosystem”, with no limit on its functionality. There is a reference tucked away in paragraph 50 to the industry being expected to create a non-commercial dashboard—a loose expectation, undefined.
Equal in importance to ownership is consumer protection. The provisions in Part 4 are far too weak. As Which? argued in its briefing,
“it is absolutely crucial that there are strong regulations in place to prevent potential harm against consumers from the misuse of commercial dashboards by providers. The bill does not go far enough to mitigate against this harm, and should be amended.”
The Bill must establish a high bar for consumer protection at the heart of the dashboard which hardwires the best interests of the savers and the resolution of conflicts of interest in the sole interests of members and beneficiaries. Transactional dashboards should not be allowed without further legislation; they open up a new market, with very significant potential for consumer detriment. We need to understand market and consumer behaviour, with legislation being brought forward before dashboards become transactional.
As has been mentioned, there is also public interest in data standards, the information to be provided, how it is presented, who can hold it and how, and so on. A priority is getting schemes’ basic data fit for release—for many it is not—but demands for further information will come, such as where investments are held and whether they align with the Paris Agreement on climate change.
If the Government compel the release of the data of 20 million to 30 million individuals to commercially owned dashboards, while simultaneously denying the public the right to access their own data through a public good dashboard not owned by the industry, and failing to implement a tough consumer protection regime, then they will fail in their obligation to millions of people. The technology is great and it should be available to people, but in a way that protects their interests.
Efficient ways for workers to share risk are to be welcomed. The Bill allows these collective money purchase schemes to be set up by a single employer or group of connected employers. However, like master trusts, these CMPSs will have to meet a financial sustainability requirement and demonstrate that they have sufficient financial resources to run the scheme for a period of time in the event of a scheme failure, such as employer insolvency and a loss of contributing members, administrative failure or removal of authorisation. As the noble Baroness, Lady Altmann, referenced, it is important to probe how this protection will work and the extent to which the employer who set up the CMP scheme has to financially contribute to the sustainability requirement. This is the issue not of funding the benefits, but of resources to manage a potential failure in a CMP scheme.
I am conscious of the time, so I will be brief. I completely support the noble Baroness, Lady Altmann, in her campaigning on the way the tax system can really disadvantage not only consultants but a large number of low-paid women. I was disappointed that the Bill does not address the gender pension gap. I compliment her on the work she has done, but I want to raise an issue that I keep raising: I will take advantage of my last minute to do so again.
There should be a carer’s credit paid through the social security system towards a private pension, complementing the carer’s credit in the state pension system. Prior to the flat rate state pension introduced in 2016, carers were credited with entitlements in both the first-tier basic state pension and the second-tier state second pension. Now that the second-tier has been totally transferred to the private pension, carer’s credit should not be lost. Prior to 2016, public policy accepted that caring was an economic contribution credited for the first and second-tier pension. Until that crediting is rightly restored, our reforms will have disadvantaged carers.
Baroness Stedman-Scott
My Lords, this has been an excellent debate with excellent contributions. I thank noble Lords for the time they have spent preparing and delivering those contributions. I thank everybody who has taken part. It has been encouraging to hear the positive responses to the measures this Bill proposes. Noble Lords have certainly laid down the challenges we need to address.
The noble Baroness, Lady Sherlock, asked me about our confidence in the Bill. We will have confidence in it if we all work together and turn every stone to make it fit for purpose. I pledge that the Government will do that, and I see no dissention from us working together to achieve that.
I shall deal first with delegated powers and the commitment I made to your Lordships that we will bring forward some examples in relation to Part 1. I do not use the word “trepidation” in conjunction with my noble friend Lady Fookes—it is quite the other way round—but I have her point about Part 3 and the point made by the noble Baroness, Lady Sherlock, about Part 4. We have a wonderful Bill team who are working incredibly hard, and if they tell me they will have them, they will have them.
I understand the concerns raised by some noble Lords in this debate that there are important legal principles at stake before the proposed delegated powers can be exercised properly. In many instances the Government have promised to consult further on the technical substance, particularly in relation in Part 1. There are also instances where there may be a statutory requirement to consult because of a connection to existing legislation. Where there is an intention, promise or legal requirement to consult on the substance of secondary legislation, the legal position is clear: the Government cannot prejudge the outcome. In opening this debate, I said that I have listened to what noble Lords have been telling me, and we are preparing illustrative regulations relating to Part 1 which will be available before Committee. I also pledge to meet noble Lords before Committee to discuss them and all the questions that I will not have time to answer. Noble Lords can see that I have them, so I am not trying to get out of doing the job.
I want to put to bed very quickly the question asked by the noble Baroness, Lady Bryan, about whether we have any plans to increase the state pension age to 75. This is not government policy. The recent independent report recommending raising the state pension age to 75 is not a government report. I hope that gives her comfort.
The multiple dashboard point was raised by numerous noble Lords. The noble Lord, Lord McKenzie, made the point that there should be a single, government-run, non-commercial dashboard to protect consumer interests. We agree that there should be a dashboard that has no commercial aspect. The Money and Pensions Service has made a commitment to deliver such a dashboard.
The noble Lord, Lord McKenzie, asked whether the CDC is just a backdoor to allow employers to close defined pension schemes and impose collective pensions. CDC schemes are unlikely to work well unless the employer and employees are comfortable with the approach. I am sure that employers with open defined benefit schemes are well aware of that. The CBI’s response to our consultation on CDC makes interesting reading. It said that CDC has advantages for both employers and employees and welcomes the opportunity that CDC presents to help fill the gap between defined benefit and current defined contribution schemes.
The noble Lord, Lord McKenzie, was very busy in this debate. He asked why we have not implemented the 2015 Act. Our approach to CDC schemes has developed since, and after much scrutiny we concluded that new primary legislation is necessary to ensure that we get the CDC exactly right for the United Kingdom.
The noble Lord, Lord McKenzie, and the noble Baroness, Lady Warwick, asked why our superfund is not in the Bill. Developing the new regulatory framework for superfunds is a complex task and we are working hard across government and with relevant stakeholders to build consensus on the right approach. We aim to publish shortly our response to the consultation which will set out in more detail our proposals for a future legislative framework. Once this work is completed, we will legislate as soon as we can.
The noble Lords, Lord Sharkey, Lord McKenzie and Lord Vaux, and the noble Baronesses, Lady Donaghy and Lady Janke, raised intergenerational fairness. Fairness between age cohorts has been one of our key considerations from the beginning of our work on CDC schemes. That is why we intend to bring forward scheme rule requirements using regulations under Clause 18. This will ensure that all members, whether active, deferred or pensioner, will share the effects of investment outperformance and underperformance in the same way every year. Should a scheme’s rules not be compliant, it will not be authorised to operate by the regulator.
The noble Lord, Lord McKenzie, and my noble friend Lady Noakes asked how many employers are considering CDCs. It is true that only one company is, namely Royal Mail. However, others are interested. We want to make sure that CDCs work before any future increase.
The noble Lord, Lord McKenzie, asked about automatic enrolment and what the Government are going about the gender pensions gap. Automatic enrolment has been a great success and is already having an impact on the gender pensions gap. Participation in pension saving among eligible women in the private sector has risen from 40% in 2012 to 85% in 2018, which is equal to the figure for men. We have made great progress on that.
Baroness Drake
The Minister is accurate. I do not disagree with her description of what is happening with women in the eligible population for auto-enrolment, but it is the millions not in the eligible population for auto-enrolment whom we are particularly concerned about and whom those figures do not address.
Baroness Stedman-Scott
The noble Baroness, Lady Drake, is absolutely correct and I am glad that she pointed out the difference to me. I would like to meet her before Committee to address that issue, if she is happy to do so.
The noble Lord, Lord McKenzie, asked why the Government have not legislated for the measures in the 2017 automatic enrolment review in this Bill. The Government have set out their ambition to lower the age at which people are automatically enrolled from 22 to 18 and to abolish the AE lower earnings limit in the mid-2020s. Our approach will be to expand the coverage and increase the amounts put into retirement savings by millions of working people, focusing on younger people and lower earners.
The noble Baroness, Lady Donaghy, and the noble Lord, Lord McKenzie, raised the subject of the self-employed. The 2017 automatic enrolment review concluded that the current automatic enrolment framework is not suitable for the self-employed. They are a highly diverse group and one solution will not necessarily fit all. The Government have committed to carrying out research trials to form the evidence base and future policy.
The noble Lord, Lord Sharkey, asked what the Government are doing to tackle investment scams—an issue raised by other noble Lords. These scams are outrageous. The Government are committed to raising awareness about pensions scams to help protect consumers. As part of this, the Financial Conduct Authority launched its ScamSmart campaign to raise awareness of the steps that people can take to avoid investment scams. During the campaign, 173,000 users visited the ScamSmart site, and 376 users were warned about an unauthorised firm.
The noble Lord, Lord Sharkey, raised the need for a stronger nudge towards guidance, as provided for in Sections 18 and 19 of the Financial Guidance and Claims Act 2018. In that Act, we committed to test different approaches to providing a stronger nudge towards Pension Wise guidance. Pension Wise began this work on Royal Assent of the Act and it was picked up at the launch of the Money and Pensions Service. Trials commenced in October 2019. We are on course for those trials to finish and for qualitative work to be undertaken ready for the publication of the evaluation report in the summer.
Many noble Lords raised the question of whether there should be one dashboard or multiple dashboards, and the views on that were mixed. My noble friend Lady Fookes asked why there should not be just one, but I was interested to hear the noble Lord, Lord Sharkey, say that multiple dashboards will give consumers more choice in where they access pension information. Multiple dashboards will help to meet the varied needs of the 24.5 million people with pensions and wealth. I am sure that this is a topic on which we will have extensive discussions prior to and during Committee.
The noble Lord, Lord Vaux, made the point that the payment of dividends will not be a notifiable event. It would be disproportionate to require every dividend payment to be notified to the regulator. Hindering dividend payments could affect pension schemes, as many are shareholders in companies with DB schemes.
The noble Lord also raised the Dutch scheme. Despite communication issues in Holland, for generations the Dutch scheme worked as though it were a DB scheme. Where adjustments needed to be made, these came as a surprise. We will ensure that in communications to members, particularly at key points throughout a member’s pension scheme journey—on joining and annually, and before and during retirement—CDC schemes are clear and transparent that benefit values may go down as well as up.
The noble Lord, Lord Vaux, asked what safeguards there are to ensure that transfer values are fair. The cash equivalent transfer value represents the actual calculated cash value of providing members’ benefits within the scheme. Legislation provides a framework for the calculation of transfer values that trustees must follow.
The noble Lord also asked why companies should not be stopped from paying dividends if their pension schemes are in deficit. We do not believe that it is sensible to stop companies paying dividends to shareholders, even when a scheme is in funding deficit. Government intervention to block dividend payments could discourage investors and weaken the business, further reducing the security of the defined benefit scheme.
The noble Lords, Lord Vaux and Lord Sharkey, and others raised a lot of questions on that subject. It is not that I am not trying to give an answer; it is just that I am unable to do so at the moment, but I will get back to them.
My noble friend Lady Altmann asked what the sanctions will be for pension scheme providers who do not comply with compulsion. If a pension scheme provider fails to comply, it might be subject to penalties, including fines. The regulator will have a range of powers, including issuing compliance notices, penalty notices and fines.
My noble friend also raised the question of simpler annual benefit statements. The industry delivery group will consider the outcome of the consultation on simpler statements when making recommendations on the information to be included on dashboards.
I pay tribute to my noble friend Lady Altmann, whose tenacity on net pay allowance and tax relief is legendary. She has taught me everything that I know about it. That was a matter raised also by the noble Lord, Lord McKenzie. I am not trying to get out of anything here but it is a matter for the Treasury. However, the Government recognise the different impacts of the two systems. To date, it has not been possible to identify any straightforward or proportionate means to align the effects of net pay and relief at source. However, as announced in our manifesto, the Government will conduct a comprehensive review of how to fix this. We say that we will do it.
My noble friend Lady Altmann asked whether the new scheme’s funding requirements support the plumbing pension scheme. I am afraid that I am not able to give a response to that at the moment but I would love to meet her and give her the information that she requires, as well as making it available to other noble Lords.
I am taking a moment to look through my responses in an attempt to be fair to all noble Lords, although I do not think that I am doing a great job.
The noble Baroness, Lady Drake, raised the important point of carer’s credit and the family carer top-up. The Government recognise the valuable role of carers and the fact that they are disproportionately women. The Government Equalities Office gender equality road map, published in July 2019, set out plans to support carers. They included helping people to return to work after taking time out for caring. We are working closely with colleagues in the Money and Pensions Service to empower people to take informed decisions about saving throughout their lives. I am sure that we will revisit this very soon.
We have talked about the gender pay gap—a matter raised by the noble Baronesses, Lady Drake and Lady Bryan. As I said, automatic enrolment has helped lots of women—I have given the statistics. We want to empower them to take informed decisions about saving throughout their life, but we have made progress in bridging the gap.
The noble Baroness, Lady Drake, talked about the consumer protection regime. The Government recognise that the regulation of dashboard providers is critical to maintaining public confidence. My department has been working with HM Treasury and the FCA to decide how best to ensure that the regulatory regime is appropriate and robust.
The noble Baroness, Lady Drake, also raised the important issue of the security of data on pension dashboards. Ensuring the security of data is key to establishing consumer confidence in the dashboards. The Government are committed to ensuring that the infrastructure includes a level of identity assurance that satisfies the good practice established for national cybersecurity.
The noble Baroness, Lady Drake, and my noble friend Lady Noakes raised the subject of the Pensions Regulator. They questioned the impact of the new criminal offences and wondered whether their scope was too wide. We do not want to stop legitimate business activity, such as lenders taking security for normal financing activities. The Government are clear that businesses must be allowed to make the right decisions to allow them to develop and grow.
The majority of employers want to do right by their scheme. However, we must ensure that sufficient safeguards are in place to protect members’ pensions from the minority who are willing to put them at risk—I mention no names. The Government are committed to the Money and Pensions Service providing a dashboard, and MaPS committed to providing a dashboard in its 2019-20 business plan.
I turn to the contribution of my noble friend Lord Young. His powers of foresight are legendary; I am envious, and I am sure that many in both Houses would like to have them. The same is true of his oratory powers; he is very eloquent and his Front-Bench contributions are much missed in this House. We will meet before Committee. Time is really getting on now. I will respond directly to my noble friend Lord Young on the points he raised, and will have an answer to the point raised by my noble friend Lord Flight on equity release.
My noble friend Lady Noakes asked whether there are adequate appeal processes. The answer is yes and I would be very happy to talk her through those at a later time. Her description of a “half-baked dashboard” is interesting. We undertook a significant consultation and got more than 120 responses. These were published in April 2019 and were taken into account during the development of the legislation. We will continue to seek all views as we develop regulations.
The noble Baroness, Lady Donaghy, raised a point about holders of multiple part-time jobs. Currently, where an individual does not earn more than £10,000 per annum in a single job but earns more than the lower limit of the automatic enrolment qualifying earnings band, they can opt in to a scheme in one job and receive the mandatory pension contribution from their employer on earnings over that level.
The noble Baronesses, Lady Hayman and Lady Jones of Whitchurch, talked about climate change. This is a subject close to our hearts and I will meet with them both to talk in more detail. The Government are absolutely committed to tackling climate change and recognise the concerns that have been raised. We have already introduced legislation to require pension schemes to state their policy. In building on this, the DWP continues to work with the industry.
On dashboards, we expect that initially there will be no more information than is already available; to start with, simple information will become available. The delivery group may make recommendations for adding more detailed information as the needs and interactions of users develop.
Guaranteed Minimum Pensions Increase Order 2019
Baroness Drake Excerpts(6 years, 5 months ago)
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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.) (EU Exit) Regulations 2018
Baroness Drake Excerpts(6 years, 6 months ago)
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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.
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.
Occupational and Personal Pension Schemes (Amendment etc.) (Northern Ireland) (EU Exit) Regulations 2018
Baroness Drake Excerpts(6 years, 6 months ago)
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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.
Benefits: Reductions
Baroness Drake Excerpts(6 years, 8 months ago)
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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(6 years, 11 months ago)
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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(7 years ago)
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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 ExcerptsTuesday 1st May 2018
(7 years, 2 months ago)
Lords ChamberRead Full debate Financial Guidance and Claims Act 2018 View all Financial Guidance and Claims Act 2018 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 97-I Marshalled list for consideration of Commons amendments (PDF, 67KB) - (30 Apr 2018)
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.