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

Debate between Baroness Drake and Lord McKenzie of Luton

Tuesday 15th January 2019 Lords Chamber

[Lord McKenzie of Luton (Lab)]

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

[Baroness Drake (Lab)]

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

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

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

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

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

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

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

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

Debate between Baroness Drake and Lord McKenzie of Luton

Wednesday 29th November 2017 Grand Committee

[Baroness Drake (Lab)]

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

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

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

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

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

[Lord McKenzie of Luton (Lab)]

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

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

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

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

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

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

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

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

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

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

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

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

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

Financial Guidance and Claims Bill [HL]

Debate between Baroness Drake and Lord McKenzie of Luton

Report: 1st sitting: House of Lords
Tuesday 24th October 2017 Lords Chamber

[Baroness Drake]

I will carry on the spirit of the contribution of the noble Lord, Lord Kirkwood. In Committee, several Peers ran several amendments trying to capture this issue of vulnerability—whether it was vulnerability because of a health shock or because of some standing reason. As the noble Baroness, Lady Finlay, explained in moving her amendment, the attraction of Amendment 11 is that it does not seek to list or define. It just tries to capture the principle that there is a category of people who become or who are vulnerable for a series of reasons, and they need to be addressed.

The purpose of the single financial guidance body is to achieve a series of improved public and individual outcomes by improving a person’s financial capability, but a person’s capability cannot be improved—it just cannot happen—if they are excluded from the market for financial services or denied the access or the means to make good decisions. As my noble friend Lord McKenzie and I frequently say, the fundamental, immutable requirement of financial capability is that you are included and have access. You cannot begin to become capable without it. One feels the sense around the Chamber, which I hope the Minister is able to find a way of recognising, of a wide concern and a very constructive amendment. It is not overprescriptive but allows the financial guidance body to recognise that it needs to address this problem.

[Lord McKenzie of Luton]

My Lords, this has been a good debate. I emphasise that we support the amendment, which is no surprise given that I put my name to it. I am sorry that we pre-empted someone: I am happy to step back.

This is a very elegant formulation, which stops a whole list being produced. It instinctively recognises that people might be vulnerable for reasons to do with their circumstances but that this is not necessarily something endemic to them. There are fluctuating circumstances which particularly fit that description: in our short debate we have had discussion of learning disabilities, mental capacity and addictions. A broader issue, but still within the key definition of vulnerability, is isolation. The noble Viscount, Lord Brookeborough, made a very telling point on that. The noble Lord, Lord Kirkwood—I keep calling him my noble friend; we have debated too often over the years—spoke about the impact of vulnerability because of destitution. We should recognise that people may be perfectly fit and able-bodied and have all their mental capacity but if they are broke and have no money then they are potentially vulnerable or in vulnerable circumstances.

The formulation is powerful and succinct and we support it. I hope the Minister will find some way of incorporating it into the Bill—even if not in the precise wording, although it seems excellent to me—so that we can support it.