Pension Schemes Bill

Debate between Lord Bradley and Lord Bourne of Aberystwyth

Thursday 5th February 2015 Lords Chamber

[Lord Bourne of Aberystwyth (Con)]

My Lords, I apologise that this amendment may not be quite as highly charged as the previous one. It corrects an oversight in relation to the amendments that we made to the transfer provisions on Report and simply inserts the provision relating to when a member’s transfer rights fall away into Northern Ireland legislation.

The amendment makes a consequential amendment to the existing transfer legislation, which sets out when a member’s rights to a transfer fall away. It puts beyond doubt that the right to a transfer value falls away after either three months or any extension period granted by the legislation. This amendment and the one applying to the legislation relating to Great Britain have been made in response to industry concerns that the current situation could place trustees in a position where the right to transfer somehow still subsisted, although the trustees could not action the transfer.

I also take this opportunity to clarify the purpose of Amendment 30, which I spoke to on Report. That amendment inserted a new limb into an existing regulation-making power in Section 101F(6A) of the Pension Schemes Act 1993. It created a power to disapply, in prescribed circumstances, the right of prescribed persons to transfer pension rights acquired as a consequence of divorce. In describing that amendment, I stated that it restored an existing power. I now understand that this is in fact a new power which expands upon the narrower existing power. I hope that noble Lords will accept this new amendment to align Northern Ireland legislation, along with my clarification of the operation of Amendment 30 made on Report.

As this is the final amendment to which I will speak, before I sit down I would like to take a moment to thank the Opposition for their constructive and positive engagement in this process—I do so sincerely; their engagement has been valuable. I also thank colleagues across the House who have dedicated their time and expertise to scrutinising and improving the Bill. It has been the House of Lords at its best. I think we can all say that your Lordships’ House has done a good job in scrutinising the Bill and that it goes back to another place a much better Bill than it was before.

A significant amount of work goes into preparing a Bill and supporting its passage through both Houses, to say the very least. This Bill contains a wide range of measures and has involved a number of different policy teams from the Department for Work and Pensions, Her Majesty’s Treasury and the Ministry of Justice. They have worked unstintingly and with dedication. I am grateful to them and to the excellent draftsmen in the Office of the Parliamentary Counsel, who have worked very hard on this Bill.

I am also indebted to my noble friend Lord Newby for his considerable work and assistance on the Bill, to my right honourable friend Steve Webb, the Minister for Pensions, for his advice and help, and to my noble friend Lord Freud for his support. With that, I beg to move.

[Lord Bradley]

My Lords, I again thank the Minister for clarification of the amendments, and these are obviously acceptable. I also thank him for the clarifications he has given throughout the Bill’s passage, as well as for the courtesy that he and his fellow Ministers have shown to this House and for the help that he has given to the Opposition as we have debated the issues. I also thank the civil servants for the support that they have given to the Opposition in answering the questions that we have raised.

As we come to a close in the Bill’s passage through this House it is worth reminding ourselves that on Second Reading we considered two Bills together—this one and the then Taxation of Pensions Bill—as it had been recognised that the two were inextricably linked. That has clearly been shown to be the case during our deliberations generally and in our consideration of this amendment. The speed between the announcement of pension freedoms and flexibilities in the Budget last year and implementation of the policy in April of this year has led to a huge number of amendments and policy clarifications, with many significant regulations still to come. Let us remember that implementation is barely nine weeks away.

Although broadly supporting the policy, we have tried during these debates to ensure that the interests of the public have been paramount and properly protected. We have sought and received assurances from the Government that the policy is clear and fully thought through, including in our debate today on the treatment of pension funds for income-related benefits and care costs assessment. However, in the light of today’s debate, I remain deeply concerned. We have been assured that not only will the crucial guidance guarantee service be fully in place by April but that it will have capacity and its staff will have the expertise and be fully trained to deliver a quality service for the 320,000 people who may seek guidance in the first instance.

Obviously, we are pleased that the Government accepted our argument for a second line of defence to give the public greater protection. We will continue to monitor closely the implementation of the powers vested in these two pieces of legislation. However, we remain concerned on many issues. These issues will be closely scrutinised both inside and outside this House to ensure that the public’s interests are properly and fully thought through and protected.

Finally, I thank all noble Lords who have participated in our debates. I would particularly mention the support I have been given by my noble friends Lady Drake, Lady Hollis, Lord McKenzie and, of course, Lord McAvoy and Lady Sherlock.

[Lord Bourne of Aberystwyth]

My Lords, I thank the noble Lord for that. Clearly, we recognise the support that we have had generally for these important pension freedoms. The noble Lord, Lord Hutton, who is not in his place, certainly spoke of this as a revolutionary measure—which it is in many ways. I accept that guidance is at the heart of it. We need to ensure that these freedoms are exercised with proper guidance and proper advice, which is where this House has been quite properly engaged, and recognise that there is still ongoing work to do, to which we will return.

Pension Schemes Bill

Debate between Lord Bradley and Lord Bourne of Aberystwyth

Tuesday 27th January 2015 Lords Chamber

[Lord Bourne of Aberystwyth]

My Lords, I address the House as one half of the Welsh mafia or the Taffia—a charge I reject totally of course.

These amendments are consequential in nature. They address an omission in the current legislation. In the course of checking through the changes made as a result of the Bill, omissions in the Pensions Act 2014 came to light. The amendments needed all relate to overriding legislation—that is, when legislation overrides provision in the scheme rules such that the legislation is treated as if it were part of the scheme rules.

Without these amendments, any overriding requirements made under regulations under Schedules 17 and 18 to the Pensions Act 2014 would not be treated as part of the scheme rules for the purposes of the Pensions Act 2004 and subsisting rights provisions in the 1995 Act, leading to inconsistency in the way in which overriding provisions are dealt with and a potential lack of clarity.

I beg to move.

[Lord Bradley (Lab)]

I shall briefly respond as this is the first set of government amendments. I thank the Minister for the courtesy of writing to me with his proposals around these amendments; it is very helpful to have that in advance, as it limits the need for further debate on these matters. Maybe I should declare an interest in that my great-uncle was Welsh, but I do not claim to be part of the Welsh mafia. With those remarks, I am supportive of the amendments.

Pension Schemes Bill

Debate between Lord Bradley and Lord Bourne of Aberystwyth

Tuesday 27th January 2015 Lords Chamber

[Lord Bradley (Lab)]

My Lords, the purpose of this amendment is to give the Government the ability to cap the charges on flexi-access draw-down pension products. It is important because it gives the Secretary of State the power to take action if it is clear that unfair charges are being levied. When the freedoms and flexibilities commence in April, there will likely be a large increase in the number of people using these products, and it is right that the Government are able to protect these savers.

In Committee, I laid out why this measure is necessary. A possible 320,000 savers will be looking to turn their pension pots into retirement income in April, and the charges that can be levied can be high. As Which?, the consumer body, has pointed out:

“Even for a simple fund structure from a low-cost provider, the annual management charge might be 1% plus an administration fee of £250 per annum, which would cover the cost of income payments and income level reviews, for example. A more common total cost is about 2% p.a. which is similar to that for an investment-backed annuity. Worryingly, we came across cases where the charges for a SIPP package and advice were 4%-4.5%”.

We remain concerned about ensuring that good products are available for low and middle-income savers, as well as for those who have large pension pots. As I have said, we should remember that the median pension pot is around £30,000. The cap on charges for these products on decumulation, alongside those in place during accumulation, could be a very important stage. As NEST pointed out in its recent consultation on the subject:

“The solutions we as an industry develop over the next few years could affect the lives of millions of people in old age. We absolutely cannot afford to fail consumers. Leaving their retirements to chance is not an option”.

As I said in Committee:

“A good first step would be to remove the possibility of savers being open to what may be termed rip-off charges. This should apply in the decumulation stage as well as the accumulation stage, because a rip-off charge is a rip-off charge, wherever a consumer finds themselves at the end of it”.—[Official Report, 12/1/15; col. 614.]

I accept that I have fallen into the jargon that we promised we would not pursue during our deliberations. Decumulation is when you are turning your pension pot into a decision on retirement income.

The Minister replied that this amendment was not required, because:

“There already exist regulation-making powers which allow the Government to cap charges on the new flexi-access draw-down funds. The Government took broad powers under the Pensions Act 2014 to limit or ban charges borne by members of any pension scheme. These powers would allow us to cap charges on draw-down funds offered by a pension scheme, including any new flexi-access draw-down funds, if this proves necessary to protect consumers”.—[Official Report, 12/1/15; col. 617.]

This is obviously potentially very welcome, but I want take the opportunity provided by this amendment to probe a little further. Can the Minister advise the House today precisely which part of the existing legislation the Government would use were they to take action? Further, can he say whether the Government have any plans to take such action and when that would arise? I am trying to establish not just whether the Government believe that it is possible to do that but whether they would use the powers that the Minister says they now have. Even if the powers already exist—I look forward to the Minister’s response to my question—accepting this amendment would send a powerful signal that the Government intended to protect savers in this market from April. I hope therefore that the Minister will indicate that the Government are ready and willing, as well as able, to do so. I beg to move.

[Lord Bourne of Aberystwyth (Con)]

I thank the noble Lord, Lord Bradley, for his contribution and recognise that “decumulation” might be jargonistic—I am sure that I have used jargon myself—but “rip-off” certainly is not, and I think we agree that we do not want rip-off charges. The Government are as much against them as the Opposition, I am sure. I will do my best to answer the specific points that the noble Lord raised.

This amendment was tabled by the noble Lords, Lord Bradley and Lord McAvoy, also in Committee earlier this month, so noble Lords will forgive me if I have dealt with some of this previously. As I mentioned on that occasion, the Government take the issue of charges on pension products very seriously and are committed to taking action where there is evidence of consumer detriment. I can reassure the noble Lord on that point.

I am pleased to be able to say that the Government have powers under the Pensions Act 2014—specifically, Section 43 and Schedule 18 confer them—to limit or ban charges borne by members of any pension scheme, including any new flexi-access draw-down funds, if this proves necessary to protect consumers.

Similarly, the Financial Conduct Authority has wide-ranging product intervention powers, including the ability to cap charges on flexi-access draw-down funds. These existing powers cover all the institutions that could offer such draw-down arrangements.

Flexible draw-down is a relatively niche product, aimed primarily at those savers with large pension pots. HMRC data from the start of 2014 showed that only 5,000 people per year have entered flexible draw-down, which has been in place since 2011. Flexible draw- down is clearly not currently a mass-market product.

With the introduction of the new flexibilities from April of this year, we expect this to change. We have given the industry a great deal of flexibility to develop a range of more flexible retirement income products and offer consumers greater choice. We want to see a vibrant and competitive marketplace, bringing forward products that meet consumers’ needs and enable consumers to make reasoned choices. The Government believe that a competitive market is the best way to ensure that products are well priced and we expect the expansion in take-up of draw-down products to exert a downward pressure on charges. Moreover, as scheme members can withdraw variable amounts, draw-down products generally require more administrative activity than accumulation-phase products. With the introduction of the new pension flexibilities, none of us can be absolutely certain how this market will develop. This was a point made quite fairly by both the noble Lord, Lord Bradley, and the noble Baroness, Lady Drake, in Committee.

Imposing a charge cap on draw-down at this stage, before we have seen the charges on the new products that are currently under development, could therefore risk setting a new norm and arrest any reduction in charge levels, or set a charge that is too low to be deliverable and stifle the draw-down market altogether. We therefore need to monitor how this market develops from April to gather further evidence about average charge levels before making any decision on what would be an acceptable charge level. The Government and regulators are therefore monitoring the development of new retirement income products, including the next generation of draw-down products, very closely.

Innovation and flexibility in the retirement income market must, of course, be for the benefit of consumers, not at their cost. The Government welcome the FCA’s commitment in its recent policy statement that it will commence a full review of its rules in relation to the retirement income market in the first half of this year. If these measures reveal evidence of sharp practice—rip-off charges, in the noble Lord’s phraseology—the Government and the FCA have the powers to act quickly to protect consumers. Along with the Financial Conduct Authority, we are also legislating to require reporting of charges and information on transaction costs by trustees and independent governance committees respectively of all workplace pension schemes from April this year. We are also committed to consulting further in 2015 on the transparency of additional costs and charges, to enable comparability across schemes; we will be considering draw-down funds as part of this work programme. We covered some of these transparency issues in Committee.

[Lord Bourne of Aberystwyth]

As I understand it, it would certainly cover the point that the noble Baroness makes about draw-down products; it will not simply be a question of reporting.

To conclude, while the Government share the concerns about member-borne charges, the Government and regulators are equipped with the powers to cap charges in all pension schemes, including draw-down products. We feel that intervening in the market at this stage would be wrong: intervention must be based on evidence, but it is an intervention that the Government have not shied away from making elsewhere in the market. We are closely and proactively monitoring developments in the decumulation market to consider whether there is need to use those powers.

In the closing remarks of the noble Lord, Lord Bradley, in Committee, he stated his hope that we would act in the interests of consumers if we were to see excessive charges in the new draw-down products that come to market. I can reassure him that this remains our intention. I therefore respectfully ask the noble Lord to withdraw his amendment.

[Lord Bradley]

I am grateful to the Minister for that response, and for taking up all the issues that I raised under the amendment. I noticed with interest his view that the competitive market will put downward pressure on charges, and I sincerely hope that that is the case. Monitoring of that situation will be essential to ensure that products do not come on to the market that seem attractive to customers, but with charges attached that are, because of the products’ complexity, hidden within them.

I welcome the fact that the Government have clarified to the House exactly what powers they have to deal with the matter, and the assurance that the Government not only have them but will use them in conjunction with the regulators if it is quickly seen that it is necessary to protect consumers from excessive charges. With those assurances, and with the certainty that this will be closely monitored both inside and outside the House, I beg leave to withdraw the amendment.

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[Lord Bourne of Aberystwyth]

My Lords, I thank the noble Lord, Lord Bradley, for his contribution and for allowing me to provide an update on NEST. I will do my best to answer the specific point on state aid rules.

I stress at the outset that the Government have broadly two concerns about the amendment. One of them is the state aid rules. The second is that we want NEST to focus on its mission to provide assistance to small and micro-employers in the run-up to 2017, when the restrictions will be lifted. However, I will go through some of the background and do my best to answer the specific points—or point—raised by the noble Lord, Lord Bradley.

As promised—and as acknowledged by the noble Lord opposite—during the Committee proceedings I wrote to the noble Lords, Lord Bradley and Lord McAvoy, copying it to other noble Lords who had participated in the debate, clarifying, I hoped, a point relating to state aid and the removal of the annual contribution limit and transfer restrictions from 1 April 2017. It must be noted that that letter referred to it certainly not being contrary to state aid rules to lift the restrictions on 2017. That was, of course, the consent given. However, it does not follow that it could be done any earlier; otherwise, a particular date would not have been chosen for lifting the restrictions. This is where the issue is: whether if a particular date is given, and consent is given for that date, it follows that you can lift the restrictions at any date before. This is the difference between us. I do not think it follows, where an application has been made for a particular date and consent is given, that you can predate it. However, I will try to come back to that.

[Lord Bradley]

My Lords, following that last point, perhaps I might quote again from the letter, which I accept I may not be interpreting correctly. It says:

“The Commission also agreed that the removal of the restrictions on individuals making transfers into and out of NEST could be brought forward to coincide with the introduction of automatic transfers if this were earlier than April 2017”.

[Lord Bourne of Aberystwyth]

Indeed, and I will come on to that point but it relates only to the transfers, not to the amount. The amount remains subject to the consideration of 2017. There are two limbs to this and I will try to cover that point, because we may be looking at a date slightly earlier than April 2017 if we succeed in achieving the aim of the automatic transfer. That limb of it could be there somewhat earlier but not the other limb, as it were. Let me proceed and, I hope, deal with the points. If not, I am sure that the noble Lord will let me know.

Later this week noble Lords will again, I hope, debate the National Employment Savings Trust (Amendment) Order, laid before Parliament on 16 December 2014. Its purpose is to implement the proposals that we have been talking about. As noble Lords will be aware, NEST was established to support automatic enrolment by ensuring that all employers had access to a low-cost workplace pension scheme with which to meet their duties, regardless of the size or profitability of their workforce. Its design, including the annual contribution limit—I think this is the point at issue, and is subject to the 2017 designation—and transfer restrictions, which admittedly could be somewhat earlier, focuses NEST on this target market of low to moderate earners, and smaller employers whom the market found difficult to serve. I believe that I mentioned this in Committee but I may be wrong on that point.

NEST already has more than 1.8 million members and 10,500 participating employers. NEST is doing what it was set up to do: supporting automatic enrolment, and doing so very successfully. During winter 2012 and spring 2013, the Department for Work and Pensions undertook a call for evidence on these issues of limitation. It sought to assess whether there was evidence that the annual contribution limit and the transfer restrictions placed on NEST were preventing it serving the market it was designed for. The evidence showed that although there was a perception that these two constraints were a barrier to access, the reality was that they did not prevent NEST from serving its target market. Seventy per cent of small and medium-sized employers expect to contribute no more than the legal minimum to their workers’ pensions. Until October 2017, minimum contribution levels are a total of 2% on a band of earnings. There is already a substantial amount of headroom within the annual contribution limit, which is currently £4,600, for contributions above the minimum. For example, minimum total contributions for a median earner on £26,000 a year would be £405.

In relation to transfers, individuals in other schemes who can already make transfers rarely do so. Evidence shows that more than 80% of workers fail to transfer their previous company pension funds across to their new employer’s scheme. In addition, around only 14,000 small and medium-sized employers currently provide trust-based workplace pension schemes that could be transferred to another pension provider. Of these, the Department for Work and Pensions estimates that around 5,000 might be able to consider a transfer of their workplace pension provision to NEST, which is equivalent to less than 1% of all firms.

Around 1.2 million small and micro-employers have yet to enrol their eligible workers. There is most likely to be a supply gap in this segment of the market, which underlies the rationale for establishing NEST. This is where the Government want NEST to focus. This is because of a shortage of provider capacity and the fact that other providers have traditionally not found it possible to serve this market at reasonable cost. Implementation on this scale needs NEST, the only scheme with a public service obligation, to be able to play a significant part in meeting this challenge.

If the House will indulge me for a moment, automatic enrolment has been a tremendous success so far, with more than 5 million workers enrolled into a workplace pension. Opt-out rates have been lower than expected, at around just 10%. We would not be in this position if not for the consensus that automatic enrolment has enjoyed from all sides of this House over the past decade. However, we must not be complacent. The 5 million workers enrolled so far work for only 43,000 employers. The challenge for the next phase of the rollout of automatic enrolment is to ensure that the remaining 1.2 million small and micro-employers are able to enrol their eligible workers.

The Department for Work and Pensions estimates that NEST will need to accept between 45% and 70% of those employers, ensuring that supply gaps are addressed. The scale of this challenge should not be underestimated—for example, during 2016, around half a million small employers will need to enrol their workers, which is an average of more than 40,000 employers per month.

With this in mind—and taking account of the evidence —the Government determined that removing the annual contribution limit and transfer restrictions immediately to address the perception of complexity would not be a proportionate response. Conversely, doing nothing would not be consistent with the Government’s broader policy objectives to encourage increased saving and consolidation of pots. We therefore concluded that legislating now to remove these constraints in 2017 was a balanced approach. Legislating now will address any current perception that the constraints are discouraging small employers from using NEST to meet their automatic enrolment duty. It will also send a clear signal that NEST will be on a similar footing to other schemes from 2017.

--- Later in debate ---

[Lord Bourne of Aberystwyth]

My Lords, I thank the noble Lord, Lord Bradley, for introducing this amendment, which we recently considered in Committee. In his speech in Committee the noble Lord explained the intent behind this amendment, as he has again today: to protect savers who put their pension savings into an annuity with the same provider they save with because of failure to shop around for a better deal. In Committee he also referred to the concept of empowering schemes to undertake the responsibility for ensuring the member gets the best deal, using their advantages of bulk buying. We can all understand the noble Lord’s motivation but, for reasons I will give, I do not think that the amendment would achieve these ends.

If the amendment were agreed to, an individual would be able to buy an annuity from their savings provider only if it was recommended by an independent annuity broker. This requirement would catch everyone who wants to buy an annuity from their savings provider, not just those who accept an annuity from their scheme without having looked for a better deal on the open market. It would also affect those who have made extensive investigations on their own behalf and who would therefore be paying a broker to tell them something they already know.

Moreover, the amendment would not protect consumers from getting a bad deal. I acknowledge that it might limit the providers who could offer that bad deal, but only regarding their existing customers. There would be nothing to stop someone getting a bad deal from an annuity provider chosen on the basis that it has a shop on their high street or appeared first on their internet search, as the annuity broker requirement would bite only if the member wanted to buy an annuity from his existing savings provider. If the broker does not recommend the savings provider, the member will not be permitted to buy an annuity from them. Are we so sure of the competence of all annuity brokers that we should, effectively, take this decision out of the hands of the person most affected by it and put it into the hands of the annuity broker?

On the idea of empowering schemes to undertake the responsibility for ensuring the member gets the best deal by using the advantages of bulk buying, there again appears to be nothing in the amendment to facilitate this. In any case, I remain agnostic on these advantages in the context of an individual choosing what to do with their pension savings. The purpose of the Budget changes is to allow the member to choose from a range of options that suit them best, based on their knowledge of their specific circumstances and wishes. It is not clear how schemes bulk buying annuities for cohorts of members would be able to reflect these choices.

In addition, we must always be careful of the law of unintended consequences—a law that cannot be amended by this House. There would be a real risk that members would simply stop even considering internal annuity products because of the inconvenience and delays, not to mention the extra costs involved in consulting a broker. In fairness to the noble Lord, that point was raised in Committee.

I remind noble Lords that some providers offer guaranteed internal annuity rates which can often be a higher rate than that available on the open market. We should be careful before we do anything which might deter members from taking advantage of such products. As I hope I have made clear, we agree that individuals should certainly be helped in reaching the decision that is right for them and, as noble Lords already know, we have put in place a number of ways in which this help is offered, and via the FCA we have brought forward additional safeguards thereto. However, we do not think that the individual’s decision should ultimately be constrained by others. On that basis, I urge the noble Lord respectfully to withdraw his amendment.

[Lord Bradley]

Again, I am grateful to the Minister for his views on this amendment, so clearly laid out. I was particularly interested in his comment that we should recognise the law of unintended consequences on this amendment. Some may consider it to be true of the whole Bill, but that remains to be seen.

Maybe the reason I am most persuaded to withdraw the amendment is that I will not have to try to pronounce “annuitise” as many times in the future as I have in the last few days. I recognise the points that have been made, and we will be debating further this afternoon matters relating to the guidance guarantee and how robust that will be in supporting people. We are particularly concerned about the number of people who remain within the same scheme and do not seek advice. We will look at that again as these matters unfold further through regulation. In the mean time, I beg leave to withdraw the amendment.

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[Lord Bourne of Aberystwyth]

My Lords, the House will be relieved that this amendment is relatively straightforward. It enables any regulations that are made under new Section 18A of the Judicial Pensions and Retirement Act 1993 to be subject to the affirmative resolution process.

Clause 78 of the Bill provides a power to create a fee-paid judicial pension scheme via new Section 18A of that Act. The creation of such a pension scheme is a legal requirement on the Lord Chancellor as a consequence of the Supreme Court ruling in O’Brien v Ministry of Justice.

The Delegated Powers and Regulatory Reform Committee report for the Bill recommended that such regulations be subject to the affirmative regulations procedure, and we are pleased to confirm this. This brings regulations on judicial pensions in line with those that will establish the new judicial pension scheme starting in April 2015, providing a high level of parliamentary control in respect of any changes to judicial pensions. I beg to move.

[Lord Bradley]

It would not behove me well to challenge anything that the Supreme Court rules on, but I am sure that it is as relieved as we are that the regulations would be subject to affirmative resolution.

Pension Schemes Bill

Debate between Lord Bradley and Lord Bourne of Aberystwyth

Monday 12th January 2015 Lords Chamber

[Lord Bourne of Aberystwyth]

My Lords, I thank the noble Lord, Lord Bradley, for moving the amendment and the noble Baroness, Lady Drake, for her contribution.

The Government take the issue of charges on pension products very seriously and are committed to taking action where there is evidence of consumer detriment. The Government’s announcement of a charge cap on default funds in pension schemes used for automatic enrolment—which, subject to the approval of noble Lords, will come into effect in April—amply demonstrates that commitment to act. However, I am pleased to be able to reassure noble Lords that this amendment is not necessary. There already exist regulation-making powers which allow the Government to cap charges on the new flexi-access draw-down funds. The Government took broad powers under the Pensions Act 2014 to limit or ban charges borne by members of any pension scheme. These powers would allow us to cap charges on draw-down funds offered by a pension scheme, including any new flexi-access draw-down funds, if this proves necessary to protect consumers.

Similarly, the Financial Services and Markets Act 2012 gave the Financial Conduct Authority wide-ranging product intervention powers. Under these powers, the Financial Conduct Authority also has the ability to cap charges on draw-down products, including flexi-access draw-down funds where these are offered by insurance companies. These existing powers cover all the institutions which could offer such draw-down arrangements.

I also reassure noble Lords that the Government and regulators are, as has been indicated, monitoring the development of new retirement income products, including the next generation of draw-down products, very closely indeed. In the publication of provisional findings from its retirement income market study, the Financial Conduct Authority has specifically committed to monitor how the retirement income market develops and to take action where appropriate if it sees sources of consumer detriment arising or if competition is not working properly in the market. In addition, again as mentioned earlier, the Financial Conduct Authority has also committed to undertake a full review of its rules in relation to the retirement income market which will commence in the first half of this year.

Therefore, while the Government share the concerns that have been expressed about member-borne charges, we believe that this amendment is not required. I therefore hope that the noble Lord will withdraw this amendment.

[Lord Bradley]

I thank the Minister for his response and the noble Baroness, Lady Drake, for her very important contribution to this debate. I am pleased that the Government recognise that this is an issue and that the purpose of this amendment is entirely to protect the consumer in this matter. I hear the Government’s assurance that the powers to act already exist. What we all want to ensure is that the Government do actually act if it does turn out to be the case that excessive charges above what would be a reasonable capped level of such charges actually come into existence as new products come on to the market.

If the Government are right that this amendment is not necessary, the test will be that they actually act in the interests of consumers in a timely way to ensure that they do not suffer the rip-offs that they have in the past in other circumstances. With those assurances, I beg leave to withdraw the amendment.

Pension Schemes Bill

Debate between Lord Bradley and Lord Bourne of Aberystwyth

Wednesday 7th January 2015 Lords Chamber

[Lord Bourne of Aberystwyth]

Clearly, any form of guidance is not going to be appropriate for ever on specific issues. The guidance is not intended to address the specific situations of every consumer; that is the purpose of advice. The guidance is indicating to people what they should do in their particular circumstance, at that stage, to look at the future. It is for those consumers to decide whether to take that option or not; that is the purpose of the guidance. It is not specific in the way that the noble Lord, Lord McKenzie, is suggesting.

[Lord Bradley]

My Lords, I am grateful to the Minister for his comprehensive reply on the new clause. The whole purpose of this and of many of the amendments we are tabling in Committee is to assure the public of their protections and to ensure that they have the information and that it is communicated effectively to them so that they can make proper choices at a crucial moment, or moments, in their retirement or post-retirement period. While we have immediately—probably quite rightly—started to discuss the guidance guarantee, I did not expect to start that process within 15 minutes of the start of the Committee stage. That will be an incredibly important part of our deliberations and, while it is very useful for the Minister to start to lay out the purpose and detail of that guidance, I know that we will have many opportunities to expand on that as we progress through the Bill.

The Minister has raised a number of fears about this new clause, which I will look at and reflect on carefully in order to ensure that the issues he has raised will be comprehensively covered by the range of activities to protect the consumer in the way that we want. I am grateful for the comments of my noble friend Lord McKenzie in support of the general thrust of this amendment, which is another attempt to get belt and braces around the advice and guidance to ensure that people are making sensible decisions.

As my noble friend Lady Drake said, we will be bringing forward the issue of a second line of defence, which is relevant to this general debate, again on the basis that we want to ensure that the public have confidence in the new arrangements that are being put in place and feel that there is protection for the decisions that they make. We will come back to whether guidance is sufficient to achieve that objective, but we need to look at these elements as a comprehensive package of attempts to achieve the objectives I have set out. However, in the light of the Minister’s comments and the opportunity to reflect on those for a later stage, I beg leave to withdraw the amendment.

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[Lord Bourne of Aberystwyth]

That would be an exceptional procedure. It is important for the industry and pensioners that we can provide assurance now that, where there is a need, there is provision to move quickly to ensure that collective benefit schemes are successful. I share the noble Baroness’s feeling that it is important that we give this a fair wind. We therefore recognise that there will be circumstances where the negative procedure is appropriate because of the great need to move quickly.

[Lord Bradley]

I thank the Minister for his explanation, for his more wide-ranging response to the report of the Delegated Powers Committee and for explaining the Government’s intentions in regard to the range of issues discussed and the recommendations made by that committee. It may disappoint him that that does not necessarily mean that we will not debate the clauses to which these regulations apply. There are wider points around those clauses which are not only about whether the regulations should be affirmative or negative. I hope the Committee will show tolerance as we go forward on that matter.

As my noble friend Lady Drake clearly and concisely laid out, Clause 8(3)(b) goes to heart of the definitions of collective benefit schemes. We need to be absolutely sure that, through debating the regulations, we understand fully the consequences of the schemes and how they will apply to the public who might rely on them. I accept entirely the need for flexibility, but I remain to be convinced that moving towards a negative position rather than a positive position through an affirmative vote in this House is the way to achieve that. As my noble friend Lady Drake pointed out, where there is a need for quick action to apply, there are procedures within the House to enable that. We are trying to support collective benefit schemes, and we want to ensure that they are properly scrutinised on behalf of the public.

However, the Minister said that he will be bringing forward amendments on Report. We shall reflect on the comments he has made on the issue and on why the Government consider that the negative procedure is appropriate. We shall think further about whether that is an acceptable position or whether we want the opportunity for further scrutiny through the affirmative procedures of this House. In the light of the comments made and the opportunity for further debate at a later stage, I beg leave to withdraw the amendment.

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[Lord Bourne of Aberystwyth]

I shall deal with the second point first. As the Minister knows, there will be a contractual obligation with contract-based schemes, but there will not be a fiduciary duty. This is because the essence of a fiduciary scheme with trustees is that fiduciary duties are held by those trustees. A contract-based scheme will have contractual duties which may be greater or lesser than the fiduciary duties, but they are somewhat different. Perhaps I could come back later to the noble Lord with a detailed answer on his point about collective schemes, because I am not quite sure of the scope of that particular aspect.

Coming back to the serious point that I was making, this reformulation of ownership of funds could result in significant obligations. We need to be clear that, if this is the approach of the Official Opposition, then those are radical changes that will require quite an upheaval in the ownership of the way that the market is organised at the moment. I am not quite clear whether the Government have got it right that that is the basis of the amendment and the Opposition are going that far.

Turning to the point that I think the noble Lord, Lord Bradley, was making, we do not want to dictate that non-trust based schemes should no longer have a part to play in pension provision in the workplace. I am not sure whether I have understood that correctly and that is indeed the position of the Opposition. We want to make sure that there is appropriate protection in occupational and personal pensions, trust and contract-based schemes. We want to encourage innovation and not necessarily restrict to a single structure, because we think we can provide appropriate protections across the piece. Similarly, under the provisions of this Bill, schemes offering collective benefits and defined ambition schemes can be trust or contract-based, and can be occupational or personal pensions. It has been suggested in discussions outside this House that such schemes should be restricted to trusts—I do not know whether that is the Opposition’s position. Again, we recognise and respect the concern about and focus on governance—that is quite right—in respect of these provisions, but we do not wish unnecessarily to close down options for how such schemes must be set up in terms of trustees. We have already made separate governance provisions for these benefits and schemes, recognising the new types of risk that they bring. Instead, we want to encourage providers to consider entering this space with innovative products that consumers want, and we have separate, parallel governance provisions for this which we will come on to later.

On the point raised by the noble Lord, Lord Bradley, independent governance committees apply to money purchase benefits. We have other requirements for collective benefits under clauses in Part 2 and in Clause 37, to which we will come later.

It is important to be clear that a requirement to have trustees is not a panacea for the myriad of governance issues that we are debating today. Let us not assume that all trust-based schemes are always better governed than contract-based workplace pension schemes. While we value the role of the many good, indeed excellent, trustees running occupational schemes, we recognise that schemes are variable and the presence of trustees is no panacea for poor governance. There is no evidence that one governance structure necessarily or always delivers better outcomes than another. We consider that factors such as scale—which we will consider later—good governance and charge levels are among the key determinants of member outcomes, not whether a scheme is contract or trust based.

The governance of contract-based schemes has grown significantly stronger in recent years, led by the FCA with the “treating customers fairly” principles which have formalised firms’ responsibilities to their customers. The introduction from April 2015 of independent governance committees with a duty to act in members’ interests will further strengthen the governance of contract-based schemes. These points taken together are why we strongly believe that current measures and independent governance committees, rather than trustees, are the right response to money purchase contract-based or personal pensions.

The proposed new clause would also be a significant cost and burden for workplace personal pension schemes. Data from the National Association of Pension Funds show that just under half of the 1,200 schemes that it surveyed in 2013 had independent trustees and that trustee salaries range from about £10,000 to £35,000 a year, although it is true to say that not all trustees or trustee chairs are paid. Therefore, as your Lordships can appreciate, there would be considerable cost involved in increasing this figure particularly over the short term. It could even mean that trust-based schemes had to replace their existing trustees.

We have made separate provision for governance measures for collective benefit and defined ambition schemes, so we do not need independent trustee committees as well. The independent governance committee measures will apply to money purchase benefits, but we have made separate provision for the other schemes. Generally, provisions under Part 2 set out a number of regulation-making powers to make requirements in respect of key governance features: investment, factors affecting benefits, policies for dealing with deficit and surpluses, transfer values and so on.

More specifically, under Clause 37, referred to by the noble Baroness, Lady Drake, we have a regulation-making power that may require managers in non-trust based schemes to have a duty to act in the best interests of members when taking specified decisions in shared risk schemes and schemes offering collective benefits. This is because of the new types of risks that may arise in these new types of shared risk schemes and schemes offering collective benefits, which are different from money purchase benefits or defined contribution schemes. Therefore, Clause 37 takes a regulation-making power to impose a duty on managers of non-trust based schemes to act in the best interests of members when taking specified decisions.

[Lord Bradley]

On Clause 37 and the Minister’s assurance of the robustness of the independent boards, why is he resisting our amendment which says that managers “must” take those powers and apply them in the best interests of members, rather than only “may”?

[Lord Bourne of Aberystwyth]

This is probably the main difference between the approaches of the Government and of the Opposition. I do not think that we are miles apart on our desired outcome, but we believe that working with the industry, consumer groups and pension groups to achieve the best interests is the right way forward. If we can achieve the same end without making it mandatory, we believe that that is the right approach. It is probably at the root of the difference between the two parties that we believe that we are achieving the result without having to make it mandatory.

I recognise the spirit behind the amendment that has been brought forward and the Government accept the need for the appropriate corporate governance. Whether it is in relation to trust-based schemes or to contract-based schemes, we want the similar result of the managers or the trustees acting in the best interests of the pensioners. I want to reassure noble Lords that the matter that this clause deals with is of great importance to the Government, and we are working with the industry and the Financial Conduct Authority to ensure that we get the approach right.

On Amendment 3, which would change Clause 9, let me set out some context on Clause 9 and why we think that the amendment would undermine a key governance provision. Clause 9 sets out a regulation-making power which may require trustees or managers of schemes offering collective benefits to set targets in relation to any collective benefits that may be provided by the scheme. Ensuring that there is a target in relation to collective benefits offered by the scheme should enable the member to have a realistic picture of the benefits that they are likely to receive. This is important, as the member is handing over control of their investments to those running the scheme. A target will also help those who wish to plan for their retirement income to do so meaningfully.

Removing the ability to require managers to set targets, which is what the amendment would do, would undermine a key provision which provides additional governance and transparency about members’ collective benefits. The requirement to set targets in relation to collective benefits in Clause 9 works closely with the other aspects of the governance regime set out in Part 2 of the Bill. For example, it is our intention that the probability of meeting the targets will be assessed annually in a valuation report to identify whether it falls within a specified probability range. If it falls outside this range, this will trigger the scheme’s policy for dealing with a “deficit” or “surplus”.

I think that we all agree that good governance of pension schemes is essential. That is why the Government’s new governance standards, applying across all workplace pension schemes in respect of money purchase benefits, will protect members by ensuing that schemes are run in their interests. It is also why we have introduced Clause 37: to ensure that there is extra protection for members’ interests.

However, the Government are taking a proportionate approach and seeking to allow constructive forms of innovation by pension providers, as well as retaining flexibility to ensure that regulation remains up to date with changing requirements. On that basis, I respectfully ask noble Lords not to press their amendments.

[Lord Bradley]

Once again, I am grateful to the Minister for the comprehensive nature of his reply. I am sure that Hansard will correct that I am not the Minister—sadly—and probably never will be. We have slightly strayed into the next amendment, Amendment 4, on targets, so I will return to that when we debate that amendment to Clause 9.

Our purpose throughout is to ensure that members’ interests are protected, as the noble Baroness, Lady Drake, has clearly and effectively outlined. We are trying to ensure sound governance. The Minister has given assurances that the proposals being brought forward will achieve the same objective as our amendment. I will reflect on the issues that the Minister has raised and his sense that our views about trustees are not as soundly based as we believe they are. There will be an opportunity for that reflection before Report. In the light of those comments and the strong feelings on this side of House regarding trustees, at this stage I beg leave to withdraw the amendment.

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[Lord Bradley]

Amendment 4 stands in my name and in that of my noble friend Lord McAvoy. Again, it flows from the recommendations of the Delegated Powers Committee. We have already had a response from the Minister about how the Government are handling this, but in the light of his preliminary comments about targets I think it is still worth our having a brief debate on this amendment.

The Delegated Powers Committee suggested that because of the nature of the powers in clause 9, which may require the trustees or managers of a pension scheme to set targets in relation to collective benefits, the affirmative procedure on first use would be most appropriate.

This clause is particularly important, as it raises many of the key areas that we wish to discuss around CDC schemes; indeed, we have already started to discuss them. These are issues such as the balance of intergenerational risk-sharing, the communication of the “risks of risk-sharing”, the importance of good governance in these schemes so that they can command sufficient trust from their members—a subject about which we have already had some discussion—and the role that actuaries are likely to play in the process.

The Secretary of State is here given the power to require a target that meets a set probability. For instance, if the probability was set at 98%, the target would have to take that into account and be set at such a level that there was only a 2% chance that it would be missed. To reflect on the most controversial aspect of CDC schemes—as I have made clear, the Opposition support these schemes—we have to look at what happened in Holland, where because of the financial crisis, pension payments had to be reduced. It is therefore important for us to look at targets and ranges, so as to give assurance to the schemes.

The Minister in the other place said that the regulations produced under the powers conferred by Clause 9 were to be subject to consultation. Can the Minister provide any further detail on when the consultation is likely to begin, and say whether the Government will be expressing a preferred option and asking for comment on that—and if so, what the preferred option is likely to be?

Because of the reasons that I have set out, communication to scheme members about how the target level is set and what factors could lead to it being altered is particularly important for these schemes. Can the Minister provide us with any more details on how the Government believe this can best be expressed to give scheme members confidence in the decisions being made?

This issue also takes us into the area of governance. The kinds of decisions that have to be made about targets and probabilities, and about how all this translates into the level of pensions paid out in a CDC scheme, require a high level of trust in the process—the kind of trust that is more easily established through a scheme being overseen by trustees rather than managers. But we have already rehearsed that argument, and I shall not go over it again.

Can the Minister provide us with any more detail on the interaction between the actuaries and the trustees or scheme managers under this provision? For instance, if the actuary gives advice that the probability of meeting a target falls outside the probability level set by the regulations, what options will be available to the trustees, in terms both of the action they can take and of how they communicate this to the scheme members? I acknowledge that this is a complex area, and the challenge of adequately communicating why a certain decision has been made is often considerable.

We understand that the Government cannot pre-empt a consultation that has not begun, and also that this Bill is not unique in being a piece of pensions legislation that confers a wide degree of delegated powers. However, it is still unsatisfactory if those powers are not before the House to be debated alongside the primary legislation. The huge range of options left open by this clause means not only that it should be subject to the affirmative resolution when the Government produce regulations on the matters within it, but that it would be useful if the committee were able to piece together the picture that the Government expect and hope will be in the regulations tied to the primary legislation, and see how they would impact on the important issues identified in Clause 9. I beg to move.

[Lord Bourne of Aberystwyth]

My Lords, I thank the noble Lord, Lord Bradley, for his comprehensive coverage of Clause 9. I shall deal first with the recommendations of the Delegated Powers and Regulatory Reform Committee, because that is the specific issue raised by the amendment. I shall then come back to some of the issues that the noble Lord raised in relation to the consultation process.

Clause 9 sets out a regulation-making power which is a key aspect of our approach to collective benefits. The issue of parliamentary scrutiny was considered by the Delegated Powers and Regulatory Reform Committee, and as I said before, we accept its recommendation on this matter.We intend to come back to it on Report and table amendments to ensure that the first time the powers are used will be subject to the affirmative procedure.

I confirm that the Government intend to have full open consultation on the regulations, which is expected to include discussions before the formal consultation takes place. Timelines will need to be agreed in due course. I suggest to the House that we come back to this subject in more detail on Report, so that we can consider the position in the round. Given the undertaking that we will table an amendment on Report on the specific issue addressed by Amendment 4, I invite the noble Lord to withdraw it.

[Lord Bradley]

Again, I am grateful to the Minister for his comments, and I welcome the fact that before Report stage we will get the detail that I sought through the amendment. It is important that we have that timeline for the consultation, so that there is clarity, both in the House and outside it, about what the process will involve. As the Minister has recognised, Clause 9 is crucial to this part of the Bill, and we need as much information as possible, and the opportunity to debate it, before the Bill passes through all its stages in this House. In the light of the Minister’s assurances, I beg leave to withdraw the amendment.

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[Lord Bourne of Aberystwyth]

My Lords, I thank noble Lords who have participated in the debate and I welcome the opening remarks of the noble Lord, Lord Bradley, who is part of a dream team with the noble Lord, Lord McAvoy—a dream team for the Opposition, if I may correct my earlier slip of the tongue. In response to the point that was dealt with by the noble Baroness, Lady Drake, and raised by my noble friend Lord German, I am told that there are no published figures on mergers but, anecdotally, it certainly seems the case that there is a trend. Whether that would continue with the new reforms is another issue but I think that there is, anecdotally, such a trend at the moment.

The amendment would impose a fiduciary duty on trustees of pension schemes to consider whether the scheme is of a scale to deliver good value to members and, if not, to consider a merger with another scheme. The Government are interested in scale, in so far as it may help schemes to improve quality and lower charges, and to be fair, I am sure that that is what inspired Amendment 7. However, we are not interested in scale as an aim in itself. The Government believe that forcing scale does not necessarily drive good governance, investment expertise or low costs. Big is not necessarily beautiful, as my noble friend Lord German correctly suggested. On occasion, many small schemes are delivering very effectively.

Our analysis of the current defined contribution landscape shows that there are already effective benefits of scale operating within the marketplace, including significant consolidation of schemes. We have no precise figures on that but we expect this to continue and probably to accelerate as smaller employers are brought into automatic enrolment. Indeed, we have already seen smaller employers moving towards larger arrangements such as group personal pensions, master trusts and the National Employment Savings Trust. They can also access the benefits of scale by purchasing investment or administration services from a large provider, falling short of a full merger.

Noble Lords may find it helpful if I try to explain to the House why we believe this amendment to be unnecessary and why the matter is not as straightforward as it may at first appear. A significant push to force consolidation would come at a financial cost which would be borne by members—at least the initial cost. Agreeing what “sufficient scale” means and policing it would be difficult. The amendment would create some inconsistency across the regulatory landscape as it would bite on trustees of trust-based defined contribution schemes but not on the managers of non-trust based schemes that are either a shared risk scheme or a defined contribution scheme. Significantly, and certainly from my point of view most importantly, it also cuts across trustees’ existing fiduciary duties to act in members’ best interests.

Trustees are already required to pay particular attention to governance standards—for example, internal controls, investment governance and decision-making, administration practice in record-keeping, and preventing fraud and so on. As part of that, they may well consider the benefits of scale. Some employers may prefer a smaller scheme that can deliver bespoke investments and communications to their workforce which a larger scheme might not be able to do.

The Government believe that their flagship reforms of introducing, for the first time, minimum governance standards to ensure that schemes are well governed with low and fair charges for members is the correct approach to drive better member outcomes. We do not believe that it would be right to interfere with how the marketplace is evolving, bearing in mind the existing fiduciary duties that trustees are acting under. It would be strange if trustees were not already considering the viability of the trust and the benefits of scale as they assess its workability.

Finally, the amendment would give the Pensions Regulator a new power to compel a merger, if it would be in members’ interests to do so, and provide for the Pensions Regulator to use this power in accordance with methodology on which it has publicly consulted and which is agreed with the Secretary of State. The amendment requires this methodology to be kept under regular review. This, too, would impose new burdens and is unnecessary. Agreeing what “sufficient scale” means in members’ best interests, and measuring and policing it, would be very difficult. We believe that new governance standards from April 2015 will mean that trustees and managers will have a general legal responsibility to ensure that the schemes are well governed in members’ interests. As I say, it would be unusual if they did not consider, as part of this, the possibility of merger and the benefits of scale. In addition, the Pension Regulator’s existing regulatory strategy and activities include providing guidance and e-learning resources, and helping trustees to demonstrate that they meet the required standards of their defined contribution quality features. The regulator will also take enforcement action where necessary, under existing powers. This ranges from advice letters, warning letters, statutory compliance notices and monetary penalties to criminal prosecution.

We believe that our focus on ensuring that schemes are well governed and deliver good quality and low charges to their members, regardless of size, is the correct approach to drive better member outcomes, while recognising that on occasion scale is of importance and that trustees should be considering that, as should managers. On that basis, I urge the noble Lord to withdraw the amendment.

[Lord Bradley]

I thank the Minister for his response to the amendment and I welcome the comments made by the noble Lord, Lord German, and my noble friend Lady Drake on the issue of scale. There is no intention in the amendment to force anything. Subsection (2) of the proposed new clause is clear. It states:

“Where trustees take the view that the scheme has insufficient scale, they must consider whether merger with another scheme would be in the members’ interests”.

That is the crucial point. It is not forcing it but looking at what is in the members' interests. The relationship between the trustees and members on governance is very important. This is about a mechanism to ensure that it is considered and that it is in the best interests of the members. We are not saying that big is necessarily beautiful but that, in certain circumstances, bigger might be better—better value for money for the members of the scheme.

There is clearly some difference between the Government and the Opposition on this issue. I do not want to caricature the Minister’s response but he was basically saying that the market will decide and that mergers will happen because the market will determine that they happen.

[Lord Bourne of Aberystwyth]

I appreciate that the noble Lord was not intending to caricature my response and that I have cut in before he finished but I said that although we believe that the market is driving things in the direction of scale, it is the case that managers and trustees should be considering this as part of their duties. We are not simply saying that it is all about the market; we believe that the framework is already there.

[Lord Bradley]

I am grateful to the Minister for that clarification and I certainly was not intending to misquote what he was saying. However, there seems to be a difference between the active consideration of mergers and the more passive position from the Government in that determination “may” be governed by the influence of the market rather than through what we are saying in this amendment. Again, it is absolutely crucial to us on this side of the House—whether it be on governance, transparency or the way in which duties are imposed on trustees—that while being mindful of previous situations regarding pensions and difficulties in the market, we are always looking to get best value and protect the interests of the public throughout this process. However, in the light of the comments that the Minister has made and the opportunity for further consideration at a later stage, I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Bradley]

My Lords, I will not labour the points that we have already made regarding affirmative resolutions of regulations, but I shall speak briefly to Clause 21 because it is another key clause in shaping the structure and policies of pension schemes that are to be developed under Part 2. This is another area that, as we know, the Delegated Power Committee picked out when it said that,

“the likely ingredients of regulations will be so significant to the working of Part 2 as a whole that the negative procedure will not afford the House an appropriate opportunity to debate the provision that will determine the shape of the arrangements”.

I am aware that the Minister is going to bring forward an amendment on that so we will have that opportunity, but it is always worth putting on the record the views of the excellent Delegated Powers Committee on these matters, and obviously we welcome the Government’s response to it.

We have another amendment in this group, along with the delegated powers amendment, which again turns—I will not labour this point—on the issue of “may” and “must”. The first part of Clause 21, which is entitled, “Policy for dealing with a deficit or surplus”, says:

“Regulations may require the trustees or managers of a pension scheme … to have a policy for dealing with a deficit or surplus in respect of any collective benefits that may be provided by the scheme, and … to follow that policy if a valuation report shows a deficit or surplus”.

In our view, it is extremely important that they have a policy around deficit or surplus; it is inconceivable, as my noble friend Lady Drake pointed out in the previous comparable amendment, that there would not be such a policy.

I ask again, similarly to the previous set of amendments, whether the Minister sees any circumstances in which there would not be a policy for trustees in applying and dealing with deficits or surpluses. In order to ensure that the members have confidence in the policies, it is crucial that they are consulted on those policies, so there must be a policy that is available for them to have that assurance. For the members of the scheme there must be a policy, so the regulations should be saying that the trustees must produce a policy around deficit and surpluses within the scheme, which are crucial to the members within the scheme. I feel sure that the Minister will be able to give us the necessary assurances on that, which is why I shall be brief and beg to move.

[Lord Bourne of Aberystwyth]

My Lords, I am grateful to the noble Lord. I apologise that I keep referring to noble Lords opposite as “Ministers”; I am afraid that it is my background in the Welsh Assembly, where I am used to asking questions rather than answering them. They should not jump the gun.

I reassure the Committee about the recommendations of the Delegated Powers and Regulatory Reform Committee. I confirm again that we are content with its recommendation and will therefore bring forward amendments on Report to reflect that. As the noble Lord has said, the power in Clause 21 allows us to ensure that schemes have appropriately transparent policies for how they will handle a situation where the scheme is outside the probability range for paying the target benefits, and that it is a permissive power, not a mandatory obligation.

I shall share some of our thinking around how and why we will use the powers in Clause 21, which deals with what happens in schemes with collective benefits when the required probability range in relation to the target benefits is not being met. In our drafting approach we have used the term “deficit or surplus” to refer to the situation where the scheme is above or below the required probability range. However, I remind the Committee that there is no promise in relation to a collective benefit that an employer would need to stand behind.

The first question to ask is why we require trustees or managers of schemes providing collective benefits to draft a policy on deficit and surplus in the first place. We believe that this is essential because schemes providing collective benefits function in an open and transparent way. It is vital to engender confidence in the way that these schemes are managed and are seen to be managed. Indeed, the lack of a policy set out in advance about how schemes would adjust members’ benefits if required has led to heated public debate in the Netherlands, where some schemes had to reduce benefits when members were not expecting that to happen. I hope that we have learnt lessons from experience elsewhere, as I indicated earlier; this is very much central to the Government’s approach.

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[Lord Bradley]

I am slightly confused. The Minister seems to be saying that there would never be a circumstance where there would not be a policy and therefore it can be permissive because there would be no exception to it. There would always be a policy in place. Can he confirm that that is the case?

[Lord Bourne of Aberystwyth]

I am happy to confirm that. I believe that I indicated in response to an earlier amendment that there would not be any of these powers where we would not anticipate regulation. We do not see a vacuum in any sense in any of these matters. As I said, I think that the difference is a difference of approach rather than a difference of outcome. We believe that we will reach the goal—achieve it—on a permissive basis. We do not believe that the mandatory approach, which I believe is what the noble Lord is pursuing in relation to at least some of these amendments, is the correct one. The difference is a difference of approach rather than a difference of outcome. I hope that that deals with the point that the noble Lord was making. On that basis, I respectfully ask the noble Lord to withdraw the amendment.

[Lord Bradley]

Again, I am grateful to the Minister for his response and clarification. From this side of the Committee we could not envisage a situation where something as important as deficit and surplus within funds and providing policies about which the members are clear and on which they have been consulted would not be addressed and in place. The Minister assures the Committee that, through a permissive regime, there will always be such a policy in place. With that assurance, I beg leave to withdraw the amendment.

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[Lord Bradley]

I am grateful to the Minister again for his explanation of the government amendments, which I accept are minor and technical. However, they clarify the position on certain aspects of the Bill, which is welcome, and remove any ambiguity that may have transpired from the original drafting. In that light, the Opposition are happy to accept them.

[Lord Bourne of Aberystwyth]

I am most grateful to the noble Lord, and I commend the amendments to the House.

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[Lord Bradley]

My Lords, I draw attention to the wording of this amendment because I am sure that it will be welcomed by the Government and that they will wish to produce and deliver such an annual review to Parliament.

When the press release that accompanied the Bill was issued, it gave me the impression that the Government envisaged that Part 2 would lead to a number of new combined collective defined benefit schemes coming into operation. However, as we have seen the Bill being considered in this House and in the other place, the number of schemes coming into operation has been cooling and the Government have been more reticent to be clear about how many new schemes they anticipate will be set up.

This is why, among other things, the number of schemes should be included in an annual review to see whether provisions in the Bill adequately enable collective defined contribution schemes to be set up. That cannot and should not be the only measure. We do not wish such an annual report to cover only quality, but it would be useful for Parliament and the public more broadly to be kept aware of how the policy is unfolding.

There is also the wider point that a number of issues that have been raised in Committee today have centred on the speed with which the Bill is passing through both Houses of Parliament, the number of changes to the Bill in that process and the ability to scrutinise secondary legislation alongside primary legislation. All this leads to the conclusion that an annual report to Parliament would be a very effective way of giving assurances that all is well with the implementation of the Bill and indicating specifically the consequences around CDCs.

I accept that the first annual review—if, or when, this amendment is accepted—might be rather thin because, as we heard earlier, the regulations for Part 2 will not come into force until later in the year. However, I do not think that undermines the basic point that legislation of this type should be reviewed and presented to Parliament on an annual basis. I believe that the Government will welcome the publication of such a report, principally because these new schemes are part of the overall package of changes which have been hailed by Ministers as a pensions revolution. It will enable the Government to communicate to Parliament, and more importantly to the public, how these packages of reforms are rolling out, how they are working in practice and how they are achieving the policy objectives which the Government have laid out, not only with the Pension Schemes Bill but with the Taxation of Pensions Act and the other pensions provisions that have been put through Parliament. I accept that this amendment only applies to collective schemes, but it establishes a principle about reporting to Parliament on the pensions changes more broadly. It is a peg on which to hang a package of reporting and a way in which we can continue to have the ability to question and scrutinise a very important area of policy for millions of people in this country. I beg to move.

[Lord Bourne of Aberystwyth]

My Lords, I thank the noble Lord, Lord Bradley, for moving this amendment. I will say a little about our approach. As I think noble Lords are aware, our approach is about enabling choice. While the number of schemes is important, it is not the only measure of success.

The Bill enables schemes providing collective benefits to be set up where employers and providers wish to do so. We believe that this Bill will stimulate greater innovation and choice, allowing employers to adopt the sort of arrangements available in other countries—we have spoken previously of the Netherlands, Denmark and Canada—if it is right for them and for their employees. The number of schemes is an important issue, but it is certainly not the only issue.

We believe that the development of schemes offering collective benefits could be more appropriately monitored in other ways than a bespoke annual review, which may become something of a tick-box approach. We envisage that this could be done through existing access through the Office for National Statistics, which conducts surveys and collects data, for example.

Perhaps more importantly and across the piece, the noble Lord indicated that this review is on only one small aspect of the legislation. There is much else in the legislation. The Cabinet Office Guide to Making Legislation already requires the relevant government department within three to five years after Royal Assent to submit to the relevant Commons departmental Select Committee a memorandum, to be published as a Command Paper, containing a preliminary assessment of how an Act is working in practice. No doubt, our House can pick up on that too.

I recognise that there is a genuine concern about providing information on how this aspect of the legislation is operating in practice and perhaps more widely than the noble Lord indicated in his contribution. There is a wider issue about how the rest of the legislation is operating. I will have a look at this to see what we can do. However, we believe that an annual review is somewhat bespoke and tick-box. We have a provision for a review within three to five years of the Bill passing, but if there is anything that we can do supplementary to that, and should be doing, I will come back on that on Report. I say that without any firm promise that we believe there is anything to do, but I am happy to look at it. On that basis, I hope that the noble Lord will withdraw the amendment.

[Lord Bradley]

I welcome the Minister’s response to the request for an annual review. It was certainly not my intention—I hope it was clear in my opening remarks—to see this as a tick-box exercise. I see it as a very effective document that would be presented to Parliament and allow us to have proper scrutiny of a very important new proposal that has been brought forward. The Minister is right that it was in the context of looking at the wider pension reforms that are going through.

While I do not believe that we need to wait three or five years to get such an annual report, I accept the Minister’s offer to at least consider how information can be provided to the House, specifically on collective defined contribution schemes, and then more widely in the context of pension reform. I welcome the Minister’s response to that at a later stage in our deliberations. With that assurance, I beg leave to withdraw the amendment.

Pension Schemes Bill

Debate between Lord Bradley and Lord Bourne of Aberystwyth

Wednesday 7th January 2015 Lords Chamber

[Lord Bradley (Lab)]

Because of the lateness of the hour and the excellent way in which the amendment was introduced by the noble Lord, Lord German, and supported by my noble friend Lady Drake and the noble Baroness, Lady Bakewell, and as all the arguments have been clearly laid out, it would not be of any great benefit to the Committee if I tried to elaborate on this proposal. Suffice it to say that we would support any proposal such as this which improves transparency for the public.

[Lord Bourne of Aberystwyth (Con)]

My Lords, I thank noble Lords who participated in the debate on the amendment and my noble friend Lord German for moving the amendment so ably. The Government are committed to improving transparency in pension schemes and have a robust and thorough work programme during 2015 and 2016 to do so.

My noble friend Lord German has raised a very important issue that this House has long recognised: the need for transparency in pension schemes. I assure noble Lords that this is an issue that the Government take very seriously. Indeed, in their publication Better Workplace Pensions: Putting Savers’ Interests First on 17 October 2014, the Government committed to improving the governance of workplace pensions and transparency surrounding the costs and charges which members are faced with, including better information about transaction costs related to buying and selling investments. I know that this amendment goes much beyond that but it indicates the direction of travel.

Noble Lords will also be aware that this Government have recently consulted on draft legislation which, subject to parliamentary approval, will introduce from April this year new requirements on trustees to improve the governance of trust-based schemes. Trustees will be required to demonstrate that they have complied with new standards of governance by completing a statement, signed off by the chair of trustees, annually. Similar rules are to be introduced by the Financial Conduct Authority to require the newly formed independent governance committees to demonstrate that they have complied with such rules for the contract-based side of the workplace pensions market on a similar timescale. The Government intend to build on this first phase of transparency work. We are committed to consulting further, later this year, on how we propose to introduce transparency on additional costs and charges. The Financial Conduct Authority will also be consulting on similar new requirements in relation to workplace pensions.

Regulations and rules made as a result of the Pensions Act 2014 will significantly improve the transparency of costs and charges in pension schemes and lead to members receiving better value for money. However, I recognise that the proposed amendment would go much further than this. It seeks to place requirements on trustees and managers of occupational and all other personal schemes to provide members with detailed additional information relating to their schemes’ investment functions, over and above what is already required, and additional to the improved transparency of costs and charges information that we intend to introduce from April. The amendment, were it to be accepted, would require trustees and managers to provide investment-related information to members on request where that is reasonable—and there is a rebuttable presumption that it is—which would be additional to existing requirements and would do so before we have consulted with the industry, savers and other interested stakeholders, as we announced we would in our Better Workplace Pensions consultation last October.

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[Lord Bourne of Aberystwyth]

My Lords, I thank the noble Lord, Lord Bradley, for moving this amendment and the noble Baroness, Lady Drake, for her contribution. As noble Lords will be aware, NEST was established to support automatic enrolment by ensuring that all workers have access to a low-cost workplace pension scheme. Its design, including the annual contribution limit and transfer restrictions, focuses NEST on its target market of low to moderate earners and smaller employers who the market found difficult to serve. Since October 2012, when automatic enrolment began, NEST has fulfilled its role very successfully. I am happy to reinforce the statements made by my noble friend Lord Freud. We think that it has done an exceptional job. It already has more than 1.8 million members and 10,500 participating employers. NEST is doing what it was set up to do—supporting automatic enrolment.

During the winter of 2012 and the spring of 2013, the Department for Work and Pensions undertook a call for evidence. This sought to assess whether there was evidence that the annual contribution limit and the transfer restrictions placed on NEST were preventing it serving the market that it was designed for. The evidence showed that these two constraints were not preventing NEST serving its target market. That said, the call for evidence revealed that the constraints were sometimes perceived as a barrier to using NEST. Smaller employers have limited experience of providing pensions for their workplace. A perception among smaller employers that using NEST is unduly complex could make choosing a scheme unnecessarily complicated. This could damage confidence in automatic enrolment and undermine its aims.

With that in mind and taking account of the evidence, the Government determined that removing the annual contribution limit and the transfer restrictions that we are debating to address the perception of restriction would not be a proportionate response at the time, given the importance of the role that NEST was fulfilling in ensuring automatic enrolment. We conceived that to be its core function and where we thought that it should focus. We therefore concluded that legislation to remove the constraints in 2017 was a balanced approach. I think that it is scheduled to happen on 1 April 2017, which is some two years away.

The noble Lord, Lord Bradley, raised the state aid situation. It is our understanding that we would have to reapply to vary the state aid consent that we have. Bearing in mind that it took us a year to get the original state aid clearance, that is clearly a significant period of time. We will double-check that in light of the comments made by the noble Lord, but I have had that confirmed while we have been debating this matter. We will reassess that, and I will write to the noble Lord and others who have contributed in the debate to confirm that position or otherwise.

Therefore, we consider two issues to be at the forefront of this. The first is that we want NEST to fulfil its core function. We believe it is doing that very well and do not want to disturb that. The second is that 2017 is only two and a bit years away, and we believe it could take a significant amount of time to vary the state aid consent, but we will have another look at that issue. In the mean time, given that I have undertaken to examine that, I ask the noble Lord to withdraw the amendment.

[Lord Bradley]

Once again, I am grateful to the Minister for his response and that, if there is lack of clarity over the state aid issue, he will look at it and write to me about the actual position, so that we can apply it to the amendment. I hope that he will be able to do that before Report, so that we may consider whether it is appropriate to pursue the matter further. In the light of his assurances on that point, I beg leave to withdraw the amendment.