Pension Schemes Bill [ Lords ] (First sitting)

Debate between Lord Harrington of Watford and Nigel Mills

Tuesday 7th February 2017 Public Bill Committees

[Nigel Mills]

I am grateful to the hon. Gentleman, and I can see the attraction of that. Given that we have effectively auto-enrolled millions of people into master trusts, I am not sure I would support a delay in the regulations coming into effect. We need the powers in the Bill available to ensure that the people we have strongly encouraged into the schemes have all the protections we think they ought to have. I suspect that the review of auto-enrolment will be long, and in some ways it will probably be difficult to work out the right balance to strike in increasing the level of savings without encouraging people to leave the schemes completely. I am not sure that waiting for a resolution of that issue would be a sensible idea.

May I raise another technical point about when a master trust scheme ends up with a large proportion of self-employed members, up to 10%, 20% or whatever percentage of the scheme? Will it have to change its regulatory position and move from being an occupational pension scheme to a personal pension scheme or some other sort? I accept that there is a lot of regulation of such schemes, which may not be the end of the world, but perhaps the Minister will set out how the Government are tackling the big self-employed pension gap, where many fewer people save much smaller amounts and end up with much smaller pension pots as they approach retirement. As our employment markets change, that will be a significant challenge for us as we try to make pensions effective for everyone in the country. I look forward to the Minister’s remarks.

[The Parliamentary Under-Secretary of State for Pensions (Richard Harrington)]

It is a pleasure to serve under your chairmanship, Mr Rosindell. I thank you for the clarification of the rules concerning hot beverages, with which I am happy to comply.

The attitude that the Opposition, the Scottish National party and all of us have taken towards the Bill is to discuss it widely among ourselves and to agree as much as we can, which is positive. Our disagreements are honourable, and no one is playing politics or at opposition for the sake of it. I wanted to make that clear, Mr Rosindell, because I have served on Bill Committees, as I am sure you have, where that has not been the case.

The Opposition amendments and those of my hon. Friend the Member for Amber Valley were tabled in the correct spirit. We had considered all the points in advance of the Bill being introduced and therefore in advance of the House of Lords proceedings and Second Reading in the Commons. Master trusts have been around for a long time, but they have grown exponentially in number over the past two years. The legislation is therefore a response not to a fundamental problem with master trusts, but to their exponential growth, pushed by auto-enrolment, and the industry seeing them as an area with a less stringent regulatory regime than other parts of the pension system. For example, insurance companies and personal pensions are regulated by the FCA under long-standing rules, and the non-master trust system is very different, because those trusts have one clear sponsoring employer and there are lots of rules and regulations under the Pensions Regulator.

The legislation is therefore meant to fill a gap. We are not filling the gap because of a disaster or problems that have arisen; we are trying to see what problems might arise. That has been the scope of discussions between the Government, Opposition and individuals, which has included some positive opposition in the other place. I hope that that will be true for most of our proceedings.

Opposition amendments 22 and 23 and the amendment of my hon. Friend the Member for Amber Valley seek to change the Bill’s definition of a master trust. Amendment 22 would extend the definition to all schemes that offer money purchase benefits, which would include schemes used only by a single employer or by employers connected to each other. The proposal would extend the scope of the definition significantly and, therefore, of the authorisation regime disproportionately.

As the debate in the other place indicated, there is general acknowledgment that further regulation of master trusts is desirable and necessary. As I explained in my opening remarks, master trusts have developed into structures that are often very different from traditional occupational pension schemes offered by single employers or the more traditional group of connected corporate employers. They offer compelling benefits to employers and members. They spur competition in the market and allow for economies of scale, providing value for money. They are also an efficient solution for smaller employers for whom setting up an individual pension scheme for employees would be difficult, onerous, impractical and expensive.

We accept, however, that those qualities also bring about new risks. As I explained, those risks are less likely to be present in single employer or connected corporate defined contribution schemes. The authorisation regime is intended to address those risks. For example, in a single employer scheme—a traditional trust scheme—the employer is usually closely involved in the running of the scheme and has an active relationship with the trustees. In a master trust, the employer’s participation is often largely limited to paying the employer contribution, which is probably the most important part. I do not take that lightly, but the responsibility for the running and administration of the trust is clearly different from a single trust for a single employer. Additionally, in a single employer scheme, the employers determine the terms of the scheme, whereas in a master trust it is done for them, with the person or organisation setting up the scheme doing it.

Those differences highlight why the purpose of the Bill is to require authorisation and provide member protection in respect of master trusts. The risks are specific to this kind of scheme and it is therefore important that the definition reflects such schemes and does not extend beyond them. The clause establishes the proper scope of the Bill and ensures that its regulation is proportionate to the issues arising.

Amendment 23 was clearly explained by the hon. Member for Stockton North. It would amend clause 1(2), which provides that the Bill’s provisions apply to a master trust scheme only in so far as it provides money purchase benefits. That would mean that the provisions of the Bill would apply in relation to the scheme as a whole, and not just in relation to the parts of it that apply to money purchase benefits. Most master trusts will only provide money purchase benefits—that is the purpose of the vast majority of them—but it is fair to say that a number will provide money purchase and non-money purchase benefits. I agree with him that master trusts can do that legally and properly. It is not the norm but some do.

As I have already set out, the authorisation regime is intended specifically to address certain risks that apply to members in master trusts that relate to the structure and funding of such schemes. In particular, the Bill is focused on the risk around money purchase benefits, and we have been open about that. In answer to the hon. Gentleman, the Bill is focused in that way because there is already extensive regulation in relation to occupational pension schemes providing non-money purchase benefits—regulation already exists. Applying the authorisation regime to them would create duplication of regulation. He warned us about duplication, but the amendment would create duplication of regulation and add unnecessary costs and burdens to the running of those schemes, with little purpose in terms of protecting members, so far as we can see.

In addition, authorisation requirements are intentionally targeted at the risks relating to money purchase benefits. Conflict and confusion might arise if those requirements are applied across the board. For example, the provisions requiring the transfer of member benefits and wind-up of a scheme might have a detrimental impact on members if applied in relation to non-money purchase benefits. It is important that the members of schemes with mixed benefits have the same standard of protection as members of schemes that only have money purchase benefits. That is why the authorisation regime applies to the money purchase aspect of such schemes. Extending authorisation to types of benefits for which it is not designed and where the risks do not arise in the same way would not be appropriate.

To answer a question asked by the hon. Member for Stockton North, I can confirm that the Government intend to include decumulation schemes—the decumulation products that he mentioned in his speech—in clause 41.

--- Later in debate ---

[Richard Harrington]

I smile, but not out of disrespect for the hon. Lady—quite the contrary. I knew that she would manage to bring in her favourite subject and I am grateful for the indulgence of the Chair in not declaring it out of scope, because she makes a relevant point. I nearly said “you”, Mr Rosindell. You would probably make it as well, if you were invited to speak on the subject.

The communication point that the hon. Lady raises has to do with the state pension. Generally, things have moved on dramatically—not just from a regulatory point of view, but with communication generally. We just have to look at the state pension side—before you rule us out of scope, Mr Rosindell. Millions of people look on the internet every year to see what the position is with their state pension. The same will apply—to bring us within scope—to private pensions. The younger generation of people do not just wait for something to come. They are aware the whole time; they see the information on their pay packet. My younger son started work after graduation in September. They sign up for the pension, it is explained and they are interested. They think it is years away, obviously, but they are interested. That is why I do not take the communication point lightly, and I will do my best now to talk in more detail about it.

We have mentioned the automatic enrolment review. That is critical—this is not just a way of sidetracking the point—because it will consider how individuals engage with their workplace pension scheme and how that can be developed so that members are better able to understand and maximise their savings. That is probably the most relevant change that we have to try to bring about—we as a Government are going to do this, but I am sure that any Government would—to get people really involved. We have appointed an external advisory board, including members that represent consumer interests as well as pension provider representation. We will lay a report before Parliament before the end of 2017. The relevant point, to bring us back to the Bill—you have been very patient, Mr Rosindell—is that it will take into account these findings. We will take them into account when considering the regulations under clause 12—that is the relevant clause—which I referred to a moment ago.

[Nigel Mills]

I did try to warn the Minister about this sort of question. The very first line of this clause says:

“The trustees of a Master Trust scheme may apply to the Pensions Regulator for authorisation.”

Will he explain why that does not say “must apply”? We do not envisage any master trusts that are not obliged to register. Is it because they can form themselves, and before they start operating they have to apply, or does he expect them to be formed only after they have been authorised?

[Richard Harrington]

Master trusts may apply. Exactly. My hon. Friend’s point is correct, but if they wish to be in a master trust in the market, they must apply. If they do not, they may say, “We’ve looked at this regulation, we call ourselves a master trust now, which we are, but the regulatory hurdles are not for us so we’ll leave the market.” We had to leave the flexibility in, and maybe many will. I do not know. Maybe entities will say, “It’s not for us, we are going to do it another way,” given the regulations, an extra burden of regulation or a different type of regulation, but if they are to be a master trust—if they are to continue as one—the “may” effectively becomes a “must”, because they have to apply and regulate. We had to leave the possibility in. It may not happen, but I think some of the smaller ones will find that it is not for them. I hope I have answered that question satisfactorily. I hope, too, that I have said enough to reassure the Committee. The Government sympathise with the intention of the amendment. We take member engagement seriously. There is no simple answer.

The Bill is about protecting those people saving in master trust schemes by addressing the key risks that arise in this type of scheme. While member engagement is important, I do not believe that the Opposition have made an effective case that these issues constitute a key risk that needs to be addressed through setting out explicit requirements in primary legislation. That is the critical point. We will consider the area further as we go through the AE review, and we will develop and consult on the regulations under clause 12. As I have explained generally on the regulations, there will be time for both Houses to go through them. On that basis, I kindly invite the hon. Member for Stockton North to withdraw his amendment.

--- Later in debate ---

[Richard Harrington]

No, I confirm that that was not the Minister’s intention at all. As we get through the regulations for this Bill, it is precisely that kind of case that we need to take into consideration, and there may be others. An IFA, of course, would be regulated and deemed to be a fit and proper person by the FCA. I am not very familiar with those rules, because they are outside my area of responsibility, but I think that they are pretty stringent and that they might be directly comparable to those under the Pensions Regulator. However, it is a fair point. In fact, most companies in the position to which my hon. Friend refers usually have to go to a professional adviser to be able to make that decision, because they have neither the time nor the experience to make the decision themselves, unless they are a very large company with suitable employees.

The regulation-making powers are needed to respond to developments in the market where the structures of master trusts might evolve to include other functions. There is a regulation-making power that enables regulations to specify matters that the regulator must take into account when assessing whether someone is a fit and proper person. As with other provisions in the Bill, we intend to work closely with industry, regulators and Her Majesty’s Revenue and Customs in developing these regulations, as well as conducting formal consultation.

The clause also gives the regulator a discretion to take into account other matters as it considers appropriate when carrying out the fit and proper person test, including matters related to a person connected to the person being assessed. That will give the regulator the flexibility to ensure that it can be fully satisfied that the criteria for a fit and proper person have been met and not avoided on technicalities.

The fit and proper person criteria are a key part of the new regime for master trusts. They relate to the competence and propriety of those responsible for the pension savings of thousands workers.

[Nigel Mills]

Will the Minister confirm that he expects this to be a high bar; that he wants people to be able to show that they are knowledgeable, competent and have the training to be a trustee and run a pension scheme, and not just that they can pass a check that they have no criminal convictions for fraud? They have to show positively that they can run these pension schemes well, not just that there is no historical evidence that they cannot.

Pension Schemes Bill [ Lords ] (Second sitting)

Debate between Lord Harrington of Watford and Nigel Mills

Tuesday 7th February 2017 Public Bill Committees

[Richard Harrington]

As I explained, there are criteria that a master trust must meet to be authorised by the regulator, one of which is that the scheme has an adequate continuity strategy. The clause sets out the requirements for that continuity strategy. It must set out how the interests of scheme members will be protected if the scheme experiences a triggering event—that is, an event that could put the scheme’s future at risk.

The aim behind the clause and the related measures is to ensure continuity of pension saving for the members of the scheme when that scheme experiences an event that could put its future at risk. That also benefits employers using the scheme, particularly those using it to meet their automatic enrolment legal obligations. An adequate continuity strategy would demonstrate that careful consideration had been given to what the scheme would do if it were at risk of failing. That should make the closure of master trusts more orderly and managed, which is good for members and employers. We all agree that chaotic and unplanned closures would likely be detrimental to them.

The reasons for and circumstances that could lead to a master trust failing may be different from more traditional occupational schemes. The risks for members and employers are different. That is of particular significance because master trusts tend to have a relatively high number of employers and members, and therefore tend to be less engaged than when an employer has a single scheme for their own employees.

That means that winding up a master trust may involve a lot of work and take a lot of time, and be complicated, difficult and expensive. Regulations under the clause will set out what the strategy should include and what actions the scheme will take to manage and protect the assets. The Government believe it essential that master trusts have adequate continuity strategies.

[Nigel Mills (Amber Valley) (Con)]

I have a quick question. Subsection (9) says that the strategy must be sent to the regulator within three months of being revised. Given that that must mean the strategy has been revised and finalised, why would we not want the regulator to get sight of it much quicker, in case there is something in it we are concerned about?

[Richard Harrington]

I believe the three months was reached after discussion with the regulator, taking the worst case into consideration. That is a long stop—it would generally be quicker than that—but it came out of discussions with the regulator.

We believe it is essential that master trusts have those continuity strategies and I hope clause 13 will stand part of the Bill.

Question put and agreed to.

Clause 13 accordingly ordered to stand part of the Bill.

Clause 14

List of authorised schemes

Question proposed, That the clause stand part of the Bill.

--- Later in debate ---

[Richard Harrington]

I am sorry, I just wanted to make sure. I thought that was the case.

The clauses make provision for a new supervisory regime for master trust schemes. One of the great strengths of the authorisation regime is that its requirements are ongoing. An authorised master trust will have to ensure that the Pensions Regulator remains satisfied, and is not just satisfied at the beginning, that it continues to meet the authorisation criteria to continue operating in the market. The clauses ensure that the regulator receives and can request the information it will need to be satisfied that the authorised schemes continue to meet the authorisation criteria, and it can withdraw the authorisation if that ceases to be the case. I believe they are very sensible clauses.

Clause 14 requires the regulator to maintain and publish a list of authorised master trust schemes. This provision will help employers looking for a scheme for automatic enrolment purposes and ensure that there is transparency about which master trusts have achieved authorisation. Clause 15 requires the trustees and scheme funders of authorised master trusts to send the scheme accounts and the scheme funder’s annual accounts to the regulator annually. This information is necessary for the regulator’s ongoing financial supervision of the scheme. We believe that it will play a key role in the regulator’s consideration of the reasonableness and accuracy of the estimates set out in the business plan, which I mentioned before, and about the running costs, sources of income and profit and loss in relation to the master trust’s activities.

The clause will also require each master trust scheme funder to provide its accounts to the regulator on an annual basis. Those accounts are also required as part of the authorisation application at the beginning, but the clause ensures that they have to do it on an ongoing basis. Taken together, that will enable the regulator to risk-assess the solvency of scheme funders and the strength and enforceability of their commitment to providing funds for the master trust.

[Nigel Mills]

I have another boring techie question, I am afraid. The clause specifies that the scheme funder’s accounts must be provided within nine months of the end of the financial year, but for the actual master trust scheme accounts it says

“no later than two months after they are obtained by the trustees.”

Is there some other provision that creates a backstop date when the trustees have to get those accounts or could we be waiting, in theory, forever to get the actual accounts for the scheme? I guess there must be a provision somewhere.

[Richard Harrington]

If I may, I will return to that point. I am a little confused by it, although I am not saying that my hon. Friend is trying to confuse me. If I may, I will continue in full flow and will do my best to answer it by the end of my comments or apologise to him.

The measure will enable the regulator’s assessment of the financial sustainability of the master trust to take that information into account, to the extent that it effects the financial position of the scheme. The combination of the information from the scheme accounts, the scheme funder’s accounts, the business plan and supporting documents will support the regulator’s ongoing financial supervision of a master trust.

Clause 16 provides that the regulator may, by notice in writing, require the trustees of an authorised master trust scheme to submit a supervisory return. The Government recognise that the requirement means additional work for trustees. Therefore, the clause provides that a supervisory return can be requested only once in any 12-month period at most, and that trustees are given at least 28 days to compile and submit the return. It may be appropriate for the Government to specify the information that can be requested through such a return. The clause allows the Secretary of State to make regulations to that effect.

Clause 17 provides that the regulator must be notified in writing if significant events occur in relation to an authorised master trust scheme. Those events will be defined through regulations. I will briefly explain what the Government intend to capture by the term “significant events” and give an example.

We intend that the list of significant events will capture events that could affect the ability of an authorised master trust scheme to continue meeting the authorisation criteria. I should like to be clear that the occurrence of a significant event in a master trust scheme will not necessarily have an impact on the ability of that scheme to meet the authorisation criteria, but it may have such an effect. For example, the scheme may have a change of trustee. As the fitness and propriety of a trustee is linked to the authorisation criteria, the regulator must be informed of such a change so that the new trustee may be assessed against the relevant standards—the regulator may well do that, and that would not affect the scheme’s authorisation status. Equally, there could be an impact. The clause sets out who will be subject to the reporting duty, and again the regulator can issue a civil penalty for failure to comply.

On clauses 18 and 19, for the first time, the regulator will have the function of authorising a pension scheme before the scheme can operate in the market, as I mentioned. The implications of the decisions that the regulator will have to make are major, and we must be satisfied that we have given the regulator the tools it requires to ensure that such decisions are fully informed. It is therefore important for the Bill to make provisions that allow the regulator to gather the information it needs about the master trust schemes. The clauses will ensure that the regulator can use all the information-gathering powers effectively in relation to master trusts and the new authorisation regime.

Clause 20 gives the regulator the ability to withdraw a scheme’s authorisation if it stops being satisfied that it meets the authorisation criteria. The clause is fundamental to the Bill; without it, there would be no consequence for a scheme that becomes authorised and then lets standards slip, or if events occur that materially impact whether the regulator remains satisfied that the authorisation criteria have been met.

The regulator seeks to support and assist those involved in running pension schemes before it comes to sanction them, but if a scheme no longer satisfies the regulator, the regulator must have the power to withdraw authorisation from the scheme. We will come to discuss the consequences of a decision to deauthorise a master trust scheme in due course, because such provisions are made later in the Bill. The clause simply provides a necessary power so that the regulator can make such a decision. Without that, the authorisation regime would be reduced to little more than a one-off check at the beginning and would not work to protect the interests of master trust pension schemes.

I will think about the point made by hon. Friend the Member for Amber Valley and either write to him overnight or bring a response to the next sitting. I apologise, but my mind has been on these matters and I will have to think about his point, which was a very good one.

Question put and agreed to.

Clause 14 accordingly ordered to stand part of the Bill.

Clauses 15 to 20 ordered to stand part of the Bill.

Clause 21

Triggering event: duties of trustees

Question proposed, That the clause stand part of the Bill.

Oral Answers to Questions

Debate between Lord Harrington of Watford and Nigel Mills

Monday 9th January 2017 Commons Chamber

[Richard Harrington]

As the hon. Gentleman will be aware, the Government have given £1.1 billion of transitional relief for WASPI women. The issue has been discussed in this House very many times and the Government have no plans to do anything further in that respect.

[Nigel Mills (Amber Valley) (Con)]

T9. Will the Minister reassure Leonard Cheshire Disability, which has a base in my constituency, that the welcome move to the Work and Health programme will not result in a large reduction in funding to help disabled people get back into work?