Pension Schemes Bill [HL]

Debate between Lord Hutton of Furness and Lord Vaux of Harrowden

Committee stage & Committee: 1st sitting & Committee: 1st sitting : House of Lords
Monday 24th February 2020 Grand Committee

[Lord Vaux of Harrowden]

I hope the Committee does not mind if I start by saying that my name is pronounced “Vaux”. I blame the noble Lord, Lord Brougham and Vaux, for the misunderstanding.

Amendment 13 is very straightforward and, I hope, not too controversial. We have already had discussions today on the importance of communication regarding CDC schemes. CDCs are often described as being somewhere in between defined benefit schemes and defined contribution schemes. That is an important misunderstanding; they are not. They are defined contribution schemes, with none of the guarantees of any level of outcome that a defined benefit scheme provides. We have heard comments today about accrued benefits and about transfer values being calculated based on target benefits payable. All these things are more like defined benefit schemes but, in reality, do not relate to CDC schemes.

Given that the schemes provide these target outcomes, there is a real risk that employees signing up will not fully understand the reality that they are taking all the investment risk and the employer is taking none. In particular, unlike with a DB scheme or an annuity under a DC scheme, the amount of pension can and does vary year on year, up or down, after it has started to be paid. This is again a very important difference from a defined benefit scheme or an annuity under a defined contribution scheme.

The experience in the Netherlands in 2012-13 shows how this can come as a surprise. People were deeply shocked when their pensions were cut in actual terms by up to 7%. Very few Dutch schemes have managed to keep up with inflation over recent years, and further cuts are expected in the coming years despite having been postponed this year by government jiggery-pokery. This has seriously undermined faith in the schemes because people expected to be paid a consistent, inflation-linked pension under them, and they have been shocked. If we are to avoid a similar loss of face, it is essential that the risks are made very clear in any publication issued by the schemes. That needs to cover all interactions: when people are considering whether to sign up; whenever statements and other communications are sent to members; when people are nearing retirement and deciding what to do; and, as pensioners, as time goes on. Most commentators on the Dutch situation highlight that the proper communication of risk is one of the biggest clear lessons that we should learn from the Dutch experience in setting up our own similar schemes.

The Minister said at Second Reading, and she has repeated today, that the Government will ensure that in communications to members, particularly at key points throughout a member’s pension scheme journey, CDC schemes are clear and transparent that benefit values may go up as well as down—or down as well as up, actually. However, that does not seem to be a requirement in the Bill. The regulations about publications in Clause 46(2) do not seem to facilitate that, and I cannot find it anywhere else. Clause 46(2) says that the regulations may, among other things,

“require the trustees to publish a document specified or described in the regulations … require information or a document to be made available free of charge … require information or a document to be provided to a person in a form or by means specified or described in the regulations … require or permit information specified or described in the regulations to be excluded from a document when it is published in accordance with the regulations.”

Nowhere does it talk about the importance of communicating risk. Amendment 13 would simply make the clear communication of the risks—just as the Minister has said will happen—a legal requirement. I very much hope that the Government can accept this really very simple proposal.

[Lord Hutton of Furness]

The noble Lord, Lord Vaux, has drawn attention to an important issue. The wording of Clause 15, which deals with communication requirements that the Pensions Regulator has to be satisfied with, is all about the systems and processes of communication. I accept that that is important but so is the content of the communication. The issue of risk, and who carries the principal burden of risk in a collective defined-contribution scheme, is central. Anyone who has followed what happened in the Netherlands a few years ago will be aware of the enormous sense of disappointment, anger and, I think, surprise that many of the scheme members felt when their pensions in benefit were reduced. No one thought that was possible but of course it was, because, at the end of the day, collective money purchase schemes are, as the noble Lord said, collective defined contribution schemes. The risk is entirely on the scheme member; it is not on the employer at all. No guaranteed promises are being made to scheme members about what their retirement benefits will be.

The issue of the content of the communications that the scheme must make available to its members is just as important as the systems and process of communication. It is a mistake in the Bill for the emphasis to be placed on just the systems and processes, as it is, with no acknowledgement of the importance of the content.