Pension Schemes Bill [HL]

Lord Kirkwood of Kirkhope Excerpts

Report stage (Hansard): House of Lords
Monday 19th December 2016 Lords Chamber

[Lord Kirkwood of Kirkhope (LD)]

My Lords, I strongly support the case made by the noble Lord, Lord McKenzie. In my experience, in a defined benefit situation the trustee is rightly prescriptive with regard to the steps that need to be taken to satisfy a reasonable test of an engagement and communication strategy. It is blindingly obvious that it is different with master trusts, because they deal with a number of employers. Some of them might be very different in the work they do and the way they do it, so the extra link in the chain justifies this. No sensible person wants to litter primary legislation with a lot of detail. However, at the very least, the master trust needs to be constrained in law by satisfying itself in some way that it is taking steps, not just to ensure that the employers within the scheme are acting properly but so that the members of those individual schemes get the benefit of a flow of information and data which is appropriate to support the important provision of their pensions in the future. The case is well made. As I say, I am not in favour of adding things for the sake of it, but the cause is just. If, as the noble Lord, Lord McKenzie, suggests, it is kept skeletal, as long as there is some duty in the primary legislation, the Committee would be much happier to consider the passage of this legislation.

[Lord Young of Cookham (Con)]

My Lords, I begin by responding to the point that the noble Lord, Lord McKenzie, made in his introduction about whether, if one was dealing with a start-up, it would have to provide accounts. Of course, it does not, because it cannot, so that bit of Clause 4(2) would not apply.

A range of amendments relating to member engagement were put forward for consideration in Committee, and during that debate and at Second Reading I made it clear that I had sympathy with the principle behind them, as I have with the case that has just been made. Member engagement is important, and members should be encouraged to develop a strong sense of ownership of their pension saving. As the noble Lord, Lord Monks, noted when we last debated this issue, the money that the scheme is managing belongs to them. I also agree that it is important that schemes should keep their members well informed, especially—again, as the noble Lord, Lord McKenzie, noted in Committee—as a member approaches retirement.

That earlier debate focused largely on member communications. Communications are not quite the same as engagement, which is a somewhat broader notion including the idea of a two-way exchange. Effective communications certainly contribute to good levels of engagement but they are not the only factor that determines whether a member develops a sense of ownership of their savings. Noble Lords may also have drawn this distinction, which is why the amendment requires that broader “engagement” strategy. In practice, however, I believe that that strategy would inevitably contain significant detail on communications from a master trust, which is why I would like briefly to revisit some of the arguments on communications which I set out in Committee.

The purpose of this part of the Bill is to introduce robust minimum requirements which ensure that the interests of master trust scheme members are protected from the risks that arise in these types of schemes; it is not a Bill that seeks to prescribe every facet of running an excellent scheme. Some of those aspects, including how required outcomes may best be achieved in relation to an individual scheme, are matters for the trustees. That is why the documents listed in Clause 4 relate to the key risks and documents directly required under the authorisation criteria, rather than to wider documentation that the scheme may have.

I also noted that there is already a series of legal requirements setting out the minimum standards for communications in occupational pension schemes, which the noble Lord, Lord Kirkwood, may have referred to. It is worth briefly recapping those requirements. Trustees must provide members with basic information about the pension scheme within two months of their joining, and they are required to update them if this information changes. They must provide most members with a member-specific projected pension and an annual benefits statement. They must also provide a wide range of information upon request, including the annual report, the scheme rules, information about the investment principles and information about benefits and transfer values.

I re-emphasise that those are only minimum standards. The Pensions Regulator publishes codes of practice and detailed guidance for trustees to help them run their scheme according to good practice. This includes guidance on member communications. Our view remains that, provided the statutory requirements are met, it should be for trustees to decide how best to manage member communications. This is one area where a good scheme has an opportunity to distinguish itself. Once the regime commences, our assurance regarding the calibre of trustees of master trust schemes will be further enhanced because they will all have passed the new fit and proper persons requirement.

I also take this opportunity to respond to a specific point that was raised in Committee. The noble Lord, Lord McKenzie, argued:

“The Pensions Regulator should have the opportunity to review the systems and processes related to communications just as much as the features and functionality of the proposed IT system”.—[Official Report, 21/11/16; col. 1754.]

I thank the noble Lord for that contribution, which I have considered further. Although I cannot go as far as he would like me to, I hope that I can go a little further than I did in Committee. I can confirm that the Bill as drafted allows the regulator to take into account the systems and processes relating to communications and engagement when assessing the adequacy of a scheme’s systems and processes more broadly. I can also confirm that the Government would intend—subject, of course, to consultation—to use the regulations under Clause 11 to ensure that the regulator specifically considers a scheme’s systems and processes in relation to these important communication matters when deciding whether the scheme is run effectively.

There is of course the wider point of the engagement of individuals with workplace pension savings, which we take seriously. As part of the review of automatic enrolment that we announced on 12 December, the Government specifically committed to consider member engagement. In a Written Statement, the Minster for Pensions confirmed that the review would include,

“how engagement with individuals can be improved so that savers have a stronger sense of personal ownership and are better enabled to maximise savings”.—[Official Report, Commons, 12/12/16; col. 38WS.]

This review will be supported by an external advisory board, which will include pension provider representation, and we will ensure that we engage closely with the industry as part of that review.

--- Later in debate ---

[The Minister of State, Department for Work and Pensions (Lord Freud) (Con)]

My Lords, these amendments put the noble Lord, Lord McKenzie, not just ahead but well ahead—because he and other noble Lords expressed concern in Committee about the Bill’s approach to regulation. With many regulations subject to negative resolution, they felt that they would not be subject to adequate scrutiny. Noble Lords will remember that I responded that I would reflect on that point, and the amendments before us now are a result of that reflection.

We accept that the first regulations made under several of the powers in the Bill could be made under the affirmative resolution procedure to allow for scrutiny via parliamentary debate. After the first set of regulations introducing the authorisation regime has been brought into force, subsequent amendments to those regulations are likely to be relatively minor and, as a result, we do not think that affirmative resolution at that stage would be appropriate. Parliament will, of course, have the opportunity under the negative resolution procedure to require a debate on any such regulations if there is concern.

The provisions that will be subject to affirmative resolution as a result of these amendments represent significant aspects of the authorisation regime, including the fit and proper person test, financial sustainability, systems and processes, continuity strategy and significant events.

I owe the noble Lord, Lord Kirkwood, a proper exposition of the process of how we get to these regulations. Currently there is an engagement process with stakeholders to develop the detailed policy. We anticipate that that and an initial consultation to inform the regulations will take place in the autumn of 2017. That will be followed by formal consultation on the draft regulations. Our intention is to lay the regulations over the summer period and commence them during October 2018.

I will now touch briefly on the actual provisions that are covered. Clause 7 relates to the need for individuals involved in the scheme to be fit and proper people. Subsection (4)(a) allows the Secretary of State to make regulations requiring the regulator to take into account certain matters when assessing whether a person is a fit and proper person to act in a particular capacity. Clauses 8 and 9 relate to the financial sustainability of a master trust. Clause 8 requires that the regulator must be satisfied that the business strategy relating to the scheme is sound and that the scheme has sufficient resources to meet certain costs. The power in Clause 8(4) is to enable regulations to set out matters that the regulator must take into account when deciding whether it is satisfied on these matters. Clause 9 relates to the requirement for a scheme strategist to produce a business plan, and the power in Clause 9(2) allows the Secretary of State to set out what information should be included.

Clause 11 makes provision for systems and processes. It includes a regulation-making power to require the Pensions Regulator to take into account specified matters when deciding whether it is satisfied that the systems and processes adopted by schemes are sufficient to ensure that they are run effectively. Clause 12 sets out the requirement for the scheme strategist to prepare the continuity strategy. The powers in subsections (5) and (6) allow the Secretary of State to determine the format in which the level of charges should be set out. Clause 16 puts a duty on specified persons involved in running an authorised master trust scheme to notify the regulator when they become aware that a “significant event” has occurred.

This group of amendments also includes one further amendment which inserts a power to make consequential amendments to other legislation, including primary legislation. I am grateful to the noble Lord, Lord McKenzie, with whom I have discussed this amendment, for allowing me to bring it forward at what I acknowledge is a late stage. It is a standard power that we have in other pensions legislation, and I really must repeat my apologies that it was not in place at the introduction. The power will be narrow in scope. It is limited to amendments that are consequential to allow for necessary technical fixes and will apply only to existing legislation and legislation passed in this Session.

While we have made every effort to identify and make the necessary consequential amendments in the Bill, pensions legislation, as I suspect noble Lords will acknowledge, is very complex and technical. Similar powers were included in the Pension Schemes Act 2015 and the Pensions Act 2014. The power is used to ensure that the legislation works as intended. For instance, the power in the Pensions Act 2014 was used to ensure that the new state pension was taken into account when setting the automatic enrolment earnings threshold. As was the case in these Acts, this power will also be subject to the affirmative resolution procedure when used to amend primary legislation.

After the concerns expressed in Committee, I hope that these proposed amendments have met noble Lords’ concerns that the crucial aspects of the regime will have appropriate scrutiny. I also hope that I have explained why the amendment to Clause 37 is necessary in order to ensure that the legislation works as it should. I will once again repeat my thanks to noble Lords for bearing with me in bringing forward these amendments at this stage, and I trust that I have explained the position properly and given the appropriate level of reassurance. I beg to move.

[Lord Kirkwood of Kirkhope]

My Lords, obviously I welcome the Minister’s amendments, which are a very appropriate response to our discussions in Committee. The compromise that he has struck is useful—and not just in these circumstances. It is actually not a bad idea for legislation to start adopting some of these things because it might avoid some of the tensions we have seen in the past in social security legislation in terms of trying to get access to the secondary legislation. Taking the first regulations under the affirmative procedure is an excellent way out of the problem we saw in Committee.

The timetable that the Minister has laid out is very reassuring and gives people an idea of what to expect in terms of the consultation and the timeframe available. I understand Amendment 24. I know that such provision has been used previously in pensions legislation, but Ministers at the Dispatch Box will be well advised to note that this clause will be particularly carefully looked at not just by the House committees that scrutinise these matters but by the usual suspects on the Back Benches who crawl over the fine print of these things. If the use of such procedure is deemed to be inappropriate, the negative procedure is always available to us to make sure that there is no abuse of the powers taken under Amendment 24. Otherwise, the noble Lord, Lord McKenzie, and the rest of us are doing quite well so far. I hope that we can keep up this strike rate for the rest of Report.

[Lord McKenzie of Luton]

My Lords, I thank the Minister for the introduction of these amendments, which are very welcome. He has been true to his word and we thank him for taking us through the process of dealing with the regulations. One of our criticisms of the Bill was the plethora of regulation-making powers therein contained without the prospect of sight of even drafts of such regulations by the time we had to conclude our deliberations.

It was for this reason that we sought to strengthen the parliamentary process for this secondary legislation by subjecting it to the affirmative regulation procedure. The Government are meeting us part way on this matter by requiring in some key areas that the affirmative procedure apply to the first regulations made under various provisions. As we have heard, the changes apply to fit and proper person requirements, financial sustainability, the business plan, systems and process, continuity strategies and significant events.

We have also had the benefit of briefings with the Minister and the Bill team, which have aided our understanding of the regime and how it is meant to operate in respect of a range of issues including non-money purchase benefits, significant events, tax and pause orders and connected employers. As our continuing amendments should signal, we are not in total accord with the Bill as it stands and consider further change desirable.

As to the Henry VIII clause introduced by Amendment 24, the Minister is right that we discussed it before it was laid and I was grateful for that opportunity to engage. We are not enamoured generally of such provisions, particularly when they emerge at the tail end of our deliberations. As originally explained to us, they will be constrained by being used only to make the implementation of the regulations effective. In the event, they seem to go further than that. I wonder whether the Minister might comment. We recognise also that these types of provision have been used by Governments of all persuasions.

We recognise the complexity of the provisions in the Bill as well as the agility of the sector in adapting to change and sometimes circumventing it. Our own scrutiny of the Bill has caused us to conclude that the primary legislation is not in perfect shape even after being improved by our amendments, but until the detail of the regulations has been consulted on, it is difficult to foresee in every respect ideally what changes might have been appropriate. This is notwithstanding the flexibility that the Government have already taken for themselves; for example, in Clause 39.

For us, the imperative is to see a fit-for-purpose Bill on the statute book as quickly as possible. We will therefore not oppose this amendment.