Pension Schemes Bill [HL]

Lord McKenzie of Luton Excerpts

Committee: 2nd sitting (Hansard): House of Lords
Monday 28th November 2016 Lords Chamber

[Lord Freud]

I think that the situation is the same—the fact that you have primary legislation will allow that to happen. I will clarify that, but I think that is the point of primary legislation.

I make the point to the noble Baroness, Lady Drake, that the Pensions Regulator will make a pause order only under carefully considered circumstances. The pause order may last for the duration of a triggering event period but is not likely to continue for a significant length of time, and the regulator must weigh up the potential impacts on members when considering whether to issue such an order.

I shall now turn to the government amendments on the pause power.

[Lord McKenzie of Luton (Lab)]

My Lords, perhaps I might speak to my amendment in this group, which he has answered in part. That might make it a tidier process.

The purpose of Amendment 47A is to look at the issue of tax relief, as the Minister has identified. Under the pause provisions, an order can direct that no new members are to be admitted to the scheme and no further contributions and payments are to be paid towards the scheme by, or on behalf of, any employer or members. This does not apply, under Clause 31(6), to,

“contributions due to be paid before the order takes effect … and … references to payments … include payments in respect of pension credits”.

Our amendment seeks to make it clear that amounts recoverable by the provider from HMRC in respect of tax relief attributable to the permitted contributions—that is, those paid before the order—will still be available to the master trust. For the purposes of Clause 31(6)(a), it is presumed that the tax component is a contribution or payment. If so, do the mechanics of how relief at source operates mean that the HMRC payment is due to be paid before the order if the related contribution is—there is a timing issue here—or is it proposed that there will be some form of carve-out for the tax relief under Clause 31(5)(b)?

The intention behind the amendment was to probe that narrow issue rather than to achieve a wider objective, but of course it raises the wider issue of the amounts of the two forms of tax relief, touched upon in particular at Second Reading by the noble Lord, Lord Flight, and the noble Baroness, Lady Altmann. They set down very clearly the problem for schemes operating net pay arrangements for individuals who do not pay income tax, in contrast to those who use the relief at source method and can get tax relief at 20% on the first £2,880 paid into a pension—equivalent to a gross of £3,600. Those who are not subject to income tax and are within the net pay method are clearly missing out. The extent to which they miss out in aggregate may not be dramatic at present and will be influenced by auto-enrolment thresholds or current required contribution levels and the income tax threshold—the personal allowance. However, this will increase as more and more auto-enrolment takes place, the required contribution increases to 3% and there is still a gap—possibly a widening gap—between the threshold and the income tax personal allowance.

Can the Minister tell us how many non-taxpayers are currently contributing to a pension under net pay arrangements and could benefit from relief at source, and what is the aggregate tax benefit forgone? Going back to my earlier point, the amendment is intended specifically to focus on the technical issue of how that tax is garnered and paid before the cut-off point of the pause order.

[Lord Freud]

My Lords, on that narrow point, I hope that I can again reassure the noble Lord that, when those rebates are due, before the pause order is in place, we have a way of making sure that they are paid—through Clause 31(6)(a). It may be easier for me to write to the noble Lord and describe that process, but I think that it achieves what he is looking for. I will have to provide the figures on the net pay separately but will write to him on those, too.

[Lord McKenzie of Luton]

I would be grateful if the noble Lord could write on that specific point because I am struggling to see how a contribution—particularly one which comes in fairly late in relation to the date of the pause order—could immediately be converted into a receipt from HMRC, which is what I think the Bill requires.

[Lord Freud]

This is really a specific point, but I will write to the noble Lord both on the numbers and on how the process will work. I hope that that will be satisfactory and that we can then dispose of the matter for the purposes of later stages of the Bill.

I turn to government Amendments 47, 48, 49 and 52. These are intended to provide further clarity and some tidying up of the provision. They are based on further consideration of the comparisons with the Pension Regulator’s freezing-order power in the Pensions Act 2004, and are intended to ensure that they work sufficiently in a triggering event period. Amendment 47 makes clear that the pause power can be used to prevent benefits being paid out. Following the introduction of the Bill to the House, we have received some inquiries as to whether this is achieved through the provisions in the Bill. That was our intent, and as the freezing-order power makes separate provision to cover this aspect, we have, through Amendment 47, made an equivalent and explicit provision in respect of the pause order. Amendment 48 inserts a missing definition of “pension credit”, which was an oversight, and mirrors the freezing-order power. Amendment 49 is consequential to Amendment 47, and ensures that members retain their entitlement to any benefit payments affected by the pause order.

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[Lord Freud]

I thank noble Lords for allowing me to speak to these amendments. Once again, please accept my sincere apologies for proposing these amendments now rather than including them in the draft Bill as introduced. Most of my proposed amendments modify the procedures the Pensions Regulator must follow when exercising some of the new functions introduced by the Bill.

Amendments 58 to 65 and Amendments 73 and 76 change the procedure that the regulator must follow when making a decision on an application for authorisation from an existing master trust scheme. The majority of the Pensions Regulator’s statutory functions are exercised through internal procedure known as “standard procedure”, with “special procedure” applying to certain functions where there is an immediate risk to members or assets. These procedures are set out in the Pensions Act 2004. The Bill as introduced provides for standard and special procedure to apply to the power to grant or refuse authorisation to an existing master trust scheme. However, on further consideration, we do not believe that some of the steps involved in these procedures would be appropriate.

The standard procedure provides for the issuing of a “warning notice” to such persons who, in the view of the regulator, would be directly affected by the regulatory action under consideration. They would then have the opportunity to make representations before a decision could be made about whether to exercise the regulatory function. This means that the Pensions Regulator would be obliged to send the trustees of an existing scheme such a notice after the trustees submit an application for authorisation.

In this instance, the regulatory action the notice would refer to would be the power to grant or refuse authorisation. It would not be necessary to warn the trustees that the regulator intends to take this regulatory action and make this decision, nor would it be appropriate to invite further representations at this point as the trustees would have submitted all necessary representations in their application. Special procedure, which dispenses with the warning notice and representations steps in the first instance, could be used only when the regulator considers there is an immediate risk to the interests of the members or assets of the scheme.

Amendments 58 to 65 and Amendments 73 and 76 would align the process of deciding whether to grant authorisation to an existing master trust with the process the Bill specifies for making this decision for new schemes. However, the amendments retain the requirement that the decision to grant or refuse authorisations must be made by the determinations panel of the Pensions Regulator. This is appropriate because in both situations a scheme operating in the market will be required to transfer members out to an authorised master trust scheme and to wind up. The impact of this is significant, and under these circumstances it is appropriate for the determinations panel to make the decision. The amendments I propose would maintain rights of appeal to the First-tier or Upper Tribunal should the decision be to refuse authorisation. The amendments would simply remove unnecessary steps and delay.

Amendment 55 has a slightly different purpose. It would ensure that if an existing master trust scheme—that is, a master trust in operation before the commencement date—submits an application for authorisation and the Pensions Regulator decides to refuse authorisation, it would not have to commence the process of transferring members out and winding up until any appeals are disposed of.

The final amendments I seek to move within this group are Amendments 72 and 77, which also deal with changes in procedure, but in relation to different regulatory powers within the Bill. The regulator has a power to direct the trustees of an authorised master trust to comply with the requirements of Clause 26 in relation to the implementation strategy. Where there is no strong reason to specify a different procedure, it is right that the regulator’s functions should be subject to the standard procedure, and for this reason Amendment 72 makes this power to direct subject to that procedure. In addition, where the trustees of a master trust should be following an approved implementation strategy but are failing to do so, under Clause 28(4) the regulator has the power to direct the trustees to pursue the continuity option identified in the strategy and to take such steps as are identified in the strategy to carry it out.

Amendment 77 makes this a power which can only be exercised by the determinations panel under standard procedure. The Government consider this appropriate, as it is a power which may have a significant impact on the scheme and its members. I hope I have given a thorough explanation of my proposed amendments. I thank noble Lords again for bearing with me in bringing these amendments at this stage of the Bill process, and I beg to move.

[Lord McKenzie of Luton]

My Lords, I thank the Minister for his full explanation of these provisions. I am bound to say that we would like to study them a bit further and bring something forward on Report, if necessary, but I thank the Minister and the Bill team for supplying us with a Keeling schedule, which made these provisions somewhat less impenetrable than they might otherwise have been. As far as the panel is concerned, we discussed the issue of resources available to the regulator before. Will the determinations panel have the necessary resources available to it, and how speedily can it act and pick up these matters?

I have two brief questions on Amendments 73 and 76, which delete particular provisions in the Bill. Amendment 76, for example, deletes:

“The power to grant or refuse authorisation of a Master Trust scheme in operation on the commencement date under section 5”.

I presume that power is being deleted because it flows to the determinations panel, but will the Minister just clarify that for us?

[Lord Freud]

I am pleased to do that. My understanding is that the second assumption is correct: Amendment 76 moves it over to the determinations panel and I spelled out last Monday the process by which we will get the financial resources required by the Pensions Regulator. Clearly, one of the issues in that process will be the funds required to operate the determinations panel.

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Moved by

[Lord McKenzie of Luton]

56: Schedule 2, page 37, line 39, leave out “six” and insert “three”

[Lord McKenzie of Luton]

My Lords, this small, probing amendment would reduce the application period from six months to three. It was conceived by seeking to deal with the question: for how long can an authorised master trust remain in operation unauthorised under these provisions? That is what sparked the thoughts. I acknowledge that the consequential amendment to paragraph 8(7), which should have followed, has not been made, so in effect we have just part of the amendment here.

The purpose of this probe is to test the rationale for the length of the period during which an existing master trust can continue to operate without authorisation. As it stands, a master trust must apply for authorisation by the end of the application period. The application period in the Bill is six months—three in our amendment—beginning with the commencement date. The commencement date is the date on which Clause 3—“Prohibition on operating a scheme unless authorised”—comes into force, which is to be fixed by the Secretary of State but is expected to be some two years away. The Pensions Regulator must make a decision on the application within six months and, if it is refused, can be referred by the trustees or others to the tribunal.

From today, absent an appeal, an existing master trust could remain in operation for two years before the commencement date; then there are six months before it applies, with a six-week extension, and six months during which the Pensions Regulator must give it consideration, assuming that there is no appeal. This is potentially a long time. It is accepted that the transitional provisions will be in place from the date the Act is passed, or 20 October, concerning triggering events, the prohibition on increasing charges and the scheme funder’s liability for the costs of winding up the scheme. Of course, all this is happening nearly two years after the commencement of auto-enrolment, which has been the spur to the growth of master trusts.

My plea is: should we not be making faster progress? Given the commitment to consult on regulations, the shape of the detail required for an application will surely be evolving long before the commencement date. Is there not a way we can make faster progress in this very important area, where billions of pounds of people’s investments are at risk? I beg to move.

[Lord Young of Cookham (Con)]

My Lords, as we have just heard, the amendment tabled by the noble Lord, Lord McKenzie, and the noble Baroness, Lady Drake, would reduce the time period an existing master trust scheme will have in which to apply for authorisation from the commencement of the relevant provisions of the Bill from six to three months. While I have some sympathy with the amendment, for the reasons set out by the noble Lord, the Government’s view, which is informed in part by the Pensions Regulator, is that there is a compelling case for allowing a maximum of six months.

My expectation is that some schemes will have relatively little to do in order to align their businesses with the new requirements and, as a result, will be in a position to apply for authorisation early in the six-month application window. Others may face more of a challenge and may need time to consider the final legislation in full—including, of course, the regulations, which will come out next year—before they determine whether to apply for authorisation or withdraw from the market. We do not want to risk losing good schemes from the market because they have not had sufficient time to make the necessary changes to meet these new requirements. Having consulted the regulator, our view is that six months will give schemes the time they are likely to need.

I appreciate the noble Lord’s concern that members should be protected as quickly as possible but we must get the balance right between achieving that and placing demands on existing businesses. As I think the noble Lord recognised in his remarks, an additional key protection for members is set out in the Bill, which will apply from the beginning of the application window. This is in addition to the retrospective provisions in the Bill, which mean that a scheme that experiences a triggering event from 20 October this year will be unable to increase charges on members to pay for scheme wind-up. The additional protection is that if a scheme experiences a triggering event during this period, and the regulator has reason to believe that there is an immediate risk to the interests of scheme members, the regulator will have the ability to issue a pause order under Clause 31, which we have just been discussing, regardless of whether or not the scheme has submitted an application for authorisation.

Finally, on the overall length of time it will take, as the Bill stands, from the date on which regulations fully commence master trust schemes will have six months to submit an application for authorisation. The Pensions Regulator will then have six months from the point of receiving an application to decide whether to grant or refuse authorisation. This means that the vast majority of existing schemes will be either authorised or not authorised within one year of full commencement. Where trustees are unsuccessful, they can appeal to the First-tier Tribunal or the Upper Tribunal. The master trust will be able to continue operating pending the outcome of that appeal.

Although I understand the noble Lord’s desire to ensure that the schemes become authorised quickly—after all, the whole purpose of the Bill is to move to a position where all master trust schemes operating in the market have satisfied the Pensions Regulator that they meet the requirements for authorisation—we must strike a balance between increasing protection for scheme members and placing requirements on the master trust industry. Having consulted the Pensions Regulator, the Government’s view, as I said, is that allowing six months for applications from the commencement of regulations strikes the right balance. For those reasons, I invite the noble Lord, Lord McKenzie, to consider withdrawing his amendment.

[Lord McKenzie of Luton]

My Lords, I thank the Minister for his reply—which was not unanticipated. I beg leave to withdraw the amendment.

Amendment 56 withdrawn.

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[Baroness Bakewell of Hardington Mandeville (LD)]

My Lords, on the face of it, Clause 40 on the power to override contract terms appears sensible to most people. While there may be very good reasons why the Secretary of State may wish to override provisions contained in some pension schemes, I believe that the House would want to be reassured that it was absolutely necessary.

People I have talked to about my concerns over this power all say the same thing: the Government are always overriding contracts. In other words, get used to it. However, I find this quite difficult to come to terms with. As noble Lords know, I come from a local government background, where every contract has to go out to tender, even if it is too small to hit the OJEU rules. It is expected that at least three quotes will be obtained. Once initial quotes are obtained, haggling often begins on the bigger contracts, and a lot of lawyers are involved before the contract is finalised, signed and executed. The contract start date is agreed and eventually the service contracted for is begun.

Quite small parish councils also adhere to the rule that quotes must be obtained before a service contract or purchase can properly be made. It is, after all, council tax payers’ money that is being spent by parish, district, county and other local authorities. Due process has to be followed. If a contract that has been correctly drawn up, tendered for, signed and legally agreed were overridden by the local authority in question, there would be very serious consequences—and even, perhaps, central government intervention.

But here we see that the Government are proposing that contracts that have been legally executed, agreed and signed can be overridden summarily by the Secretary of State. Of course we want to be reassured that the interests of pensioners and their pension pots are protected, and we all want to ensure that all steps are taken to make that happen—but do we really need such a draconian step to facilitate this?

I originally felt that this clause set a very dangerous precedent. But I now understand that Secretaries of State do this all the time, so it quite clearly does not set a precedent as the practice already exists. I will therefore confine my comments to the Minister to asking: does he not feel that this is setting double standards for those who hold elected office and are in positions of authority? One rule exists for governance at local authority level and a completely different set of rules exists for central government. Does the Minister feel that this is likely to generate trust and confidence in central government—or, as I feel, that it will do quite the reverse?

[Lord McKenzie of Luton]

My Lords, I will comment briefly. I find it difficult to support this proposition. The noble Baroness drew attention to contracting in local authorities, and we understand that—a number of us have been there. But is not the key issue here that the market does not produce the right result? There is weakness on the buyer side, and given the complexity of the product, you need some specific provision to deal with that. We are dealing here of course with a ban on member-borne commission and a cap on early exit charges. The latter in particular is seen to be an inhibitor to people accessing their pensions—indeed, the evidence is clear that it is an inhibitor. If those issues have to be addressed, then we have to use the mechanisms which are at hand. I agree that causing an override of these contract provisions is not the most comfortable mechanism, but it already exists in relation to scheme details, I understand, between the FCA and contract-based schemes, and this extends it to deal with other contractual arrangements relating to schemes.

I am afraid that this proposition does not have our support. We think it is important that we go ahead and get the ban on member-borne commission and the cap on early exit charges in place as soon as possible. On that latter point, I am bound to say we are somewhat disappointed. We are pleased to see the press release from the Minister announcing a cap of, I think, 1%, or 0% for new provisions. But it is will be October next year before that is in place, which again seems a little bit tardy, because the FCA is moving to get the restrictions in place by the end of March.

[Lord Kirkwood of Kirkhope (LD)]

My Lords, I will add my voice to commend the merits of my noble friend’s position. I understand what the noble Lord, Lord McKenzie, says, and I understand too the grave situation and the need for protection, but as I have said before—the Minister was sensitive enough to pick it up the last time we discussed this—the provision of an override completely freezes the responsibilities and duties of the trustees. There is a master trust here, which presumably—I cannot see any way round this—has a trust deed which sets out the rules and responsibilities. The provisions in this clause do not just override the contracts but run a coach and horses through the trust deed and the responsibilities of the trustees. It is effectively a vote of no confidence in the trustees, as far as I can interpret how this is to be used, and that is an extremely serious situation.

In the past, trust law has served pension provision well in this country. In addition, there are extremely onerous fit-and-proper-person tests in the earlier clauses of this Bill. The assumption should be that people of good faith and knowledge and experience will not get into these positions at all. We have always been able to rely, in the main, on trustees doing their duty well, but this clause gives them no chance to do that. It sets them aside and is a vote of no confidence in what they do. If I was in that position, I would resign as a trustee—and if the trustees of the master trust resign, then the pause period might be not just three months or six months but a lot longer. My position in supporting careful consideration of this clause before we vote it into law is not just about the important points my noble friend made but about how this will impact on the assumption and service of trustees. If I was invited to become a master trustee in these circumstances, I would look twice at the provisions in this clause before agreeing to do any such thing.

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[Baroness Altmann]

My Lords, I will comment briefly on my noble friend’s absolutely valid observations. The concerns expressed across the House on this issue are particularly acute as there has been an interdepartmental, cross-government approach to try to clamp down on these issues. Police initiatives such as Action Fraud and Operation Scorpion have all supposedly joined together to fight this issue. The FCA is involved as well. However, in response to Written Questions that I have tabled, my noble friend has said that so far this year, for example, nobody has even been charged and, over the last few years, nobody has been convicted. So this initiative, while very worthy, is not necessarily catching the public’s attention. If you ask those who have been scammed where people should go if they are not quite sure about something or have had a problem, they simply do not know. So we either spend a lot more money advertising the existing initiatives or, preferably, ban cold calling and introduce further measures—as the Chancellor has already indicated is the intention—to prevent or make more difficult the transfer of pension money to one of these unregulated vehicles. If we do that, the public will be better protected.

[Lord McKenzie of Luton]

I will be brief as I do not want to echo the fantastic contributions made by the noble Baroness, Lady Bakewell, my noble friend Lady Drake, the noble Baroness, Lady Altmann, and the noble Lord, Lord Flight. I can see that if an intelligence unit were part of a wider cross-government approach, it could well pay dividends. However, I fear that we would simply replicate arrangements whereby HMRC constantly chases tax avoiders, alights on some and then there is a change, and then somebody draws a line somewhere else and it is a never-ending process. Nevertheless, it may be worth while pursuing that.

The noble Baroness, Lady Bakewell, should be congratulated on bringing forward this amendment, the thrust of which we clearly support—although I disagreed with her on her last amendment. As others have said, events have to a certain extent overtaken it because we heard from the Chancellor last Wednesday the welcome news that the Government will shortly publish a consultation on options to tackle pension scams, including cold calling. It proposes giving firms greater powers to block suspicious transfers and making it harder for scammers to abuse “small self-administered schemes”. So this approach appears to take us a little further than the strict terms of the amendment, but if we are to forgo the opportunity to legislate now, at least on cold calling, we need some reassurance from the Minister on how short is “shortly” and what legislative vehicles will give effect to these conclusions.

I do not seek to repeat a number of the awful situations that noble Lords have identified, of people being deprived of their life savings. We have argued before that insufficient groundwork was undertaken by the coalition Government when they introduced these reforms; my noble friend Lady Drake made that point. One omission was clearly to anticipate the opportunities for fraud which these changes attracted. So if the Government are not able to convince us how quickly they can introduce measures to tackle these problems, we will be minded to support the amendment in the name of the noble Baroness, Lady Bakewell, at least as an interim measure.

[Lord Freud]

This amendment seeks to make it a criminal offence to make a cold call or send other unsolicited electronic mail or communications for the purpose of scamming a pension scheme member of their pension savings or to make changes to their existing arrangements; for example, inducing them to participate in high-risk investments. The noble Baroness, Lady Bakewell, focuses on a substantial issue. The figures are enormous. According to the ONS—the Office for National Statistics—eight scam calls happen every second in the UK, or over 250 million a year. Almost 11 million pensioners are targeted annually by cold callers, and savers have reported losses of nearly £19 million to pensions scams between April 2015 and March 2016. The amendment also stipulates that a person convicted of such an offence is liable to a term of imprisonment not exceeding six months, or a fine, or both, so it aims to deter scammers from such activity.

I state firmly that this is a priority for the Government, and we are determined to tackle the scourge of fraudulent nuisance calls. We want to send a strong message to consumers that they should not respond to such approaches. However, as my noble friends Lady Altmann and Lord Flight and the noble Baroness, Lady Drake, pointed out, that is not enough—banning cold calling alone will not stem the flow of transfers in scam vehicles or the establishment of those vehicles in the first place. Scammers who make cold calls are criminals and will continue to cold call and incite people to part with their savings. It probably does not make a huge amount of difference to the savers whether the criminals are based in this country or elsewhere in the world where we find it difficult to get hold of them.

The Government have explored this issue in detail, which is why in the Autumn Statement last week we announced that we will consult on how best to ban pensions cold calling. That needs to be supported by a wider package of proposed measures intended to tackle pension scams themselves. With regard to timing, on which I have been pushed by the noble Lord, Lord McKenzie, the plan is to publish a consultation on these measures before Christmas and to have the next steps ready for the 2017 Budget—I think it is still called a Budget—which will be in the spring. Comments can then be made on proposals to: ban cold calling in relation to pensions investments, and tackling inducements to do that; placing restrictions on certain types of transfer, which seeks to limit the flow of funds into scams; and making it harder for scammers to set up and run fraudulent small self-administered schemes, which tackles the potential vehicles for scams. We intend to provide more detail on these proposals in the consultation document.

To tackle the scams effectively, it is clearly vital to get this right and to do so in a way that does not impact on legitimate businesses. The consultation will seek to understand what impact these proposals would have on legitimate firms and member transfer activity, and what, if any, legislative solutions might be available and proportionate to disrupt the scams. In answer to the noble Baroness’s question, we will also be consulting on appropriate custodial sentences, although imposing them on people in different parts of the world is harder to achieve.

As I said, we need to ensure that we get this right, and the consultation, alongside existing engagement with experts from the pensions industry and consumer groups, will help inform our thinking. With that in mind, I ask the noble Baroness to withdraw the amendment, with which we are entirely in sympathy.

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As I say, this issue is of growing economic importance. It seems quite extraordinary that huge pension fund deficits continue to be reported and we are aware that the amounts are probably hugely overstated, but we are stuck with being legally obliged to show these deficits when directors are producing companies’ accounts. If we are constrained by EU agreement, we should require at the very least that deficits calculated at an appropriate rate of interest are also shown. I beg to move.

[Lord McKenzie of Luton]

My Lords, the amendment of the noble Lord, Lord Flight, seeks a way of tackling the concern about the calculation of DB pension liabilities and deficits, particularly their volatility and the impact a large deficit can have on a company’s balance sheet.

By way of illustration, the LCP annual survey of FTSE 100 company schemes estimated deficits at 31 July 2016 of £46 billion, compared with £25 billion a year earlier and an estimated surplus in February 2016—big swings, clearly. Of course, a significant factor in these calculations is bond yields, which reduced sharply following the EU referendum, pushing up liabilities, although it is suggested that some of this reduction has been negated by interest-rate hedging and that foreign currency-denominated assets have benefited from some decline in sterling.

The reality is that a number of factors feature in how DB schemes should be accounted for: life expectancy, inflation and discount rates, as well as contribution levels and benefits. In seeking to understand the sensitivity of this, for FTSE 100 companies, as reflected on the basis of International Accounting Standard 19, the aggregate pension deficit of £46 billion in July 2016 comprised liabilities of £628 billion and assets of some £582 billion. These are very large aggregates.

The noble Lord’s amendment concentrates on the calculation of defined benefit pension liabilities and would enable directors to use an alternative method if,

“they are satisfied that accounts give a true and fair view”.

It provides that the Secretary of State must,

“set out one or more alternative methods”,

for these purposes—I understand that this is based on actuarial advice—and that an alternative method of valuing DB liabilities must not be,

“contrary to international accounting requirements”.

I am grateful to the Institute of Chartered Accountants in England and Wales for the information it provided in helping me to frame this contribution. At present, listed companies have to adopt international accounting standards. In other cases, companies can choose to use IFRS or FRS 102, which replaced FRS 17. However, it is understood that so far as pension scheme liabilities are concerned, the two standards are broadly consistent. The amendment of the noble Lord, Lord Flight, would not appear to apply to listed companies which are bound by international accounting standards—but for how long? He raised that interesting question. FRS 102 sets out how defined benefit plan liabilities are to be measured and recognised. It requires a defined benefit obligation to be calculated on a discounted present-value basis, using a rate of discount by reference to market yields at the reporting date on high-quality corporate bonds. This has to be recognised in full on the balance sheets.

We have sympathy with the amendment to the extent that it seeks to dampen the volatility of the measurement of liabilities for accounting purposes, but not if it is seen as a route to lessen employer contributions to DB schemes. We recognise that the current accounting treatment which generates this volatility is not ideal, although it is not helped by government policies such as quantitative easing. However, we have concerns about this approach. The Financial Reporting Council is responsible for setting UK accounting standards, not the Secretary of State.

A process in which generally applied standards are overridden on particular issues would set a precedent that could lead to a confusing regime and not help transparency and confidence in financial reporting. It begs the question of what alternative method of valuing DB liabilities would enable directors to be satisfied that the accounts give a true and fair view. What would this mean for trustee scheme valuations? The era of very low interest rates has brought the matter into sharp focus. In winding up our Second Reading, I think the Minister said that the Government had this issue in their sights and would explore it in the upcoming winter Green Paper. We look forward to that but, in the interim, we seek an update on where the thinking is going.

[Lord Freud]

I thank my noble friend Lord Flight for this amendment, which opens up a fascinating area. Amendment 81 would require the Secretary of State to make regulations which would have the effect of allowing companies to disregard any method of valuing defined benefit pension liabilities required by accounting standards. I recognise and understand the concerns that have been expressed in this debate and during Second Reading about the measurement of the liabilities under accounting standards, particularly when we are in what one would hope is an unusual period of interest rates being low not for reasons of the economy but because of quantitative easing.

Following its recent public consultation on its future agenda, the International Accounting Standards Board concluded that,

“there was no evidence of problems that were sufficiently widespread and significant to require a comprehensive review of IAS 19”.

However, I assure my noble friend that this is not the end of the matter. The UK’s Financial Reporting Council is in the early stages of considering the impacts of the current approach and will be examining the case for an alternative approach. I believe that this is the most appropriate way forward compared with the approach proposed by this amendment. The independence of the standard-setting approach is widely regarded as one of its strengths. I do not think it would be right for government to intervene directly—here I echo the wise words of the noble Lord, Lord McKenzie. It should not effectively set aside the accounting standards framework that has been developed to deal with these complex matters. If the Financial Reporting Council finds objective evidence or broad stakeholder demand for change, any proposals would need to take fully into account the risks they may pose to members’ benefits and would need to be tested through public consultation.

My noble friend talked about the experience in the US. When he did so at Second Reading, he got me to do some work—I always resent that—to look at that. In the US, schemes may move to calculate their funding based on yields from high-quality bonds averaged over the past 25 years. That approach would effectively discount rates by 1% and lead to employers paying significantly less into their pension schemes. What we must not allow to happen—again I echo the noble Lord, Lord McKenzie, and it is not often that that happens—is a change that releases pressure on employers, only to find that that leads to their pension scheme being less well funded and members losing out.

I do not think there is a quick and easy solution here. Nobody who looks into this issue can be in any doubt that this is an extremely complex and technical area. To come up with an alternative accounting methodology would require a number of substantial steps. Those would include: undertaking a detailed analysis of the current commercial, financial and broader economic impacts of the current methodology to determine whether there is a need for that change; developing alternative approaches, which would also have to model transition impacts between the two regimes; seeking views from the market through public consultation on identifying the costs and benefits and any adverse impacts; and, finally, developing the detailed standard itself, which again would require a further round of public consultation.

We are planning to publish a Green Paper over the winter, and I can reassure noble Lords that it will explore the issue of how liabilities are measured and reported in the round. We want to ensure that measures of liabilities and deficits are properly understood and are being used and interpreted appropriately. We will explore and seek views on whether the measures used could, in some cases, be driving investment behaviour that is not in the best interests of members or employers, and we will look at what the alternatives might be. I hope I have reassured my noble friend that his concerns are being addressed and that he will withdraw his amendment.

--- Later in debate ---

[Baroness Altmann]

My Lords, I commend the noble Baroness, Lady Bakewell, on her amendment. I was proud that the Government finally recognised the need to allow people to undo unwanted or unsuitable annuities when that decision was announced and indeed put in the manifesto, which the noble Baroness quoted.

Government rules effectively forced people to buy these products even though they did not want or need them. They had no protection when they were buying but the plans were in place to ensure that they would have protection if they considered reselling them. There was to be mandatory Pension Wise guidance and advice depending on the value of the annuity, and indeed legislation had already been passed to make that happen. As the noble Baroness mentioned, companies have already spent quite significant sums in preparation for this market, which consumers want and in some cases need, as the case studies showed.

In the annuity market it is normal for there to be only a small number of providers, which has never stopped that market operating in the past. For defined benefit pension schemes and bulk annuities, for example, for many years there were only ever two companies that would offer quotes. That should not be a reason to stop people being able to sell their annuity. Indeed, many people with secure defined benefit pensions, and the additional voluntary contributions that they were saving on top of that, were often forced to buy an annuity that they clearly did not need. Very often, because the regulatory system drove people to shop around for the best rate, they did not know that that would not actually necessarily be the right product. If you shopped around for the best rate and bought the single-life annuity, there was no protection for your spouse. In some cases, individuals have bought a product that they do not need and is not suitable for their family circumstances. This measure would have given them an opportunity to undo that. The law currently allows people who have less than £10,000 a year in an annuity to undo it, but if we do not proceed with the plans that were previously in place, they will potentially be doing so without any consumer protection. The plans had been to ensure that there was consumer protection before this happened.

It is not up to the Government or the pensions industry to decide what is best for somebody’s money; they are the ones who know that. If they have bought something that is not suitable, it is right that the Government give them an opportunity to undo that deal. If you buy a brand-new car and it is the wrong car for you, you have the opportunity to sell it in the second-hand market—yes, you have to take a discount; yes, it may be a significant discount; but that is your choice. When the Government have enshrined freedom and choice in the pension system, it is appropriate for us to continue to enable people to access their savings, which they need and to which they were promised access. If it requires a delay to get the consumer protection in place, so be it. That is a shame, but it is at least a rationale for asking people to wait longer. To take away the opportunity altogether seems unfair, as the noble Baroness, Lady Bakewell, said. She is receiving representations; I am hearing from large numbers of ordinary people across the country how much it would mean to them to have the opportunity to undo an annuity that they no longer want, or perhaps never even wanted or needed.

[Lord McKenzie of Luton]

My Lords, we were a little surprised—perhaps we should not have been—to see this amendment seeking the establishment of a secondary annuity market, given the Statement made by the noble Lord, Lord Young of Cookham, just a month ago. I say first to the noble Baronesses, Lady Altmann and Lady Bakewell, that the fact that people may have ended up with an annuity which is not the greatest in the world does not mean that they should compound that problem by doing a bad deal in the secondary annuity market. That is the nub of this issue. You simply cannot equate a transaction on a second-hand car with the sale of an annuity. It is fairly clear what is the market price for a second-hand car; there is a vibrant market out there, as I understand. It is quite different with annuities. That is at the heart of this issue.

An amendment seeking to establish a secondary annuity market was rejected by the noble Lord, Lord Young of Cookham, and we supported him in that. In that Statement, he explained that the Government had consulted extensively with the industry and consumer groups to explore whether conditions for a secondary market in annuities could be established. The conclusion was that, without compromising consumer protection, there were likely to be insufficient purchasers to create a competitive market and that pensioners were likely to incur high costs in seeking to sell. They concluded that the policy would not be taken forward, despite the loss of front-end-loaded tax revenue to the Exchequer. As I said, we supported the Government in that, and we oppose this amendment.

We were sceptical from the outset that this was a sensible policy, and my noble friend Lady Drake and I raised a number of concerns when it first surfaced as part of the Bank of England and Financial Services Act. Indeed, we went on a delegation to see the noble Baroness, Lady Altmann, in her former role. There is of course no pre-existing secondary annuities market to help form a judgment on these matters, but what was proposed was potentially very complicated, with the players including individual annuity holders, potential beneficiaries and dependants, purchasers of rights of an annuity under a specific regulated activity, a further regulated activity for providers buying back annuities, regulated intermediaries, IFAs providing mandatory regulated advice, and authorised entities to check that holders of relevant annuities had received appropriate advice.

No wonder that even the then Pensions Minister, Steve Webb, opined that, for the vast majority of consumers, selling an annuity would not be the best decision. There would be significant costs arising from the necessary regulatory systems. There were further unresolved issues of means-tested benefits and social care and how the income deprivation and capital disregard rules would work in this context. There have been many problems—and, at the end of the day, concerns that there would be insufficient purchasers to make the market work for pensioners. I have not heard any new points raised by the noble Baroness, Lady Altmann, that dislodge this conclusion. Surely there is more for the pensions sector to concentrate on at this time than complicated arrangements that will likely serve only a very few.