Pension Schemes Bill [HL]

Debate between Lord Sharkey and Baroness Stedman-Scott

Report stage & Report stage (Hansard) & Report stage (Hansard): House of Lords
Tuesday 30th June 2020 Lords Chamber

[The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Stedman-Scott) (Con)]

My Lords, perhaps I may start by addressing the government amendments. I recognise that in Committee and in subsequent meetings, some noble Lords expressed concern over the regulation-making powers in Part 1 and how they might be used. I have considered those arguments carefully and am persuaded that your Lordships are, in many instances, right. Following your Lordships’ helpful comments, I am now persuaded that it would be more appropriate to make certain regulation-making powers subject to the affirmative procedure on all usages. I recognise that CDC schemes are a totally new form of pension provision in the UK and it is right that Parliament is, as a matter of course, able to debate changes to key parts of the regulatory framework surrounding them.

Your Lordships will recall that Clauses 11 to 17 set out the authorisation framework that all CDC schemes must meet. I know that the House was concerned by the delegated powers in respect of these clauses, as they provide for the core foundations of the authorisation regime. I am pleased, therefore, to announce that those delegated powers which were subject to the affirmative procedure only on first use will now be subject to the affirmative procedure on each use. In addition, the transfer-related regulations for CDC schemes, introduced by Clause 25, will now always be subject to the affirmative procedure rather than the negative procedure.

The relevant provisions contain two powers to amend the timeframes set out in primary legislation which govern when action must be taken by trustees once a transfer out of the scheme has been requested. First, there is a power to extend the time in which trustees must facilitate a request to transfer out of a CDC scheme to a period longer than the specified six months. Secondly, there is a power to amend the three-week “cooling-off” period, during which trustees may not facilitate the requested transfer unless they receive written instruction from the member to do so. Given the importance a decision to transfer out of a CDC scheme may have for a member, it is right that regulations in respect of the timeframes for related action are debated in Parliament under the affirmative procedure as a matter of course.

Amendments 35 to 38 make changes to Clause 47 to make it clearer that this power is not as wide as it may have appeared on first reading. I understand noble Lords’ concern about this clause: it contains a Henry VIII power and as such it should be as clear as possible when and for what purpose it can be used.

Our amendments make it very clear that the power can be used only to provide for non-employer established schemes, such as master trusts, and other non-connected multi-employer CDC schemes as and when concrete scheme designs come to light over the next few years. Noble Lords may recall that the Work and Pensions Select Committee in its report on CDC schemes called for our legislation to be extended to provide for CDC master trusts at the earliest opportunity, and organisations from commercial pension providers to trade unions and even the Church of England have made similar requests.

However, there are clear administrative differences between a scheme with one closely involved employer and a master trust with many more distant employers. The authorisation and supervision legislation will therefore need to be tailored to reflect the risks posed by such schemes and providers so that members and participating employers are to be adequately protected.

This is what Clause 47 seeks to do. It is intended to allow us to make the necessary changes via regulations in a timely fashion so that master trusts and other non-connected multi-employer CDC schemes can be up and running as soon as possible, and employers and employees can benefit at the earliest opportunity. Without this clause, it is likely that the extension of CDC provision to master trusts and other non-connected multi-employer models would be delayed.

However, I assure noble Lords that any such changes required would be considered carefully and consulted on thoroughly before being brought before the House to ensure that they covered the right ground. Such changes would also be subject to the affirmative procedure, which would give the House opportunity to scrutinise the regulations.

The amendments before the House are intended to address concerns in key areas— authorisation, transfers and the provisions relating to the future expansion of CDC—and I am grateful for the informed and thoughtful comments that have led us to this point. The points that I have made also apply to the corresponding Northern Ireland provisions in Part 2 of the Bill. I hope that noble Lords are reassured by the amendments. I beg to move.

[Lord Sharkey (LD) [V]]

My Lords, I shall speak briefly to government Amendments 1, 3 to 7, 9 to 12 and 14 to 31, as well as to my related Amendment 2. First, I thank the Minister and her team for their close engagement with us on the Bill and their time, patience and occasional willingness to change their minds.

The government amendments are a good example of mind-changing. As the Minister said, they remove the instances in Part 1 of first-use-only affirmative procedures; that is a very good thing. The DPRRC’s report on the Bill in February this year was concerned about the use of these procedures. It pointed out that the powers in the regulations remain exactly the same on subsequent use. In Committee, I strongly urged the Government to remove this type of procedure; I very much welcome the fact that they have now done this. All the subsequent uses of the negative procedure have been withdrawn by these amendments.

However, one negative procedure remains: what is left of Clause 11(8) in line 18 on page 7. This is the subject of my probing Amendment 2. Subsection (8), as amended by government Amendment 3, prescribes the negative resolution procedure for regulations under Clause 11(2)(e). Subsection (2)(e) seems a little opaque. It seems to allow the Secretary of State to add persons or categories to those whose fitness and propriety TPR must assess. On 22 June, the Government confirmed to me in writing that this was the case. They believed that this was largely an operational matter and that the negative procedure provided

“appropriate scrutiny as well as opportunity for debate if desired”.

This is a mischaracterisation of the negative procedure, which in practice barely merits the label “scrutiny” at all. Possibly because I did not ask them to, the Government did not address why subsection (2)(e) was necessary at all or give examples of what kind of persons or categories of persons are envisaged in subsection (2)(e) and what role they may play in the schemes themselves. Any additional involvement of these persons or categories of persons may give them significant influence over the conduct of the schemes.

It is obviously desirable to have these new entrants assessed for fitness and propriety. The issue here is the Secretary of State’s decision to add persons or categories to the list without constraint, restriction or proper scrutiny. I would be grateful if the Minister could address these points when she replies.

Pension Schemes Bill [HL]

Debate between Lord Sharkey and Baroness Stedman-Scott

Committee stage & Committee: 2nd sitting (Hansard) & Committee: 2nd sitting (Hansard): House of Lords
Wednesday 26th February 2020 Grand Committee

[Lord Sharkey]

I also want to be invited. A critical feature of the discussion is the effectiveness of TPR. When we have the meeting—to which almost everybody seems to be invited—it would be very helpful to have a detailed discussion on what assessment the Government have made of the performance of TPR against its three key principles, certainly in the past year and perhaps slightly longer. I know the Minister gave an example of TPR being effective, but that was one example and I would like to see more data on why we should have faith in TPR’s ability to police this scheme or any scheme.

[Baroness Stedman-Scott]

We will pass a piece of paper around, and if noble Lords will write their names on it, we will make sure they are all invited.

I am sorry if I am repeating myself. I am well aware of the expertise of noble Lords in this Room who work in the industry. It is highly regarded and highly respected. The message in the points that noble Lords are making is received. We will meet to talk about them in more depth. That will give officials more time to reflect on the very detailed questions that noble Lords have asked, collect data, answer some of the exam questions and try to come to a place where we all understand and agree on what we are trying to do. We take it in that spirit. In that spirit, I ask the noble Lord to withdraw his amendment.

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[Baroness Stedman-Scott]

As I understand it, we have to consult before we can make that decision.

[Lord Sharkey]

Could I join in on this? We are talking about Amendment 73, which would insert new Section 41A on “Climate change risk”. Its first proposed subsection says “Regulations may impose requirements”; it does not specify any requirements in that part because, as the Minister rightly says, they are all to be consulted on later. But it is odd that it should say “may” and not “must” since it talks about imposing requirements. In practice it means that the Government need not do anything at all, which is unfortunate.

Exactly the same comment applies to new Section 41C, headed “Sections 41A and 41B: compliance”. It begins “Regulations may make provision” and underneath that is a long list of things that will eventually turn out to be regulations and will be consulted on. I understand that “may” is appropriate there but, as it stands, the Government do not have to do anything at all about this as long as the word “may” remains as it is in both those initial paragraphs. I re-emphasise the point made by my noble friend Lady Bowles: leaving the provision of an appeal mechanism to “may” might not be a very good idea.

[Baroness Stedman-Scott]

I do not know whether the noble Lord has put his name on the list to meet, but it looks as though I am able to offer him a meeting on the consultation first, if that is helpful, to try to get to where he wants to be.

Going back to the point raised by my noble friend Lady Altmann about schemes not having a website, schemes are not required to set up a website to publish their statement of investment principles or other documents. The information must be published on a publicly available website in a manner which allows for the content to be indexed by internet search engines. This can include a social media site, a blogging platform or a repository offered by a search engine provider, as long as trustees have ensured that the document is public and can be indexed. The Government are not in the business of endorsing publishing tools, but Facebook, WordPress and Google Docs allow for free publication.

Coming on to my noble friend Lady Altmann’s point about what is meant by a large scheme, following the passage of the Bill, we will consult extensively in the summer on what schemes should be in scope and how the scope will increase over time. My noble friend also said that the Pensions Regulator is not doing anything about breaches of ESG legislation. The chief executive of the Pensions Regulator has written to DWP to confirm that it is taking action. The regulator has engaged with the findings of the UK Sustainable Investment and Finance Association on the poor state of compliance among some pension schemes and will follow up on breaches of compliance.

My noble friend Lady Altmann also said that pension schemes should be required to align their portfolios with the Paris Agreement to reach net zero by 2050. The Government’s amendment and subsequent regulations will focus on schemes’ governance of climate risk and disclosure of that risk. We do not wish to direct pension schemes to align their investments with the Paris Agreement targets, and the legislation does not allow us to do so. Nevertheless, Paris alignment reporting could be useful as a measure of climate-related risk to the scheme. We will consult over the longer term on whether it is a useful assessment of a scheme’s exposure and risk.

I have already come clean to the noble Baroness, Lady Hayman, on whom to credit for the speedy inclusion of the amendments. She also raised a point about taking account of members’ views. The Law Commission has found that pension schemes have a fiduciary duty to take account of all financially material risks, including environmental risks. We have legislated to require all schemes with 100 members to publish their policies on financially material environmental risks, including climate change, and defined contribution schemes will be required to report annually on how they manage those risks from October 2020.

Trustees do not have a duty to take account of members’ ethical concerns but are free to do so when they believe a majority of members who express a view share those concerns and when doing so would not result in significant member detriment. The noble Baroness, Lady Hayman, asked why we will not legislate for personal pension schemes. Personal pension schemes are regulated by the Financial Conduct Authority, not the Pensions Regulator. To place requirements on personal pension providers through this legislation would create a patchwork of overlapping regulatory oversight under which providers would have to respond to two separate regulators on the same activity. The FCA is currently considering how best to enhance climate-related disclosures by workplace personal pension schemes, building on its existing rules framework and enforcement powers. I will write on the number of members of personal pension schemes.

The noble Baroness, Lady Hayman, asked whether dashboards will include pension schemes’ environmental, social and governance policies. We are very interested in how dashboards can support and increase engagement, including whether information on areas such as ESG, which trustees are required to cover as part of their disclosure obligations, may be incorporated into the dashboards. This is to be informed by user testing and may evolve over time.

The noble Baroness, Lady Bennett, quoted the Minister for Pensions, who wrote,

“pension schemes ought to be thinking about the assets which help … drive new investment in important sectors of the economy … which deliver the sustainable employment, communities and environments which all of us wish to enjoy.”

How will we meet this if the scheme does not know members’ wishes? The Government have been very clear that the purpose of a pension scheme trust is to deliver an appropriate return to its beneficiaries. The context of the Minister’s quote makes this clear and that it is possible to deliver this while having a beneficial effect on the communities in which they invest. The noble Baroness also talked about the implementation and chair statements being published. Schemes are already required to publish their chair’s statement and implementation statement. We are working closely with the regulator to develop a central index that can also be applied to the implementation statement and the chair’s statement.

Finally on the point raised by the noble Baroness, Lady Bennett, about pension schemes being required to go beyond climate change to consider sustainability more broadly, trustees already have clarity that they should take account of financially material social and environmental risk in investment policies. This includes, for example, considering violations of human rights laws and destructive environmental practices. In practice, most trustees do not actively manage investments and cannot make stock selections, but the Government have set the requirement for a clear policy which will be published and shared with those managing the investments. As I have said before, the Government do not tell pension schemes how to invest. Seeking to do that would force trustees to chose between acting in the best interests of members and following government directions.

I hope I have answered all noble Lords’ questions and therefore urge the noble Baroness to withdraw her amendment and urge noble Lords to support the amendments standing in my name.

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[Baroness Stedman-Scott]

I thank the noble Baroness for this homework. I will ensure it is delivered to her and that it is accurate.

[Lord Sharkey]

My Lords, in her explanation of the £1 million upper limit, the Minister relied to some extent on the consultation outcomes from 2018. I am curious about who was consulted. Was the ABI a consultee? She will have heard earlier in this debate the ABI’s rather enthusiastic approval of an increase in the £1 million limit, so it would be interesting to know whether the ABI has done a reverse ferret or whether it was not included in the first place.

Secondly, if the Minister is confident in her arguments for the £1 million penalty, as she clearly is, then I find it very strange that in the next section of the Bill it says, “If we don’t like that, we can increase it to anything we like via regulation”. That shows a startling lack of confidence in the £1 million. It is quite wrong to give unlimited discretion via regulation to raise the fine to any amount at all. It is unsatisfactory that this provision exists within the Bill. I am sure that we will want to discuss this further, preferably before Report, and if not, certainly on Report. In the meantime, I beg leave to withdraw the amendment.

Pension Schemes Bill [HL]

Debate between Lord Sharkey and Baroness Stedman-Scott

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

[Baroness Stedman-Scott]

I thank my noble friend for her intervention. My understanding is that CDC schemes are obviously new and will not carry any legacy data issues, which should lower the initial risk. The focus will be on not cleaning old data but establishing strong processes for loading, managing and maintaining data, with regular checks to ensure that quality is maintained. If that does not answer my noble friend’s point in the way she would like we can deal with it when we meet later in the week, if that is acceptable.

I appreciate the importance of good systems and processes. However, the proposed addition to the illustrative list is unnecessary, as we already envisage that appropriate requirements relating to the accuracy of member data and record keeping will be included in regulations. Schedule 5 of the illustrative CDC regulations provides an early indication of our thinking in respect of member records. However, we will consult to ensure that what is included in the regulations is appropriate and that sufficient scrutiny is applied. We also want to ensure that any requirements are proportionate.

In conclusion, I hope that my statements today and the illustrative regulations deliver sufficient reassurance of our commitment to ensuring that CDC schemes are financially sustainable and that systems and processes for member data are sufficient and effective. With that, I ask the noble Lord to withdraw his amendment.

[Lord Sharkey]

I should like to ask one or two questions about the buffer concept. It seemed to me that a lot of what was being described was the equivalent of a buffer in some ways, but it was not entirely clear how it would be produced, brought forward and exercised. It was not entirely clear to me whether the members of any proposed CDC scheme would be given a choice or say in whether the scheme should go ahead without buffers, as the RM scheme will, or whether it should include buffers. It seems to me that there is merit in consulting the workforce about which they prefer.

In paragraph 1.3 of the consultation response the Government said:

“We do not want to preclude or legislate against buffers in CDC schemes—there are perfectly good reasons why employers and workforces may wish to provide for a scheme that mitigates volatility in this way, and we agree that a buffered scheme could be appropriate in some circumstances.”


Those circumstances might very well include avoiding frequent and disconcerting changes in benefits but also the provision of wind-up or restructuring costs, even if that does somewhat impact intergenerational fairness. My request is for clarity about this cloud of assets or obligations that might substitute in some way for capital. I am not clear about how that will happen. It would be good idea to make sure that in any future schemes the workforce is consulted about whether or not they prefer a buffer.

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[Baroness Stedman-Scott]

Let me try to be helpful and to placate noble Lords on this: money needed to wind up should come from the employer. A scheme would not be authorised if it did not have this financial sustainability from the employer. Is that helpful?

[Lord Sharkey]

But the scheme does not include a buffer and I am still not clear about the money. If it is going to come from the employer, where does it say that they have to do that? All we are talking about is a notion of fairness, but people may disagree about what that means.

[Baroness Stedman-Scott]

I think the original question was around the consultation we are going to do on this. This will be resolved in the consultation.

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[Baroness Stedman-Scott]

I thank the noble Lord for that important point, which we will certainly consider.

[Lord Sharkey]

Before I come to the meat of the matter, may I ask what it means to “confer discretion” on a person?

[Baroness Stedman-Scott]

It would be very helpful if the noble Lord would repeat that for my officials.

[Lord Sharkey]

I am delighted to repeat it. What does it mean to “confer discretion” on a person?

[Baroness Stedman-Scott]

As I understand it, it means to delegate powers.

[Lord Sharkey]

If that is what it means, and I am sure it does, then we are giving the absolute, unrestricted authority for delegation of any power to anybody at all. That seems to me to be slightly wider than is normal.

I shall move on. I will have to read tomorrow’s Hansard very carefully to understand exactly what the Minister said, but there were several points that struck me as really quite controversial. One of those is about Clause 51. The Minister said, and she is obviously entirely correct, that you cannot set up a multi-employer CDC scheme by regulation if you remove Clause 51. Yes, that was the point of my amendment: it seemed wrong to introduce multi-employer CDC schemes by regulation. That is also exactly what the DPRRC said. It is wrong, or inappropriate, to do it that way: that was the whole point of my amendment. I do not think it is a substantive response to that to say, “Well, if we accept it, we cannot do it.” That was the point of the amendment.

I thought I also heard the Minister say that one of my amendments—I cannot now remember which—would adversely affect the ability to reduce intergenerational fairness because it would remove a delegated power. I am not at all certain, having thought about it, that it would have that effect, but in any case we have already heard very strong arguments for intergenerational fairness mechanisms being in the Bill. I did not hear in the Minister’s reply a lengthy argument against the view of the DPRRC that the powers in Clause 47 are inappropriate. I understand their absence is inconvenient, but it does not address the central argument put forward by the DPRRC that it is inappropriate to create these new schemes entirely by regulation.

To make a general comment about the framework Bill, a lot of what is going on seems to be effectively cutting Parliament out of meaningful participation in critical aspects of scheme design. I understand that there is a need for a strong element of a framework Bill when you are dealing with these kinds of pensions, but it seems wrong to deploy them so widely that Parliament itself is effectively cut out of the process. Parliament is cut out. No matter how many times we mention secondary legislation in this debate, it is clearly the case that we cannot amend and do not reject secondary legislation. It is difficult to see exactly what our participation in secondary legislation would amount to. Having said all that, I beg leave to withdraw the amendment.

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[Baroness Stedman-Scott]

I thank noble Lords for raising these amendments that relate to events which can occur in an authorised CDC scheme and which must be notified to the Pensions Regulator. The amendment in the names of the noble Lords, Lord Hutton and Lord McKenzie, would require the trustees of an authorised CDC scheme to notify the regulator where a person assumed a role that was subject to the fit and proper persons assessment. This notification would be required within two weeks of the change. The regulator would be required to assess whether the new person met the fit and proper persons requirement. Where it was not satisfied, the amendment would require it to consider withdrawing authorisation from the scheme.

The fit and proper persons requirement is set out in Clause 11 and is one of the authorisation criteria. The aim is to ensure that only suitable people are involved with a CDC scheme in order to protect the interests of members. It is also worth noting that the Bill already includes a power in Clause 30 for the regulator to withdraw a scheme’s authorisation if it is not satisfied that the authorisation criteria are met. The regulator will need to be satisfied that this is the case on an ongoing basis, including that the fit and proper persons requirement continues to be met. Some events would still warrant consideration by the Pensions Regulator because they could affect the ability of an authorised CDC scheme to continue to meet the authorisation criteria.

Clause 28 covers such “significant events”, which must be notified

“as soon as reasonably practicable”

to the Pensions Regulator. The draft illustrative regulations that we shared with noble Lords, and which have been placed in the House Library, provide an indicative list of potential significant events. Noble Lords may be reassured to know that the event in their amendment is contained in the illustrative regulations. We will work with the Pensions Regulator and others to develop the CDC significant events; we will also consult on the draft regulations in due course.

Amendment 11, tabled by the noble Lord, Lord Sharkey, would mean that the decision of any employer or relevant former employer

“to withdraw from the scheme”

would automatically be considered a triggering event. It may be helpful to point out that the triggering events listed in Clause 31 are already intended to capture withdrawal events that pose a significant risk to the future of a CDC scheme. For example, the withdrawal by the employer from a single employer-established CDC scheme or the largest employer in a connected employer scheme may trigger the winding up of a scheme. The withdrawal may also have arisen as a result of employer insolvency. In this scenario, it is clear that such a decision could risk destabilising the scheme. As such, it should be treated as a triggering event and be subject to greater scrutiny and oversight by the Pensions Regulator to ensure that the trustees are taking all necessary steps to address the issue and protect members.

Not every withdrawal of an employer, however, may pose such a significant threat to the scheme. For example, the impact of a small connected employer deciding to withdraw from a CDC scheme may be minimal on the viability and sustainability of the scheme; it may not warrant a decision to wind up the scheme as a whole. Such an event would be more appropriately dealt with as a significant event. We intend that such events should still be reflected in the continuity strategy, so that the regulator is aware that this risk has been considered and planned for.

We propose that regulations would provide for such events to be a significant event, which would need to be notified to the regulator. Such a notification will allow the regulator to engage with the trustees to ascertain the impact on the scheme’s viability and continuity, and whether this should lead to a formal triggering event or other regulatory action. This approach allows the regulator to retain appropriate oversight of withdrawal decisions and resulting actions, while providing some flexibility and proportionality in approach where the withdrawal of the employer is not expected to impact significantly on the scheme. I am also pleased to advise the Committee that the regulator will engage with the scheme to look at the options before withdrawing authorisation. For the reasons I have set out, I urge the noble Lord to withdraw his amendment.

[Lord Sharkey]

I thank the Minister for her comprehensive explanation of why it may not be necessary to add what I proposed. However, I am uncertain on one thing about triggering events. It concerns the fifth of the triggering events which we have been talking about. I could not find anywhere in the Bill what the trustees must do in the event of an Item 5 triggering event apart from notifying the Pensions Regulator that such an event had occurred. I acknowledge that I may have simply missed it but I would be grateful if the Minister could say what the trustees are supposed to do after an Item 5 triggering event. What actually gets triggered?

[Baroness Stedman-Scott]

I thank the noble Lord for his question. I am advised that we will write to him with the answer.