Pension Schemes Bill [HL]

Baroness Altmann Excerpts

2nd reading (Hansard): House of Lords
Tuesday 1st November 2016 Lords Chamber

[Baroness Altmann (Con)]

My Lords, I welcome this Bill. It is absolutely vital that the Government ensure that people’s pensions are properly protected. The policy of auto-enrolment has been a significant success story in broadening coverage of private pensions and I am delighted that millions more people are saving for retirement with the help of their employer. Improving retirement provision across the population is vital in our ageing society and the Government’s excellent freedom and choice reforms, allowing people to use their pension savings as suits them best, have paved the way for a better appreciation of the merits of pension saving. If we are truly to make policy in the interests of the many, not just the few, then having an attractive and safe private pension system for everyone is a vital element of future planning.

I confess that I was taken aback last summer when, as Pensions Minister, I discovered that proper protections for people’s trust-based defined contribution pension savings had not been put in place before auto-enrolment began. Under the FCA rules, contract-based pension money is protected and those setting up and selling pensions are subject to strict criteria. However, this is not the case for trust-based defined contribution pensions. Currently, members of DC pension trusts could lose their entire pension, and all their employer contributions and tax relief too, if the scheme they have been contributing to winds up. Even if the actual investments are protected, members could lose their whole pension because all the costs of winding up the scheme—if they cannot be paid for by anyone else—might have to be met by the funds in the trust. It is, therefore, most welcome that the Government are finally taking action to address this. However, while we are putting the legislation in place, the House must ensure it achieves its main objectives. Therefore, there are important areas on which noble Lords will no doubt seek assurances from the Minister in Committee.

The House must be confident that the proposed protections will actually work in practice. When I first started working with government on pensions policy in 2000, it was on the issue of lack of protection for defined benefit pension trusts. Post-Maxwell, the Government of the day assured members that their pensions would in future be protected by legislation that introduced minimum funding standards. This MFR regime was supposed to mean that their DB scheme would always have enough money to pay the promised pensions, whatever happened to their employer. In practice, however, well-intentioned standards were inadequate and members ended up losing their entire pension. It took years of misery and campaigning before the Government acknowledged this lack of protection and introduced a proper insurance scheme for the future with regulatory powers to back it up. The Pension Protection Fund has worked well and the Government must ensure that any new regime to protect trust-based DC members will also provide proper protection.

Some of the issues which noble Lords will wish to explore include careful consideration of how adequate the capital adequacy safeguards will really be. We will certainly need to drill down into this more in Committee. I welcome the extension of the Pensions Regulator’s powers and the requirement for master trusts to pay for authorisation and an ongoing levy. However, it is not clear how any new regulations will dovetail with the existing master trust assurance framework that has been used by the regulator to assess master trust scheme quality. That framework does not include coverage of wind-up costs, nor adequately cover employer or member communications to ensure that proper, clear warnings are in place about the impact of such things as using a net pay scheme for workers who earn below £11,000 a year and could be required to pay a 20% penalty on their pension savings, for example.

Millions of people are already saving in master trusts, so noble Lords will be interested to hear from the Minister how existing scheme members will be protected. If their DC trust fails between now and when the new rules are enacted, what provision is the Government making to cover wind-up costs or ensure a smooth takeover of members’ pensions? Will there be a default scheme that can take over while the past records are clarified? Will there be new rules to ensure that bulk transfers between DC schemes can legally occur promptly and efficiently, with immunity for the receiving scheme against providers’ past mistakes to ensure continuity of pension coverage for members of failed trusts? As regards the definition of “master trusts”, there may be some confusion. Currently, the definitions in Clause 1 differ from the definition of “relevant multiemployer schemes” in the charges and governance regulations that were introduced in Parliament only last year. Noble Lords may be interested to understand why this is the case, and whether the Bill should look to align the definitions.

I hope my noble friend the Minister will be able to reassure the House that all relevant schemes will be covered by the Bill, and that all pension trust members will be protected on wind-up. It is not currently clear whether the definitions in the Bill are adequate. For example, a single employer trust could potentially take in DC savings from other employers, but would then not be covered by these protections for master trust members. Will the Bill ensure that the new measures cover all relevant pension saving trusts, whether for pension accumulation or decumulation, so that we do not find ourselves in need of further legislation in coming years because some schemes fell through the cracks left by the current measures?

Currently, the FCA protection regime for contract-based schemes is far tougher than that run by the Pensions Regulator for trust-based DC, and there has clearly been some regulatory arbitrage. It seems strange, however, that an insurance company with a diversified business fully regulated by the FCA would not be permitted to back a master trust. This Bill would force the existing large insurers to set up separate entities to run their master trust, which may weaken the protection for members rather than strengthen it. Will my noble friend the Minister explain why an existing large regulated insurer is not considered suitable to run a master trust, but a much smaller company whose only business is the master trust itself would be considered more suitable?

I believe noble Lords may also wish to understand what consideration has been given to an insurance arrangement along the lines of the PPF itself to cover wind-up costs if no other means exist. If the scheme funder is a limited liability company, and this company becomes insolvent, where could wind-up costs be covered from? It is a little-known fact that the Pension Protection Fund already has a provision to insure all trust-based pension schemes against fraud, including master trusts, I believe. Could this fraud compensation scheme perhaps be extended to ensure that existing master trust members were protected in the event of scheme wind-up in the near term? Imposing regulatory operational capital requirements for DC schemes is, of course, a valid policy but this is no guarantee of member security—think of the banking system, for example. Insuring against a catastrophe would usually be more efficient than every fund setting aside money just in case the worst happens. An insurance option, however, has not been included in the impact assessment accompanying the Bill, even though it was considered at industry round tables and consultations. Will regulators know in advance what amount of capital is needed to ensure adequacy? The actual costs of wind-up will not be known, or knowable, in advance. Therefore, it is important for the House to be reassured that the Government’s new proposals will work in practice, or that there is an alternative contingency plan in place for the failure of a DC pension trust whose records are in disarray.

I also support and welcome this Bill’s proposed ban on early exit charges and member-borne commission, which will enhance pension outcomes for customers. I hope that the 1% cap proposed by the FCA will be introduced as quickly as possible. In all good conscience I admit support for the concerns raised by the noble Baroness, Lady Hollis, in relation to women’s state pensions, where the failure to communicate state pension age rises and failure to allow thousands of mostly female low-paid part-time workers to accrue either state or workplace pensions has caused, and will cause, retirement hardship. But that is not the issue for today.

In summary, I welcome the Government’s legislation that aims to protect members of master trusts. Members’ interests are so important. It is imperative, however, to ensure that the planned protections will have the best possible chance of working in practice and, of course, if any measures can be introduced in this Bill to reduce the scourge of pension losses resulting from scams and frauds, that too will be most welcome.

Pension Schemes Bill [HL]

Baroness Altmann Excerpts

Committee: 1st sitting (Hansard): House of Lords
Monday 21st November 2016 Lords Chamber

[Lord Naseby (Con)]

My Lords, I support my noble friend Lord Flight in his amendments, in broad terms. The Minister will recall that at Second Reading, at col. 570, I raised the question of mutuals and the mutual movement. His noble friend on the Front Bench confirmed that since a great many of them were defined benefit pension schemes, they would be outside the scope of the Bill. However, that does not take everybody out. Since that time I have had discussions with the Universities Superannuation Scheme. It is perhaps a bit of an oddball, but it is deeply concerned about the Bill and its effect on it and its members. Its representatives emphasised to me in our meeting that they were very much behind the intention of the Bill—so it is not a question of some organisation trying to undermine the situation.

They made three particular points on why the Universities Superannuation Scheme should not be subject to the Bill. First, there is,

“the comprehensive regulatory regime already in operation for hybrid schemes, which already provides a well-established, ample level of protection for pension savers”.

Secondly,

“the protection already afforded to USS members with Defined Contribution … benefits both under statute and the scheme rules, whereby the DC benefits are underwritten by the whole fund (DB and DC) which means that the only circumstances where DC benefits could not be fully satisfied would be where the whole scheme fund (assets currently circa £49 billion) was depleted in full”.

Lastly, there are,

“the anticipated costs of compliance”—

a common thread that has been raised by noble friends across the House. The cost of compliance is estimated at,

“in the region of £10.5 million in order to satisfy the financial sustainability requirements over 2 years, plus a further £250,000 per annum for compliance with the requirements of the Bill, which would be funded from the scheme assets”.

I hope very much that the Minister will take these points on board. I do not expect a full and complete answer this afternoon, but I would have thought that schemes such as this—there probably are others that have not been brought to noble Lords’ attention—could be dealt with in secondary legislation. It certainly seems to me that they need to be addressed at some point. All I am seeking this afternoon is a reassurance that my noble friend recognises that there are some schemes out there that should not be covered by the Bill but may need to be covered in some form in the regulations. I look forward to his response.

[Baroness Altmann (Con)]

My Lords, I will make just a few remarks at this stage. My noble friend Lord Flight mentioned the position of the NAME schemes. There are significant problems with the DB sections of those schemes, and a number of employers have written to me who are about to go personally bankrupt because they cannot meet the obligations—and that is setting aside the defined contribution issue that we are talking about today. From the perspective of the Universities Superannuation Scheme and other schemes that may have AVC-only sections to them, it would seem to me that we cannot, given the intentions of the Bill to protect scheme members’ benefits in the event of wind-up, just assume that the money will come from somewhere if there is not any proper provision for it—and currently there is not. It would suggest—my noble friend the Minister might consider this—that there may be a case for extending the Pension Protection Fund itself, which already covers the DB benefits of those schemes, to take care of any residual risk in the AVC section.

Indeed, the capital adequacy mentioned in the Bill will not necessarily achieve the aim that the Pension Protection Fund achieves for defined benefit schemes. In the event of wind-up, with a scheme’s records in disarray, it is not clear that any initial estimate of capital adequacy might be sufficient to cover those costs. I would be grateful for some comment from the Minister on the possibility of some sort of backstop or tail-risk insurance. That could also pick up the AVC schemes that have been mentioned. I understand the points that have been made there.

--- Later in debate ---

[Baroness Altmann]

I ask my noble friend for some reassurance on the issue of defining the whole structure via the word employer. An employer in a single employer scheme may be considered a single employer but they may be attracting money from members who used to work for other employers and do not currently accrue. Therefore, I hope that the intention of the Government for the Bill is that it should apply in the case where there is a single employer but he has attracted money from people who worked for other employers in the past. I recognise that my noble friend says that this may be captured in Clause 39, but I would be grateful for some reassurance on that point.

[Lord Freud]

At the moment, these schemes would not be within the master trusts legislation. I cannot give a full answer now because I am not sure what other protections there may be for people in this situation, but we will have a chance to come back to this issue again and again and I shall make sure that we have a dialogue on this point later, as we consider the Bill in Committee.

This Bill addresses the risks that arise in master trusts. It is important to remember that these risks are specific to this particular type of structure, and it is therefore important that the definition reflects those structures and does not go wider. This ensures that the regulation in the Bill is a proportionate response to the issues arising. I hope that with these explanations and assurances particularly on the process of consultation, noble Lords are reassured, and I ask them not to press their amendments.

--- Later in debate ---

[Lord Stoneham of Droxford (LD)]

My Lords, I very much welcome the opportunity to support this group of amendments. I have put my name to Amendment 10 but, having heard the speeches so far, I can see no difficulty in supporting the rest of the amendments in the group—and if they come back on Report I would be pleased to sign up to them. The arguments have been strongly made but I will make three specific points about why member engagement is really important.

The first reason is that the risk in contributory pensions is totally with the employee. They are not like direct benefit schemes, where the employer is sharing a lot of the risk; in this type of pension, employees are holding the risk and therefore their engagement and involvement with how their money is being handled is pretty important. If you are introducing a regulatory scheme at this stage, it should be a central point.

My second point is that if you are introducing a regulatory system, you do not want sole reliance on the regulator to make sure that things are running well and that members are satisfied; you want a counterweighting source of evidence and interest from members themselves to support that regulatory role. That is why this should have the attention of the Government in the Bill.

The third reason is that, as we have already heard, organisations such as Legal & General are already doing that. If that is good practice, the Government should take the opportunity of the Bill to encourage it, take it forward and make it more widespread. The concept of an annual meeting, which Legal & General already accepts as a valuable new forum for communication with members, should be examined and included as an option in the legislation. That would be a way to introduce the discipline of finding out what members want and to make it the fiduciary duty of the trustees to understand what members want from their pension investment. For all those reasons, the Government must take this very seriously. I hope that they will look at this more closely so that when we get to Report, there will be no need to retable the amendments.

[Baroness Altmann]

First, I support my noble friend’s remarks about the master trust assurance framework under the previous amendment, because that framework already exists and there are a number of shortcomings in it, so I could not support including it in the Bill’s requirements.

However, in these amendments we are dealing with member engagement—and, indeed, employer engagement, because with a master trust, the employer has in a number of ways handed over responsibility to the trustees. Many of the smallest employers who are currently joining auto-enrolment and using master trust schemes are not fully aware of all the implications and intricacies of pension arrangements. Therefore, it is important to have member engagement and information requirements as part of an authorisation process.

In particular, this might help to address one of the big injustices that your Lordships’ House has not yet addressed. Members who earn less than £11,000 a year who join a pension scheme—in particular, a master trust—which happens to use a net pay arrangement, are charged about 25% more for their pension than they would be if their master trust used a different scheme. I have to mention that that is apart from the NOW: Pensions master trust, which has itself made up the extra money that those low earners are unable to receive from tax relief they are due because of the administration of their scheme.

If there were proper member engagement and information that told both members and employers that this particular complicated administration arrangement denies low earners a significant amount of money, perhaps the operation of the schemes would work better in members’ interests and the employers themselves would be better informed.

Pension Schemes Bill [HL]

Baroness Altmann Excerpts

Committee: 1st sitting (Hansard - continued): House of Lords
Monday 21st November 2016 Lords Chamber

[Lord McKenzie of Luton]

I shall speak also to Amendment 38. Amendment 37 seeks to probe an additional route to continuity. As the Bill stands, where trustees have chosen, or are required, to pursue continuity option 1, they must identify one or more master trust schemes to which members’ accrued rights and benefits are proposed to be transferred. Continuity option 2—an attempt to resolve the triggering event—is a route to be determined by the trustees, and not, seemingly, the Pensions Regulator. It is understood that in some circumstances a route to achieving continuity would be to change the scheme funder at the initiation of the Pensions Regulator as an alternative to transferring out or winding up a scheme. On the face of it, the regulation-making powers of Clauses 24(3)(a) and (b) do not seem to cover the position, but perhaps the Minister will tell us how, or indeed whether, this outcome can be accomplished.

Transferring the responsibility for a master trust to a new scheme funder could provide a quick answer to a collapsing master trust and would fit in with what happens with standard occupational schemes where it is wished to avoid having to wind up the whole scheme if a scheme sponsor becomes insolvent. Changing the scheme funder could be an easier solution that costs less and helps members because it keeps the scheme intact and avoids unnecessary investment transition costs and expenses for the members. Does the Minister agree that this opportunity should be available and, if so, can he put on the record how it might be accomplished?

The purpose of Amendment 38 is to highlight circumstances under continuity option 1 which require a transfer out and winding up and for members’ accrued rights and benefits to be transferred. Notwithstanding regulations which might require transfers to alternative schemes or the right of employers or members to opt out of a proposed transfer, what is the position if the trustees simply cannot identify a transferee scheme? How is continuity option 1 to proceed? It is accepted that the focus of the Bill is just the money purchase component of a master trust but, if other benefits are provided, what is the position regarding these and how are they to be covered by other legislation and regulations? I beg to move.

[Baroness Altmann (Con)]

My Lords, I want to raise an issue which is very relevant to this point. As the Bill will, rightly, require continuity strategies for the event of failing master trusts, I ask the Minister to consider introducing measures that will facilitate bulk defined contribution pension transfers. At the moment, the bulk transfers are governed in a way that would be suitable for defined benefit schemes rather than defined contribution schemes. It seems that we have an opportunity to disapply Regulation 12 of the 1991 preservation regulations and to introduce measures in this Bill to directly facilitate defined contribution pension transfers, which could also cut the costs of transferring across.

[Lord Young of Cookham (Con)]

My Lords, I am grateful to the noble Lord, Lord McKenzie, for proposing his amendment. I am afraid that I am back in the default mode of resisting.

Before I address the amendments, I say to my noble friend Lady Altmann that I would like to reflect on what she said about the transferability of defined contribution pots and perhaps write to her, because I am not sure that it directly arises from the two amendments before us.

Clause 24, and the regulations to be made under it, sets out the detail of continuity option 1 and the requirements relating to it—where a master trust chooses or is required to transfer out its members and wind up. This option would be pursued where a master trust scheme could no longer satisfy the regulator that it met the authorisation criteria and had its authorisation withdrawn or refused, or where, for any other reason, it could no longer continue to operate and the trustees chose to pursue continuity option 1 rather than resolve the triggering event and keep the scheme running.

To protect the rights that members have accrued in the scheme, it is necessary that these rights be transferred to alternative schemes or pension arrangements. Clause 24 therefore requires that under option 1, the trustees of the scheme must identify a master trust to which members’ rights and benefits can be transferred. Then the trustees have to notify members and employers of the transfer, as well as of other information that will be set out in regulations.

The aim of Clause 24 and the related clauses is that members will continue to save in a pension despite the master trust of which they are a member experiencing a triggering event that results in the scheme having to wind up. In this situation members should be transferred out to an authorised master trust and continue to save with as little disruption as possible. We want to encourage and facilitate the continuity of pension saving. Therefore, when a master trust is going to close, the provisions in the Bill will mean that members have the reassurance that, if they do not make an active decision to go elsewhere, they will become a member of an alternative master trust that has been authorised by the Pensions Regulator.

Amendment 37 provides that where the trustees have the choice, and have decided to pursue continuity option 1, they can do so, except where the Pensions Regulator decides that continuity of saving for members would be best achieved by the substitution of a new scheme funder. I think that the noble Lord, Lord McKenzie, was seeking to give the regulator some sort of power to require the trustees to follow continuity option 2 instead of continuity option 1, where the trustees had chosen the latter. However, in effect the amendment would give the regulator the power to exempt a scheme from fulfilling the requirements under continuity option 1 where the trustees have decided or are required to pursue this option and where the regulator is satisfied that continuity is best achieved by the substitution of a new scheme funder. I see real difficulties in what the noble Lord has proposed.

Trustees are responsible for running and managing their scheme and making decisions in relation to it. They have a fiduciary duty to act in the best interests of the members of their scheme—a point that the noble Lord, Lord Kirkwood, made during our discussions. This amendment would effectively allow the regulator to second-guess and overrule trustees and to make a decision about a pension scheme. This would be a fundamental change to the principle that trustees have responsibility for managing their scheme. We do not think such an intervention by the regulator would be appropriate.

The option of finding a new scheme funder, as proposed by the noble Lord, is already open to trustees as a means of resolving the triggering event and continuing. Depending on what triggering event the scheme experienced, there could be a variety of ways of resolving it. We consider it important not to limit these, but to give trustees the freedom to resolve the event and the regulator the power to decide whether it is satisfied that the triggering event has been resolved. Where the sourcing of a new scheme funder is the most appropriate resolution of a triggering event, as suggested by the noble Lord, it should be up to the trustees to identify this funder. It should not be the Pensions Regulator’s responsibility to decide what the resolution method should be, for example, that the method should be a new scheme funder, or to source that funder. That is not the regulator’s role and it would be overruling the trustees, who rightly have ultimate responsibility for the scheme and its members.

We consider it important that any resolution of the triggering event and continuation of the scheme be subject to the full requirements of option 2. These requirements include the preparation of a comprehensive and detailed implementation strategy by the trustees, having certain safeguards in place for members and employers, additional support and assistance for them, and greater protection for members. Further, there is oversight of the adequacy of the strategy by the regulator.

We agree that where a master trust has experienced a triggering event, a new scheme funder could be identified and could be the most appropriate resolution of a triggering event. However, the Government believe that it is the trustees’ responsibility to make decisions for the scheme, and that if they want to resolve the triggering event by finding a new scheme funder, they should go down the route of continuity option 2.

Amendment 38 makes two additions to what will be covered by the regulations. The first part of the amendment would require the regulations made under this clause to set out what happens where the trustees have not been able to identify a master trust into which their members will be transferred. As the Bill makes clear, there will be a comprehensive set of regulations under Clause 24 that will cover many areas. These regulations will cover members’ right to transfer to a scheme of their own choosing, if they do not wish to transfer to the trustees’ choice of scheme. Members could also take up other pension options open to them, where relevant. Where a member is in receipt of a pension from the failing master trust, they will have the right to transfer their benefits to an alternative appropriate arrangement. For example, this could include a draw-down arrangement or the purchase of an annuity.

Pension Schemes Bill [HL]

Baroness Altmann Excerpts

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

[Baroness Drake (Lab)]

My Lords, I shall speak to Amendment 45 and to the other amendments in this group. My noble friend Lord McKenzie will speak to Amendment 47A.

Clause 31, taken with Schedule 1, provides a power for the regulator to pause certain master trust activities once a triggering event such as a wind-up has occurred. That power can be exercised if there is an immediate threat to the assets of the scheme or it is in the interests of the generality of the scheme members. A pause order prevents new members coming in, payments being made, further contributions being received or benefits being paid. That is a sensible provision. The administrative and accounting records of the master trust or of other companies used by the trust to hold investments or provide services may be in a mess. It may not be clear who is entitled to what. Evidence of fraud may emerge during a triggering event. The early years experience of the Pension Protection Fund when accessing schemes that have the mix of DB and DC benefits revealed just how poor the records could be and the problems that that throws up.

The amendments in this group in my name and that of my noble friend Lord McKenzie are directed at how the pause will work in practice. Clause 31(4) restricts the use of a pause order to circumstances in which there is,

“an immediate risk to the interests of members … or the assets … and … it is necessary”,

to act. Amendment 45 adds the words “or prudent” after the word “necessary” to protect members’ interests, as a condition to be met if a pause order is to be made. The intention behind inserting that phrase is to give the regulator greater discretion and an ability to act more cautiously and earlier than is suggested by the word “necessary”—and, indeed, before a risk has crystallised—to allow the regulator to mitigate emerging risks to members and take action when in their informed view it would be prudent to do so. The power to issue a pause order comes into effect only when there is a triggering event, when a failure of some kind has already occurred, which means that the likelihood of a risk to the assets or members crystallising is greater, so allowing a prudent approach in those circumstances seems sensible.

If a pause order is in place, Clause 31 provides that no subsequent pension contributions due to be paid into the scheme by or on behalf of the member or employer can be paid, and any pension contributions deductions from a member’s earnings will be repaid to them. Under the Bill as drafted, the total period during which a pause order can be in place is six months, but the Government have tabled Amendment 52, which will allow the regulator to extend the pause order on one or more occasions, unconstrained by the six-month limit. So, the pause order could stay in place for quite a long time. During the period when the pause order is in place, the member loses the ability to save for a pension through the workplace scheme, loses the tax relief and loses the employer’s contribution due under auto-enrolment. It is harsh on the individual to lose pension savings and interrupt the harnessing of inertia in auto-enrolment, when through no fault of theirs a master trust fails.

Amendment 46 would address that loss to the member by requiring that pension contributions that would otherwise have been due to a member should be held in an escrow account or otherwise under arrangements to be specified by the regulator. Those contributions could be held somewhere safe until the pause order is lifted and then paid into members’ individual pension pots. It would not be necessary for the money held to be invested so as to gain value that reflects what the member would have received if the original scheme had not been wound up. Holding it in a cash fund could be sufficient.

Does the Minister agree that it is harsh and unfair for workers to lose savings in their pension pots under auto-enrolment as a consequence of a master trust’s failure? Will he consider a provision allowing the pension contributions otherwise due by and held on behalf of the scheme member to continue to be paid into an appropriate holding vehicle during the period of the pause order? Clause 31 allows a pause order to prevent the making of payments and the paying out of benefits while it is in place. Depending on how such an order is applied, and for how long, that could pose real problems for some members of the scheme. Amendment 50 would allow payments to be paid for someone in ill health. For example, an older person with debilitating chronic ill health or a terminal illness could be in real difficulty if they were denied access to pension savings that they needed to live on. How is it intended that the pause order regulations will address the needs of people in ill health?

Master trusts will receive pension contributions into members’ pots, but they will also pay out money to members accessing their savings. Where a scheme member has been relying on such payments to live, and may have standing orders in place for their bills, if payments are suddenly ceased they could be in some difficulty. How will the pause order regulations address the needs of those people, particularly pensioners, who are dependent on payments received from the master trust? As I said in opening, the provision for a pause order seems sensible: it is the manner in which that order is operated that could cause unfairness or difficulties.

[Baroness Altmann (Con)]

My Lords, I support these amendments, and I would like to probe the Minister on what the pause order is really meant to achieve. As the noble Baroness, Lady Drake, has just asked, how does he envisage it will work in practice? If a pause order is introduced by the Pensions Regulator, it is likely that an employer will be in breach of its auto-enrolment duties and potentially in breach of contract with its employees. In those circumstances, we could need some of the bulk DC transfer regulations, which we have discussed and I hope we may come to later, to enable a scheme to ensure that such transfers can be made relatively swiftly and without too much expense—perhaps before a triggering event, although the proposal is currently only if there is a triggering event. That would require some of the existing regulations that are made with DB schemes in mind to be undone.

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

My Lords, I thank noble Lords for the debate last Monday when a number of amendments were considered. Today should bring an equally interesting discussion on a slightly broader range of topics. This group relates to the new pause power introduced in Clause 31, and includes some amendments tabled by the noble Lord, Lord McKenzie, and the noble Baroness, Lady Drake, and some tabled by me. I thank the Committee for its forbearance in considering government amendments at this stage.

--- Later in debate ---

I note that the noble Lord, Lord McKenzie, has also tabled Amendment 47A on tax treatment, which would provide that contributions in the form of tax relief at source would not be subject to the pause order. This amendment is unnecessary. I reassure the noble Lord that if the intent is to ensure RAS rebates which are due on contributions due before the pause order is in place, but which are paid after the pause order is made, Clause 31(6)(a) already achieves this. However, when I read Amendment 47A with Amendment 46, I wonder whether the intent is broader than this. If instead the intent is to ensure pension RAS tax treatment of the contributions being paid into an escrow or another account during the pause power, I am far from clear that this is achieved without also needing changes to complex tax law. However, the key issue here is that I do not think Amendment 46 works or achieves the right balance of cost and complexity for the rare occasions on which this type of pause order is likely to be used.

[Baroness Altmann]

If there is no such provision as that in Amendment 46, what exactly protects members and employers by ensuring that they can continue with their legal duties to contribute to pension schemes for their members under auto-enrolment? Currently, it is not clear to me how it is intended that this pause order will fit with the legal obligations or contracts between the employer and the employee in relation to ongoing pension contributions.

[Lord Freud]

I think I am right in saying that the pause order would effectively trump those obligations while it is operating. However, I will come back on the detail of that. I think that is accurate. That is why it is in the legislation—so that there is legal clarity about the obligations people have when they pay into a scheme that is formally paused by the regulator.

Under Amendment 50, the pause order would not be able to prevent payments with regard to ill health benefits. The current provisions mirror those in the Pensions Act 2004 with regard to the Pensions Regulator’s freezing order. I am not convinced that there is sufficient argument on why this should differ to those provisions. In particular, the pause order direction can specify payments, so—in response to the noble Baroness, Lady Drake—the regulator will be able to consider whether to use the power to stop such payments.

The provisions in Schedule 1 to which the noble Baroness has added her amendments make it clear that there is no impact on orders made on divorce which modify members’ rights in the scheme. They do not provide for generalised exemptions to the power to prevent transfers under the pause order. The amendment would mean that, regardless of the situation, ill health payments could not be affected by a pause order. Government Amendment 47 would enable the regulator to tailor the pause order to the circumstances with regard to stopping benefit payments. I hope that the noble Baroness will agree that that solution is better than the one in Amendment 50. That would include being able to apply the pause to specified benefits and specified members, and in a way that would take account of the specific case and situation. I therefore trust that this gives some comfort that the regulator could consider certain types of membership.

To come back to the question raised by my noble friend Lady Altmann, on the legal duty for employers, paragraph 13 of Schedule 3 ensures that a pause order will not cause employers to fall foul of their legal duties. I am glad to be able to confirm that.

[Baroness Altmann]

Does that also apply to a contract between the employer and the employee for pension contributions rather than just under auto-enrolment, if it is a term of the employment contract?

[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.

--- Later in debate ---

[Lord Freud]

Let me just respond. The difference is that we are trying to get control of an obviously difficult situation. The pause is to allow the regulator to go in and make sure that the situation is sorted. We are not talking about keeping the flow of things going in a normal way; we are talking about a very difficult situation. We are worrying about losing the money that is already there, not about the smooth flow. We are typically talking about a very short period. Setting up large paraphernalia, which the noble Baroness is beginning to drift towards, would not be the point. The real point is to get the funds transferred as quickly as possible.

The noble Baroness asked where the legislation is. I can direct her to Clause 31(5)(c), which states that any contributions not paid over to the scheme are returned to the member, and paragraph 13 of Schedule 3, which ensures that the pause order will not cause employers to fall foul of their legal duties. I hope that that helps the noble Baroness in her consideration of what we are doing.

[Baroness Altmann]

I have a couple more probing questions for my noble friend. The pause order is obviously intended to be used only in exceptional circumstances and in extreme concern about the solvency or probity of the master trust itself. I can certainly understand that, in that situation, one would not want to take any new employers, so it would pause adding any new employers. But it still seems that there is no protection for the ongoing accrual of members’ pension benefits, which is what we are trying to do with auto-enrolment. If the procedures suggested in the amendments in the names of the noble Baroness, Lady Drake, and the noble Lord, Lord McKenzie, are not considered appropriate—in other words, for the regulator itself to collect in the contributions—would it not be prudent at this stage and before the legislation is passed to have a proper plan for how ongoing contributions can be made and collected, perhaps through some form of bulk defined contribution transfer, even on a temporary basis, for members without consent to another master trust? At this stage we should produce such a plan rather than wait and hope that it will be okay.

[Lord Freud]

I am grateful to my noble friend. There are different processes going on and the intention of the pause order is not to be the paraphernalia for sorting out a scheme that is in difficulty. What we are looking at is a process we can go to where we can discuss option 1 and option 2 in order to transfer the funds to a better functioning scheme. While we are doing that, we are pausing it to allow the process to happen. It is important to view the two things on more of a sequential basis than trying to make a big performance of the pause order. It is there for a different reason: it allows us to get on with sorting out the scheme and making the transfers that my noble friend is looking for.

--- Later in debate ---

When the pension freedoms were announced, they were received by many with rapturous acclamation as a reform with no downside. However, the evidence now is that unsupported savers with insufficient financial capability are providing a free lunch for the sharks. The future is a growing defined contribution market and many more savers will be at risk. The noble Baroness, Lady Bakewell, is right in her desire to ban unsolicited communications and the Chancellor is right to acknowledge the scale of savers’ vulnerability to scams. I hope the Government’s action is rapid and comprehensive because, looking at the evidence from TPAS, every month of delay means another human tragedy as lifetime savings are lost to scammers.

[Baroness Altmann]

My Lords, I support the amendment in the name of the noble Baroness, Lady Bakewell, and welcome the Government’s announcement that they will consult on banning cold calling and look at tightening up the procedures for transfers. Both of those are very important—but so is acting swiftly, as the noble Baroness, Lady Drake, mentioned. The longer we delay, the more people are caught. Banning cold calling will not necessarily stop people’s pensions being transferred, but it will send a clear signal to anyone who gets that sort of unsolicited approach that the person approaching them is doing something illegal. That is important, because at the moment people do not know this and we cannot give that message. If we wait until there has been a scam, the money is already lost and we are too late.

The Government must do everything they can to avoid this kind of scamming, which is going on as we speak. I am constantly getting letters and emails from people explaining the way in which they have been scammed. It has come to my attention that an individual who was involved in mortgage scams as long ago as 2002 has set up a new system for scamming pensions. Some parliamentarians seem to have been taken in by this system, which takes people’s pension money and invests the proceeds of a defined benefit scheme, which are completely guaranteed, into one unregulated investment promising exceptional returns. I have seen the materials: it is extremely plausible, as is the person responsible. This was the subject of a BBC exposé but seems to have morphed, with the same people, into a new type of scam. As I say, Members of this House and the other place have apparently been caught up in this and look as if they have been endorsing it.

It is important that we do all we can. I completely support the amendments that the noble Baroness has tabled. At some point we might also consider introducing a ban on selling lists of people’s details. The Bill should say clearly to the public, “Nobody who approaches you out of the blue about your pension, offering you either a free review or some kind of exciting investment opportunity, is bona fide”. We need to be able to give the public that very important message. Currently, we cannot do that. The amendment, if it is agreed, would allow us to do so.

[Lord Flight (Con)]

My Lords, the establishment of an intelligence unit to smell out the operators of scams, track them down and prosecute them before they have a go at robbing people is perhaps almost more important than merely changing the law, which is welcome in itself but does not necessarily solve the problem. The issue is where such an intelligence unit should be located. Should it be part of the Pensions Regulator, the police or the FCA? Too often regulators are seen as doing nothing until the media or “Panorama” have exposed something, and then they address it, whereas the public expect them to spot the bad eggs and deal with them before they have too much opportunity to rob the public.

[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.

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[Lord Flight]

My Lords, Amendment 80 proposes a new clause that would enable the trustees of master trusts, or the sponsors or sometimes the managers of group personal pension schemes, to require the transfer of accumulated assets from default funds when moving from one investment manager to another.

The issue here is that at present the agreement of the individual members of the scheme is required, but often deferred members, although advised of the new arrangements, do not have the time to be bothered with them. As a result, small bits of money are left in historic default funds where no one really keeps a watchful eye on them.

It is in the interests of members in default funds to move to the default fund of the new manager when there is a change of manager, so that their funds are kept under surveillance. In addition, quite often the reason for moving to a new investment manager is that the performance of the previous investment manager has been unsatisfactory, so there is at least the possibility that shifting to a new scheme default fund will provide an improvement in performance.

I raised this issue at Second Reading and am interested to know what the Government’s attitude towards it is. I am aware of the debates of the past on this subject but, from some direct observation, I suggest that the point is particularly relevant for investments in default funds. Where individuals have chosen their own sub-funds—for example, in a group personal pension scheme or where they are offered under a master trust—they are naturally going to be interested in looking after their own investments. Therefore, in a sense, it is not necessary. But where people have chosen a default fund, I think it makes more sense, both administratively and in terms of the potential returns achieved, if the default funds follow the pension pot.

[Baroness Altmann]

Might I suggest that my noble friend’s amendment is particularly relevant where the master trust has had a triggering event? At the moment, the rules for a bulk transfer of defined contribution benefits do not allow trustees easily to transfer the members’ rights across to another scheme. In many cases it may require member consent or complex calculations that are based on defined benefit schemes and not defined contribution schemes. Therefore, I certainly echo the sentiments expressed by my noble friend about the importance of being able easily to transfer accrued rights across from one scheme to another without member consent. As he rightly said, very often members become a little disengaged from their pension pots and may not themselves want to engage in the idea of transferring across. Somebody else being able to do it on their behalf would make sense.

It may also be prudent to consider the notion of bulk transfers, which I did raise on the first day of Committee, even in the circumstances that there has not been a triggering event. That might more easily facilitate the orderly transfer across of members’ accrued benefits under a scheme in which it is considered likely or inevitable that a triggering event will occur. The Pensions Regulator may then be able to be proactive rather than reactive in being able to protect members’ rights and transfer them across without consent in certain circumstances. I would be grateful to hear my noble friend the Minister’s thoughts on that issue.

[Baroness Drake]

My Lords, as others have referred to, central to the resolution regime for a failing master trust is the transfer of the members and their benefits to another approved master trust. However, for this to be achieved efficiently and promptly, and indeed legally, it would be necessary to undertake a bulk transfer of members and their assets. But as the noble Baroness, Lady Altmann, has detailed, the current rules on bulk transfers would not be fit for purpose for a failing master trust, with its range of different employers and the potential to provide a wide range of benefits and investments to members, who could be either accumulating or accessing their savings. The amendment put forward by the noble Lord, Lord Flight, is an attempt to address that problem and provides a welcome opportunity to address the issues, because they are concerns that are clearly shared by various Members of this House.

The provisions in the Bill and the regulations will need to enable those bulk transfers to take place efficiently and legally. The regulations will need to set out a clear set of rules. Amendment 80 gives the Secretary of State considerable overarching and overriding powers to require the trustees of a failing master trust to transfer accrued benefits. They are extensive powers, but I suspect of an order probably needed to make the transfer regime work in the event of a master trust’s failure.

These powers will give the Secretary of State and the regulator the ability to direct where, potentially, many millions of pounds of members’ money is transferred to. Had we had draft regulations before us, we might have had many questions. I refer in particular to the House having discussed at length the problems that can occur if the administrative records of the master trust are incomplete or in disarray. Even something simple like the lack of a current address for a member can cause delay if a notification is required, I promise. I have been there and bought the T-shirt. It is a nightmare.

Is it the Government’s intention that bulk transfers will be able to take place during a triggering event before all past records are clarified? Post-transfer to the receiving scheme, who will bear responsibility for any administrative errors that existed at the point of transfer? Will there be circumstances where the regulations under this Bill will override other pension regulations in order to effect that bulk transfer? I have one small example. Under auto-enrolment, when members are in self-select funds and are transferred without their written consent, they are from then on treated as having been put into a default fund and the charge cap of 0.75% is applied. I do not want to go into too much detail, but that is to illustrate the question of whether there will be circumstances where the regulations under the Bill will override other pension-related regulations. I commend the amendment because it seeks to address an issue that all of us are aware of if the resolution regime will be based on directing the trustees of failing schemes to transfer their members’ benefits to other master trusts.

--- Later in debate ---

[Baroness Altmann]

Perhaps I may follow up that comment. Yes, indeed, there will be transfers on a triggering event, but I seek some reassurance that proper provision will be made for bulk transfers that do not depend on defined benefit rules which make those bulk transfers much more costly and time-consuming and do not automatically ensure that they can occur in a timely way. Does the Minister also consider that there could be circumstances where a bulk transfer could happen without a triggering event? We are trying to consolidate schemes, but we know that there are schemes already in existence that will need to consolidate and either will not or will not wish to meet the authorisation criteria. If there were the possibility of doing so, that would be helpful. Finally, going back to a point that I raised on our previous day in Committee, it is true that the Bill will place what is potentially a legal duty on trustees to effect a transfer, so there will be an obligation for that transfer to happen. But I am not clear that we are any the wiser as to who would be able to fund the transfer if the records of the scheme are in disarray and there are no funds to pay for advice or administration services to enable the transfer to be made. What provisions can we rely on to ensure that the transfer takes place, and of course I am referring again to some kind of potential back-stop insurance as required in case the costs cannot be met anywhere else.

[Lord Freud]

We are currently considering whether there may be some scope to simplify the current arrangements which will make life easier for defined contribution schemes when making bulk transfers, but we must do that at a time when we do not compromise member protection. As my noble friend will be well aware, there are certain protections in place such as the requirement for an actuary to certify that the members’ rights in the receiving scheme are broadly no less favourable than those which are being transferred. When a transfer is made under the mechanisms of this Bill, after a triggering event when the regulator is looking at it, one of the main points is to make sure that there is adequate capital to fund such an event. I will have to come back to my noble friend on how that will work when a bulk transfer is made and the regulator is not involved in the process. What one would normally expect to see is a negotiation with the receiving scheme manager to ensure that it is able to fund the transfer because of the benefits of scale through putting together two systems. I imagine that when the regulator is not involved in the process, that is where the money will come from. I will double-check that and come back to my noble friends, but that is how I foresee it happening.

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[Baroness Bakewell of Hardington Mandeville]

My Lords, I am conscious that people are waiting for the Urgent Question on Aleppo. However, I feel that this is a really important issue. I am concerned, as are others, that the Government appear to be backtracking on their manifesto promises on the secondary annuity market. As part of the pensions freedoms, the Government planned a secondary annuities market, where original purchasers who had a poor or inferior-quality product would be able to sell it and buy a better one with the cash. This move and this promise were welcome. The Conservative Party manifesto of 2015, on pages 65 and 67, promised:

“We will … give you the freedom to invest and spend your pension however you like … we will allow pensioners to access their pension savings and decide whether or not to take out an annuity, so they can make their own decisions about their money”.

The message was clear going into the election: the Conservatives would help those who had poor annuities and allow them to get a better deal for their money.

However, as has been widely publicised, not least in the Daily Mail on 16 November, there has been heavy lobbying against this move by the pensions industry, which has claimed it would be hard to set up a secondary market and difficult in terms of consumer protection. This lobbying seems to have come to a head at Gleneagles, when Government Ministers came under heavy fire from insurance company chief executives and gave way under the pressure. The resultant government change of mind has left many people with poor annuities that they now cannot get rid of.

It is all very well for the Government to succumb to the pressures of the insurance industry; I would prefer them to succumb to the pressures of the pensioners who are suffering as a result. The Daily Mail highlighted the cases of various pensioners. One 70 year-old veteran who would love to own a second-hand car said:

“Waiting at the bus stop for the hourly service to Nottingham city centre can be a miserable affair—particularly as the winter days draw in”.

He,

“must make the lengthy journey from his sheltered housing in the outskirts of the city every time he needs to go to the supermarket or visit friends”.

For him,

“and millions of pensioners like him, the Government’s promise to let him sell his paltry retirement income for a lump sum offered a vital lifeline. The Army veteran was preparing to exchange his £11-a-week … annuity for a few thousand pounds—enough to buy a small runaround to get to town and back”.

But the Government’s “dramatic U-turn” scrapped his plans. It means he will have to carry on taking the bus. He said:

“‘I was so disappointed when I heard the news … These insurance companies are making so much money from us and their bosses are earning millions. The money from my pension would be a small amount to them, but it would make all the difference to me’. Until the rules were changed in 2014, more than 400,000 savers a year bought annuities when they retired”.

Consumer protection can be problematic but it is not rocket science. We are extremely disappointed the Government have reneged on their promise and left people in the lurch. This should be rectified in this pensions Bill and is a big omission.

The original proposal turned pensions savings into income: for example, each £10,000 might give you £500 a year. Plans for a so-called secondary annuities market would have enabled savers to sell these deals. The idea was that insurers would compete to offer lump sums if a pensioner gave up the guaranteed monthly payouts. I have received case studies and lobbying on this issue, some couched in such strong words that I am unable to repeat them in this Chamber, but the Government must be under no illusion that feelings are running extremely high on this issue.

The decision to kill off the secondary annuity market even caught pensions companies off guard. Legal & General, for instance, had invested a considerable amount of resources in a new website, auctionmyannuity.com, so that it could act as a broker when the market launched in April. Obviously it thought the idea was viable and believed there were companies interested in doing it that would have been ready by April.

Legal & General’s website would have offered identity checks, risk warnings and advice on how to avoid falling victim to fraud. The former Pensions Minister, the noble Baroness, Lady Altmann, said:

“The Government was being furiously lobbied by the industry in the weeks before they cancelled the market. Protections were in place. Most of the work was already done. Legislation had been laid. If the Government felt that consumers were still not protected enough, it could have delayed the launch, not abandoned it altogether”.

However, despite all the groundwork that had taken place, the Government decided to cave in to the lobbying.

I will leave noble Lords with the following case. A pensioner, aged 68,

“receives a £160-a-month annuity from a £52,000 pension pot with Prudential. It took the former roadside equipment installer from High Wycombe, Bucks, 30 years to save the money. He would have never taken the deal three years ago had he realised the Government was preparing to allow savers to take their pensions as cash”.

He now fears that his wife, who is 67,

“a local authority worker, will not get a penny, should he pass away suddenly. The small print of the annuity contract states that payments are only guaranteed for ten years after the date”,

in 2014 when he signed up.

“Should he die after this date, the remaining cash will go straight into his insurer’s pockets”.

He says:

“I think it’s diabolical that the Government has gone back on its word … I wouldn’t blow that money, but I could do something with it, perhaps keep it invested, instead of an insurer taking the lot”.

This is a serious issue and I hope the Minister is minded to give at least some comfort to all those affected in their old age. The Government must do something about secondary annuities for all those suffering under the current system. I beg to move.

[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.

Pension Schemes Bill [HL]

Baroness Altmann Excerpts

3rd reading (Hansard): House of Lords
Monday 16th January 2017 Lords Chamber

[Lord Naseby (Con)]

My Lords, I welcome the amendment from Her Majesty’s Government, as I very much welcome the Bill. However, it still raises the outstanding problem in Clause 10, on scheme funding. The point is that a master trust can, if it so chooses, be treated as a separate legal entity and, as the Bill stands, can still transfer the risk to another entity. That remains one of the problem areas, because solvency for any of these master trusts is absolutely vital to current and future pensioners. I place on the record that although what we have heard this afternoon is an improvement, it does not solve that problem.

While I am on my feet, there is still concern from insurance companies that run master trusts that, under the Bill, they may be required to keep separate solvency requirements for the master trust element of their business when the majority must already comply with Solvency II financial regulations, which are extremely stringent and ought to be enough to cover any of the required security for their master trust business.

[Baroness Altmann (Con)]

My Lords, I echo some of my noble friend’s concerns. I welcome the Minister to his position and wish him much success.

Obviously, I welcome the Bill, which is much needed. It is vital that we protect members’ pensions and ensure that accumulated savings are safe in the event that the master trust scheme fails. Therefore, I broadly welcome the measures in the Bill. However, having engaged with Ministers to try to tidy up some important points to ensure that the Bill works as intended and needed without serious side-effects, I would like to place on record some issues that still require attention.

Pension Schemes Bill [HL]

Baroness Altmann Excerpts

Ping Pong (Hansard): House of Lords
Wednesday 5th April 2017 Lords Chamber

[Baroness Drake (Lab)]

My Lords, the Bill, in strengthening the regulation of master trusts, is indeed welcome. I noted that a recent release by the ONS on funded pensions and insurance in the UK national accounts referred to the significance of the establishment of DC master trusts, so in general there is increasing recognition of the importance of having fit-for-purpose regulation of master trusts. However, the government amendments in this group raise certain questions that I would like to put to the Minister.

Amendment 2 to Clause 9 simply deletes the provision for a funder of last resort. That is disappointing. Will the Minister update the House on what further action the Government have taken since the Bill was last considered by this House to address the protection of scheme member benefits in the event of a master trust winding up with insufficient resources to meet the cost of complying with and obligations under the Bill? The noble Lord, Lord Freud, implied that there was ongoing work and discussions with the industry, so it would be helpful to know what actions have been taken.

The other government amendments in this group, to Clauses 25 and 34, addressed the issue of allowing, in a wind-up on failure, the transfer of scheme members and their benefits to a receiving scheme that is not a master trust—for example, a group personal pension. While not wanting to disagree in principle with widening the pool of schemes to which transfers can be made, I think that that change to the Bill raises some questions. Given that the Pensions Regulator will be authorising a transfer to a scheme that has not been subject to the master trust authorisation regime, how will it satisfy itself that the receiving scheme on transfer is both sustainable and well governed?

The Bill provides under Clause 34 for a prohibition on increasing or imposing new charges on members by either the transferring or the receiving scheme in order to meet the cost of resolving failure. As a non-master trust receiving scheme will not have been subject to the authorisation regime and the continuity and implementation strategy requirements in the Bill, how will the Pensions Regulator apply the prohibition on increasing charges and police it after the transfer of members to a non-master trust, given that the receiving scheme will not be in its regulatory jurisdiction?

Government Amendment 13 provides for regulations to allow for transfers from a master trust to a contract-based scheme. Given that the transfer will be from a trust to a contract arrangement, do the Government consider that there are any special considerations that the regulations will need to address? If so, what are they?

[Baroness Altmann (Con)]

My Lords, I welcome much of the thrust of the Bill. I am also delighted to see Amendments 3 and 4, which, I hope, ensure that insured master trusts will not be forced to separate from their insurance parent, which would have forced them to face higher costs and reduced the security of their members. I am very grateful to my noble friend for taking on board the comments made during the Bill’s passage through this House.

It strikes me that Amendment 2 should be considered separately from those to which it has been joined. I reiterate my strong concern—notwithstanding the reassurances from my noble friend—about leaving out Clause 9. I understand that there is a view that it is unnecessary and that the new regime will ensure that master trusts have sufficient resources, are financially sustainable and have capital adequacy in place. However, even with new schemes and the best will in the world, capital adequacy tests may prove inadequate. No provision in the Bill would cover members of a very large pension scheme that suffered a catastrophic computer failure and lost member records. The cost of restoring that could be well above the capital adequacy put in place, and nothing in the Bill explains where the cost of restoring those records would be covered. The only place might be the members’ pots themselves, which is not supposed to happen.

I vividly recall assurances given by Ministers on defined benefit schemes during the 1990s, when the minimum funding requirement was supposed to ensure that schemes would always have enough money to pay pensions. No one foresaw the problems evident in the early 2000s, when schemes that had met MFR legislation wound up and ended up without enough money to pay any money to some members on the pensions that they were owed.

Even more concerning than that is that the Bill is being introduced when 80 or so master trusts are already in existence in the market with a huge number of members across the country already saving in a pension. These trusts have not been subject to the capital adequacy test or other tests that the Bill will rightly introduce. What is the protection for members of existing schemes who are saving in good faith? They are not protected at all. That was why I was very pleased that we passed the amendment concerning the scheme funder of last resort. I echo the question of the noble Baroness, Lady Drake: what discussions have taken place with the industry to find a solution to cover the eventuality—we do not expect it and it is, I admit, a small probability—that an existing master trust winds up without enough funding to cover the costs of administration to sort out its records and transfer them over to another scheme? I should be grateful for some information from my noble friend about whether there are ongoing discussions and how the department sees that eventuality being covered: where would the money be found?

On Amendments 5 to 19, I share some of the reservations mentioned by the noble Baroness, Lady Drake, such as the regulatory disparity between a master trust, which would be regulated by the Pensions Regulator—and therefore under its control, if you like —and a master trust transferred under the amendments to a pension scheme regulated by the Financial Conduct Authority. How would the regulatory systems work together when they are under different legislation?

I have other concerns, but I may raise them under the next group.

[Lord McKenzie of Luton]

My Lords, let me start by expressing our regret that the requirement for there to be a funder of last resort—successfully pressed by my noble friend Lady Drake on Report—has been deleted from the Bill. That concern was also expressed by the noble Baroness, Lady Altmann. We of course accept that the whole purpose of the Bill—its protections, including capital adequacy, financial sustainability, systems requirements, scheme funder and transfer regime—is to secure people’s pension pots, militate against scheme failure, and ensure good order when difficulties arise. But as my noble friend asserted on Report, notwithstanding this, it cannot be guaranteed that a master trust will not fail and when it does there will be an available master trust to step into the breach so that members’ funds are protected. The noble Baroness, Lady Altmann, has just expressed similar concerns with vivid potential examples.

In seeking to resist the funder of last resort proposition, the noble Lord, Lord Freud, claimed that it would be costly and a disproportional response to the issue and with moral hazard implications—arguments deployed by the Parliamentary Under-Secretary of State for Pensions in the other place. We remain unconvinced of these arguments when put in the balance against the importance of protecting people’s savings. Nevertheless, we need to examine how the Commons amendments to Clauses 25 and 34 contribute to ameliorating this risk, which at least potentially they do.

We acknowledge the amendments to Clauses 25 and 34 which potentially widen the scope of continuity option 1 and expand the prohibition on increasing administration charges or imposing new administration charges. In particular, they raise the prospect of the accrued rights and benefits under a master trust scheme being transferred to an alternative pension scheme which is not a master trust. No detail is offered in the amendment about the likely characteristics of an alternative pension, other than the fact that it must be a pension scheme under the 1993 Act. This of course will include both personal and occupational pension schemes. Regulations will spell out the circumstances when the alternative might be available, and the characteristics of an alternative scheme. Regulations will also spell out how such an option is to be pursued.

While we can see the benefits of a potentially wider pool of pension schemes which could be available in the event of a master trust failure, it begs a number of questions about how any alternative scheme would be regulated and what protection it would offer members. My noble friend Lady Drake, in particular, as ever has produced some forensic questions to seek at least some clarity on key issues: further actions and discussions that have taken place; whether a receiving alternative scheme is sustainable and well governed; how such a scheme can operate a prohibition on increasing charges and preventing members’ funds from being accessed; and consideration of how bulk transfers would work. The noble Baroness, Lady Altmann, joined in the same sort of inquiry.

It remains to be seen how much these amendments provide a real opportunity to add a layer of protection and whether the market will offer up alternative schemes which can assist. We look forward to the Minister’s reply, but we are not minded to oppose these amendments.

--- Later in debate ---

21: Clause 46, page 31, line 3, leave out subsection (2)

[Baroness Altmann]

My Lords, before the Bill passes through, I will make a couple of observations. Perhaps the Minister, who will not have the answers now, might write to me to allay some of my concerns that I will put on the record about the Bill.

The first regards net pay schemes being used for auto-enrolment as master trusts for low earners, who cannot get tax relief so they end up paying 25% more for their pensions. These low earners, who are probably mostly women, are the ones who surely most need extra money yet are unable to receive it. There is nothing in the master trust framework that will require employers to ensure that low earners are not enrolled into such schemes. Indeed, one pension scheme—NOW: Pensions—is reimbursing members for the tax relief they have lost, which is fine; they are not out of pocket.

The second issue on which my noble friend might be able to write to me is that I remain concerned that during a pause order, members may in fact lose entirely their entitlement to an auto-enrolment pension building up for them—for an indefinite period, because we do not know how long the pause order can last.

[Lord Henley]

My Lords, I am not sure that I have ever spoken on a privilege amendment before, but I have noted what my noble friend had to say and I promise to write to her. I beg to move.