Pension Schemes Bill [HL]

Baroness Altmann Excerpts

2nd reading & 2nd reading (Hansard): House of Lords & 2nd reading (Hansard)
Tuesday 28th January 2020 Lords Chamber

[Baroness Altmann (Con)]

My Lords, I declare my interest as set out in the register of interests and warmly welcome my noble friend to the Front Bench on the Bill. I certainly agree that this is far more than a morsel: whoever called it that had not quite seen its scale. I warmly welcome it.

My remarks will be mostly framed from the perspective of members of pension schemes, customers of pension providers, and their interests, being future pensioners. Part 1 on collective defined contribution, is adding a new type of pension scheme with the concept of a target pension. As the noble Lords, Lord McKenzie and Lord Sharkey, mentioned, it is important that people realise that this is not one of the two current systems. It is not a money purchase system, where there is no guaranteed outcome and members shoulder all the investment risk and costs, whatever the final outcome. Nor is it a non-money purchase scheme, where there is some element of guarantee: either the traditional defined benefit with an assured lifetime pension income—although that can be reduced in the PPF—or the assurance of a lump sum payment, where employers bear some of the risk and the costs, beyond just their contributions.

The aim of this scheme is to ensure that employers know the limits of their liabilities. That means that the huge challenge with the CMPSs, as they will be called—we have added another acronym to our arsenal—will be communications to explain the lack of security that these schemes will provide.

The shouldering of investment risk and the intergenerational risks is vital for us to help members to understand. As with the Netherlands and Denmark, as the noble Lord, Lord Vaux, mentioned, CDC pensions can reduce when in payment. The risk is still on the worker. Although the scheme will bear the cost of the actuarial analyses, and will look after the management of investment choices and the decumulation options for some members if they stay, there are still residual risks. The Bill is not yet sufficiently robust on what regulatory protection there should be for members’ money. Of course, Royal Mail, which is expected to be the first scheme using this CDC structure, may be a powerful and well-resourced employer.

I am pleased that Clause 7 requires the authorisation of these schemes and that Clauses 11 to 17 suggest that there will be criteria but, as other noble Lords have said, we need to know what those criteria are and what attention will be paid to a situation where authorisation is withdrawn, as proposed in Clause 26. We also need to know what provisions we need to put in place at this stage if the scheme needs to wind up and members’ pensions must be raided to cover the costs of the wind-up, to make sure that members do not end up with no pension—as could happen in theory, although I hope not in practice. We need some more robust underpinning and assets set aside to cover the cost of a wind-up, or some kind of insurance could be embedded in the Pension Protection Fund.

Having seen this before, I know that there are risks. So what risk margins will be retained for future market falls? This is particularly relevant to Clause 25 where members will apparently have a right to transfer their benefits, but these are not accrued pension rights. They do not have accrued rights to an income. So what reserving requirements and risk margins need to be applied to members who want to transfer out on the basis of their rights to a particular portion of the fund today, which may then leave future members and those who do not transfer out—those who are trusting the scheme, if you like—at risk of having reduced pensions later on because those who transfer out today took more than they would ultimately have been entitled to?

Part 3 deals with the regulator’s powers. I fully support the idea of giving the regulator extra powers—its statutory duty to protect scheme benefits is certainly important—such as the power to intervene sooner and the power to demand information. At the moment, the regulator can ask for information but it must use its powers before it can require that, so I warmly welcome this measure.

The aim is to focus on forcing employers to fund these schemes in full but, as we have heard from the noble Lord, Lord Vaux, and others, the annuity cost of these schemes are way beyond the ongoing costs of running them. So the ongoing funding and the technical provisions of these schemes are well below what would be required in buying out with an annuity. Even certain billionaires have been allowed to walk away without meeting Section 75 debt. Just paying an initial starting pension means that the future pensions will be lower, which recognises some of the problems that exist in the annuity market today as a result of quantitative easing and its impact on the cost of buying so-called secure or risk-free long-term assets.

I support the aims, but perhaps my noble friend will consider whether we need to look at the issue of Section 75 debt as well because it is imposing draconian costs. I want particularly to raise the issue of the plumbing pension scheme. In this case, employers are being asked to pay money they do not have without selling their own homes and losing everything they have built up over their entire lives in order to fund Section 75 debts for an event that they were never warned about, which is their retirement and which apparently crystallised these debts, and yet the scheme is supposedly fully funded. There has been no deficit recovery and all the dues have been paid. I urge my noble friend to facilitate a meeting to discuss this issue and consider whether some of these problems can be dealt with in the Bill.

I fully support the aim of having a pensions dashboard, but I fear that the Government have severely underestimated the challenge facing the Money and Pensions Service in delivering any kind of comprehensive pensions dashboard. It needs to include charges and the information that members would actually like to see, as called for by Which?, but the Bill seems to imply that the Government believe that the existing regulatory framework will provide appropriate consumer protection. I have serious concerns about that. There are more than 12 pension regimes with different subsets of those regimes, legacy schemes which have guaranteed annuity rates, protected tax-free cash and death benefits. All of these need to be identified on a dashboard before members decide whether they want to transfer money or consolidate their benefits. We need to make provision for that.

There are masses of manual records in the depths of life assurance companies and pensions administrators, so I fear that the powerful financial institutions may not wholly support the dashboard, especially those which have bought closed books of past pensions. The cost of transferring millions of partial manual records on to a platform on an electronic database has not been adequately appreciated. I would therefore welcome my noble friend asking her department to consider mandating the simple statements that are currently being consulted on. These could be sent out to everyone in a standard format as the very minimum requirement to facilitate a comprehensive dashboard, regardless of whether they are immediately provided in an electronic format. The Money and Pensions Service could work together with the consultation team to make sure that a dashboard-compliant annual statement is produced so that the data can be merged. Of course, any commercial pensions dashboard needs to be properly regulated and authorised. I have severe concerns about this being used as a marketing tool, which may not be in the best interests of the members.

There is also the issue of DB funding and transfer rights, along with the allied problem of scams. Of course we must put duties on trustees and managers to facilitate transfers where members want them, but I support what the noble Lord, Lord Sharkey, was saying about how best to protect those members who have potentially fallen for a scam, which is usually the result of a cold call, against transferring their pensions out of the scheme and then regretting it later. Perhaps we could put conditions on the transfer rights that would ideally trigger an automatic referral to Pension Wise. Its representatives could go through questions with the individual to help identify whether it is likely to be a scam. Or, at the very least, it would require the trustees to ask those questions themselves, which to be fair are not that many, such as, “Are you trying to transfer out as the result of a cold call? Do you know the people who are recommending you to transfer? Do you know anything about the scheme that you want to transfer to?” Those would raise red flags and thus would immediately help to protect members from what we all want to ensure does not happen. We must not forget how many hundreds of billions of pounds of taxpayers’ money is in these pension schemes from the tax relief they receive over the years. That money was given to make sure we do not have problems of having to support poor pensioners.

I implore my noble friend to look at a couple of other issues dear to my heart; I know a number of other noble Lords have alluded to them. Number one is the problem of net pay pension schemes and whether we can put in this Bill a duty on trustees and the regulator to ensure that any member automatically enrolled in a pension scheme is enrolled in one that is suitable for them—in other words, not one that charges the lowest earners 25% extra for their pension, which a net pay pension scheme currently does. Finally, there is an issue with the National Health Service Pension Scheme. It might be worth pursuing whether we can look at putting any of this problem into this Bill to help sort out on the scheme-pays side for the NHS.

I stress that I welcome this Bill. I am delighted that we are looking at all the measures in it; it is a very large piece of legislation. I look forward to hearing from my noble friend and to discussing it further in Committee.