Pension Schemes Bill [HL]

Baroness Altmann Excerpts

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

[Baroness Altmann (Con)]

My Lords, I support all three amendments. I have added my name to Amendment 2 —so excellently moved by the noble Lord, Lord Sharkey —which intends that any CDC scheme that is applying for authorisation must have a considered strategy for the long-term intergenerational fairness considerations that we have just discussed. The scheme would need not just buffers—we will talk about buffers in the next group—these would also be required against scheme failure and scheme wind-up. In this case I would prefer to think of these as risk margins, to recognise the long-term risks to remaining members, most particularly if scheme members transfer out. That is the particular aim of my Amendment 7, which would also impose on the scheme, when calculating benefits, a requirement to consider how it will recognise the risks in future years if somebody cashes in the pension today.

The cash equivalent transfer value is not really a benefit under the scheme. If the member is in poor health, for example, they will be selecting against the scheme, because the scheme will assume a certain life expectancy. Some will have less and some more, but if all those who have lower life expectancy transfer out at full value, then clearly the pensions in payment are too high. If they take money when markets are performing well, they may receive more than if they had waited longer and there was a market correction, so the remaining members, again, will bear the cost.

Given that a CDC scheme is designed specifically to pay a pension rather than a lump sum as an alternative, without the same draconian guarantee requirements on employers, to the defined benefit system that we have had traditionally in this country—which as the noble Lord, Lord McKenzie, rightly says, is the gold standard—we would not want this to be at the detriment of defined benefit but rather as an alternative to defined contribution. However, those members who transfer out are not placing their trust in the scheme; they are not saying, “I want my pension to come from the scheme,” and they are leaving the remaining members to bear an extra risk. I remind noble Lords that we have seen this in defined benefit schemes with the minimum funding requirement, and also with the rules around scheme surpluses. In the short term it was judged that an amount in the scheme was sufficient to pay a specific level of pension over the long term and it turned out that that was not the case, because assumptions were incorrect, markets changed or demography changed. Therefore, it is wholly inadequate to assume that whatever is happening today should be reflected, for example, in cash equivalent transfer values.

As the noble Lord, Lord Vaux, said, it is not just intergenerational fairness; it will select against today’s pensioners, potentially, because if over the next couple of years markets are weak, pensions will need to be reduced more to reflect people who transferred out at what seemed to be fair value two years previously. I hope my noble friend will consider the thrust of these amendments and perhaps look at whether we can introduce some requirements for schemes when members transfer out or when market values are judged to be at a certain level. Can we insert some risk margins that will protect members who rely on this scheme for their lifetime pension in the future?

[Baroness Bowles of Berkhamsted (LD)]

My Lords, like others, I speak in favour of all three amendments. In fact, I signed Amendments 6 and 7 but too late for it to show on the Marshalled List in respect of Amendment 7. I was one of the many noble Lords who mentioned intergenerational fairness, and fairness more generally, at Second Reading because, as has been explained, a significant number of members, particularly older members but not necessarily just them, transfer out after some good times for investments in the investment cycle. That leaves others bearing the brunt of later down cycles, hence the Ponzi analogy. I am actually not quite sure what “fairness among all members” actually means—it is difficult because of, for example, the different longevities between men and women—but I signed Amendment 6 because that was the closest thing to saying, “You’ve got to look widely at everything.”

I have come to the conclusion that the only way in which you can have fairness is to have some kind of buffer, which we will come to later on, or some kind of risk margin as proposed by the noble Baroness, Lady Altmann, or maybe both. In the interests of fairness, those who are transferring out should have to take their share of the risk; otherwise, if you are a good market-watcher you could perhaps spot your moment to make your move, and then that is perhaps unfair on the rest.

I, along with others, think that something must be enabled for these measures to be required. It is nice to know that something is already envisaged for the scheme, but there needs to be something for every scheme. There should at least be a requirement for that, and actually I think there should be a permission for things such as buffers and risk margins, rather than a prohibition.

--- Later in debate ---

[Baroness Stedman-Scott]

I thank noble Lords for tabling the amendments. I turn first to the proposed amendments to Clause 14. The fundamental aims of the financial sustainability requirement are to avoid disruption to members through CDC schemes failing because of inadequate financial planning or resources and to ensure that, if a scheme experiences a triggering event, the costs of dealing with that and continuing to run on the scheme for an appropriate time can be dealt with. These costs may include costs of transfer and wind-up, if that arises.

As these will be new schemes, it is possible that the up-front costs of establishing and running a CDC scheme may not be covered in full by the charges paid by members. Similarly, if a scheme experiences a triggering event, it might also find that it has insufficient resources to meet the cost of resolving that event without further recourse to members’ funds. The financial sustainability requirement is intended to protect against these risks.

It is envisaged that there will be a variety of mechanisms for financing these costs. As the noble Lord, Lord McKenzie, identified, those are likely to involve support from establishing and connected employers. We will consult on this matter before bringing forward regulations, but a range of options is likely to be available—for example, an amount held in escrow or contingent assets.

Envisaged regulations made under Clause 14(3) will ensure that the regulator has sufficient evidence to satisfy itself that the financial sustainability criterion is met and that members are protected. We intend that these regulations will require evidence of any financial commitment by the establishing employer or connected employers and that the scheme has access to the financial resources it needs, including in the event of employer insolvency. If the regulator is not satisfied that the scheme is financially sustainable, the scheme will not be authorised to operate by the regulator, so it is in an employer’s interest to ensure that its scheme meets the envisaged requirements. We do not intend to require CDC schemes to hold a minimum level of capital to meet relevant cost. If authorisation is to work effectively, the Pensions Regulator must be able to consider the risks posed by each scheme to determine whether adequate mitigations are in place. I believe that that is a fairer and more effective approach.

I turn to my noble friend Lady Altmann’s amendment. It would add to the illustrative list of what regulations may require the regulator to consider when deciding whether the processes used to run the scheme are sufficient to ensure it is run effectively. I appreciate the importance of good systems—

[Baroness Altmann]

I thank my noble friend. Before we finish on this topic, I hear what is being said but what I was trying to achieve with Amendment 5 was to avoid repeating the mistakes already extant in automatic enrolment schemes. We are setting up a brand-new system, and there seems to be nothing in the current processes which would require checks on data accuracy. The processes mentioned in Clause 16 include records management, in subsection (4)(d), while subsection (4)(b) recommends standards for IT systems’ “quality”. However, there are no processes to verify on an ongoing basis a regular audit of whether the data are correct. We know that data are currently incorrect in a large number of auto-enrolment schemes. Even the modern ones are full of errors.

I am trying to introduce something that would help us learn from experience and avoid repeating the kind of mistakes that we know have arisen. They are not intentional mistakes, but if we put in place right from the start processes which require data audits and, potentially, capital buffers as well, against mistakes that have not been foreseen, we will set up a more robust system for the longer term.

[Baroness Stedman-Scott]

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

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

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

--- Later in debate ---

[Baroness Sherlock]

I think this is a language question. The problem that my noble friend Lady Drake raised at Second Reading and which we are trying to raise here is not about a capital buffer to deal with the intergenerational questions of benefits and payments at a time. It was the equivalent in master trust regulations where the sponsoring employer has to put money up front in a safe place so that if things go wrong and the scheme collapses the fallout can be funded without raiding members’ benefits. I think the noble Baroness, Lady Bowles, is describing something slightly different.

[Baroness Altmann]

I hope I can intervene helpfully. This is allied to the issue of data. If a scheme has to wind up, the biggest cost is the administration, and the likelihood of a scheme with poor data records needing to take money from members’ pensions to meet the very high costs of administration when a scheme is failing is much greater. That goes back to the original reason for suggesting that we need a buffer that can cater for the disaster scenario. It is like an insurance policy so that if things have gone horribly wrong with that scheme, members do not potentially end up with no pension because there is something that we have set up from the beginning that can help fund the costs involved and there are systems and processes to check regularly that data are correct along the way which would mitigate the costs of going back over many years and trying to resurrect records.

--- Later in debate ---

[Baroness Stedman-Scott]

I am advised that we are confident that that will be the case.

[Baroness Altmann]

In that case, I seek clarification on what would happen if the employer became insolvent. There would still be the same problem that members’ pots would be needed to cover the costs of wind up, because they could not be got from the employer. If there is not a capital buffer up front and we rely on waiting to recover it from the employer, we may still end up with the same kinds of errors that we had in defined benefit schemes, where there was nobody to get the money from and the members ended up with potentially no pension.

[Baroness Donaghy (Lab)]

In the absence of knowledge in this area I have had to resort to listening to the debate. I think the consultation is important. We need to be clear what the headroom is, what the buffer is and whether the headroom is to take account of inflation, as the Minister says. Taking account of inflation has nothing to do with sustainability, emergency action or catastrophes of other kinds, so we need clarity about, first, what questions are asked in the consultation and, secondly, what responsibility is taken.

It is all very well saying that the regulator will look at this and make sure it is sustainable, but I am not sure that the history of the Pensions Regulator gives me a good night’s sleep. I apologise if I have got it wrong, but there seems to me to be a bit of confusion about what this headroom or buffer is for, who takes responsibility for it and how the Pensions Regulator will keep a look out. It is not clear to me that statutory instruments will do it. However, if the Minister is confident that they will, we need to see them.

--- Later in debate ---

[Baroness Altmann]

I support my noble friend’s proposed amendment. He has raised an important issue here. Once again, it is about pre-empting a problem that we have seen elsewhere and not importing it into brand-new legislation. The pause order and triggering events that might permit some protection against people transferring out inappropriately will arise only if the scheme is in trouble and the regulator has already picked that up. That will be a number of steps down the line.

I wholeheartedly agree with what my noble friend said. Before transferring out of a defined benefit scheme, one is required to take advice if one is losing a meaningful lifelong potential income—not guaranteed, but potential. That protects members and potentially the scheme. If there are risk margins in transfer values, members should also have somebody talk them through what they might imply for them. Given that the aim of the CDC scheme is to deliver a lifetime pension, having the same requirement for advice as we already have in defined benefit schemes does not seem overly draconian. I am not saying this is necessarily the right wording or optimal route for a CDC scheme, but the aim of this amendment to protect members has merit. I would be grateful if my noble friend and the department might consider introducing it.

[Viscount Eccles]

My Lords, I say in support that, if I were a trustee of a pension scheme, and one, two or more people wanted to transfer out, I would be extremely unhappy if they had not taken independent financial advice. I would see that as a necessary condition of coming to the deal that we were possibly coming to.

--- Later in debate ---

[Lord Hutton of Furness]

The noble Lord, Lord Vaux, has drawn attention to an important issue. The wording of Clause 15, which deals with communication requirements that the Pensions Regulator has to be satisfied with, is all about the systems and processes of communication. I accept that that is important but so is the content of the communication. The issue of risk, and who carries the principal burden of risk in a collective defined-contribution scheme, is central. Anyone who has followed what happened in the Netherlands a few years ago will be aware of the enormous sense of disappointment, anger and, I think, surprise that many of the scheme members felt when their pensions in benefit were reduced. No one thought that was possible but of course it was, because, at the end of the day, collective money purchase schemes are, as the noble Lord said, collective defined contribution schemes. The risk is entirely on the scheme member; it is not on the employer at all. No guaranteed promises are being made to scheme members about what their retirement benefits will be.

The issue of the content of the communications that the scheme must make available to its members is just as important as the systems and process of communication. It is a mistake in the Bill for the emphasis to be placed on just the systems and processes, as it is, with no acknowledgement of the importance of the content.

[Baroness Altmann]

My Lords, I added my name to the amendment moved comprehensively by the noble Lord, Lord Vaux. I want to add a few points.

As many of us said at Second Reading, communication is one of the key issues of this type of pension scheme, especially in a country that is used to traditional defined benefit schemes, which were thought to offer guaranteed pensions—and have done so in most cases. This is completely different. Indeed, it relates to the idea of capital buffers and some kind of insurance. If there are no buffers and there is no insurance and things go wrong, it is entirely possible that the member will get no pension from this type of pension scheme. Will that concept of risk be explained to members? Will it be explained to members who may, as my noble friend Lord Young said, be transferring into a CDC scheme?

The aim of this scheme is to offer lower-cost administration and better returns on the investment than an individual defined contribution scheme because of the economies of scale and access to a wider range of assets—perhaps also with more individualised professional management of the scheme as a whole—and to offer better income prospects than what an individual would achieve through buying their own annuity, with all the risk and profit margins involved in that transaction. Communication to the members that this does not guarantee a pension and that there are no pension rights in this CDC scheme will be crucial. Explaining to members, who will be contributing their own resources, what this means—not least to Royal Mail members, whose guaranteed defined benefit scheme was ultimately picked up by the taxpayer and then moved into a new type of defined benefit scheme that was considered unaffordable by the new body and is being replaced by this scheme—needs to be an integral part of establishing the scheme.

I thank the noble Lord, Lord Vaux, for raising this important issue. I hope that my noble friend will take it on board.

--- Later in debate ---

[Baroness Bowles of Berkhamsted]

My Lords, I have no objection to making things the same everywhere, but last time I came across this 0.75% cap I did not ask a question, so I will now. What exactly does it cover? Compared to some SIPP investor platforms and so forth, it seems rather high. Does it cover all the trading charges as well? You can get 0.15% from Vanguard, 0.25% from AJ Bell and up to 0.45% with all your trading charges covered from Hargreaves Lansdown. I could go on. If you go to some of the insurance companies —I will go on—they tend to be greedier, up to 0.3%, but that is far short of 0.75%, so what is this paying for?

[Baroness Altmann]

I shall raise similar points. Will ask my noble friend say how the 0.75% charge cap was arrived at, given that the purpose of the CDC scheme, as I understood it, is to provide members better value than if they had their own defined contribution fund and to benefit from the economies of scale of collective management and administration, which clearly should be much lower per member than an individual defined contribution scheme?

Another point my noble friend mentioned is that that there should be no exit penalty. If that were the case, the issue we were discussing earlier about potentially reducing or applying a risk margin to transfer values would become impossible. Intergenerational fairness, which we were concerned about in our earlier discussions in Committee, may be undermined if there is an express prohibition on what may be called an exit penalty, but which to others is a risk margin or buffer against future market dislocations or changed assumptions.

[Baroness Stedman-Scott]

The noble Baroness, Lady Bowles, asked what the cap covers. This is defined in the regulations, and we will send details to all Members of the Committee. We will consult on 0.75% and the final level of the cap, as part of the regulations, so there will be more opportunity for noble Lords to influence that. The noble Baroness, Lady Altmann, raised the exit penalty. I will have to write to her on that.