Pension Schemes Bill [HL]

Baroness Altmann Excerpts

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

[Lord Sharkey (LD) [V]]

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

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 All the subsequent uses of the negative procedure have been withdrawn by these amendments.

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

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

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

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

[Baroness Altmann (Con) [V]]

My Lords, I very much welcome the Government’s amendments to this Bill and congratulate my noble friend on her initial speech, in which she so clearly explained what the Government intend to do. I also congratulate her on the way in which she has engaged with Members across the House and, together with the Bill team, has listened to the concerns expressed at previous stages of this Bill. I particularly welcome the change from the originally proposed first-use-only affirmative procedure and the comments made by my noble friend on the importance of, for example, the cooling-off period before pension transfers occur.

I must admit that I also support Amendment 2 in the name of the noble Lord, Lord Sharkey. I share his concerns and would welcome an explanation, such as he has requested from my noble friend when she comes to respond, of why only this area—assessment of whether somebody is fit and proper to run a CDC scheme—should be left to the negative resolution procedure and be wholly at the discretion of the Secretary of State without what we would normally consider to be appropriate parliamentary scrutiny in this important area. The CDC framework is completely new for this country. I therefore think that colleagues across the House who have expressed the same concerns are right in suggesting that it is important that we have as much scrutiny as possible.

I have an amendment in this group—Amendment 13—regarding the accuracy of pensions data that needs to be submitted to a CDC scheme. I will not move it at this stage; I will come back to this subject during debate on a later group with my other amendments.

I welcome the current government proposals and hope that my noble friend will listen to some of the concerns expressed. I look forward to hearing contributions from other noble Lords and colleagues as we go forward in this debate.

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[Lord Vaux of Harrowden (CB) [V]]

My Lords, I wish to support Amendment 32, tabled by the noble Lord, Lord Sharkey, to which I have added my name. I should add that I also wholeheartedly support Amendment 8, but I will restrict my comments to Amendment 32.

While there seems to be general support for the introduction of this new type of pension—collective money purchase schemes, or CMPs; I am going to try very hard not to call them CDCs as we go through this—they are not without risk. As we discussed at some length in Committee, one of the greatest risks that is often raised in respect of CMPs relates to intergenerational fairness. Indeed, at the extreme, in a situation where no returns are being earned but pension levels are maintained for existing pensioners, the pensions being paid would be dependent on the funds being put by new joiners, as in a Ponzi scheme. That is very extreme, as I say, but it demonstrates that there is the possibility of one cohort being disadvantaged by the treatment of another cohort. If existing pensioners are paid too much, those currently paying in will suffer, and if the scheme is overcautious in what it pays out to pensioners, pensioners will suffer and current workers will gain.

This is not theoretical. We only need to look at what is happening in the Netherlands to see that the question of whether to cut benefits when returns are not as good as expected is a real and current issue. In a standard defined contribution scheme, the risk is not pooled, so the issue does not arise. In a defined benefit scheme, the matter is dealt with by the employer making up the difference. However, in a CMP, there is no possibility of that happening. If you want to maintain the level of pensions when returns are low, the future pensions of those still contributing will be impacted and vice versa, so the issue of intergenerational fairness is specific to CMP schemes.

It is also worth pointing out that CMPs have implications for not only intergenerational fairness but fairness more generally. For example, as the noble Baroness, Lady Bowles, pointed out, if someone wants to transfer their fund out of a scheme, how do you value their share? The benefits that arise from the scheme are uncertain, being targets only, so if you value a transfer based on the target benefits, which seems to be what is proposed, that will not take account of the risk that those benefits may not be achieved. In that situation, the person transferring out is getting a better deal than those staying, unless that risk is taken into account in the transfer valuation. The issue is complicated further because of the pooling of longevity risk in a CMP. For example, if someone has just a couple of years to live, there would be a strong incentive for them to take their money out to the detriment of those staying in.

Given that fairness is the single most commonly raised risk that relates to CMPs, it is curious that there is no explicit mechanism in the Bill to deal with it. In our previous discussions, we were pointed in the direction of Clause 18 to see how the matter is dealt with, but in fact that clause sets out only how benefits and so on will be calculated and says that regulations will be made in that respect; nowhere does it mention the critical question of fairness. I imagine that that is because it has been based on other pension legislation, which, as I said, does not suffer from this risk.

Amendment 32 introduces as very simple means by which to ensure that intergenerational fairness and fairness more generally must be assessed by the trustees. Given the importance of this issue, I urge the Minister to consider it really seriously.

[Baroness Altmann [V]]

My Lords, I have enormous sympathy with the aims of the two amendments in this group. Amendment 8, in the names of the noble Baronesses, Lady Drake, Lady Sherlock and Lady Bowles, was expertly moved by the noble Baroness, Lady Drake, and deals with situations where a pension scheme may not have enough money to meet its obligations and there is a risk that it will need to draw on the funds in the members’ pension pot rather than have money coming in from outside.

As I mentioned in debate on earlier stages of the Bill, I am particularly concerned about the situation where a scheme has had a triggering event or is winding up and may not have sufficient administrative budget to cope with, for example, a significant IT failure in which member records are lost or transposed from one to another so that it is an enormous job to unscramble each member’s entitlement. The costs of that work can be significant; if no reserves are in place to meet those costs and the employer is in financial difficulties, what will a CMP scheme be able to do to fund the costs of sorting out the records? It is true that the aims of the CMP scheme as set out in the Bill will be to have central estimated assumptions for guiding benefit adjustments to ensure that there is no difference of treatment between different members, but on the particular issue that I am referring to and that Amendment 8 refers to, the continuity strategy outlined in the Bill is supposed to have money to meet a triggering event, including its costs, but may not do so.

Therefore, as I understand it, the thrust of this amendment is to ensure that the Pensions Regulator requires a separate capital buffer, or that an insurance arrangement will cover the costs incurred in winding up, or that, in exceptional circumstances, the costs required to administer the scheme are met other than from members’ funds. When we set up this new regime, it is important that we make sure that we cater for eventualities that we do not expect to happen but which we know could in theory happen. Having seen with defined benefit schemes the devastating impact of scheme wind-up without sufficient resources and the amounts of money taken out of defined benefit schemes when an employer has failed or walked away from the scheme—those cases have reduced the amounts available for pensioners, in some cases to zero—there is a real need to look at some catastrophe insurance, disaster-type insurance or capital buffer of some kind to make sure that we have catered for that before it happens.

I think it would be wise for my noble friend to consider what else might be done over and above what is in the Bill. I also look forward to her answer to the specific question asked by noble Lords about what would happen in practice should a scheme require money that does not currently exist within the fund, other than in members’ entitlement pots, to cover the costs of wind-up. Of course CMP does not give each person an individual pot, but if the overall assets have to be raided to meet these costs, their pensions will be impacted.

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[Baroness Altmann [V]]

My Lords, I have added my name to these amendments in the names of my noble friends Lady Noakes and Lady Neville-Rolfe. I congratulate my noble friend Lady Noakes on the way she introduced this amendment.

There are valid concerns around the wording of the good intentions of this Bill to introduce criminal offences or financial penalties for avoiding employer debt or risking member-accrued benefits. But it is right to express some concerns that this should apply only if the person is either an employer or associated with the employer, so that professional advisers cannot be held criminally liable, nor banks just making loans in the ordinary course of business, nor even insurers for mistakes made in underfunding the pension scheme.

I welcome the long-overdue extension of the Pensions Regulator’s powers contained in this Bill, which can punish wilful or reckless behaviour and non-compliance with contribution notices and so on. I also welcome the intention to deter bad practice by scheme employers, and indeed scheme trustees from undermining their pension scheme. It is right to have a criminal offence, but, as currently written, the provisions under Clause 107 could criminalise anyone who deals with a pension scheme. I do not believe that is the intention, and it could leave parties reluctant to deal with a business because of its pension scheme, which could in turn jeopardise the ongoing solvency of the company. Therefore, I would welcome some reassurance from the Minister that this will not be the outcome of this legislation.

Some might say that advisers should surely share the responsibility were there to be attempts to avoid pension debt. I have some sympathy with this. So, once again, will my noble friend reassure us that this Bill will not see those acting in good faith being caught out by the actions of an employer, or even perhaps of complicit trustees who might act in ways that are detrimental to the scheme? I hope that this reassurance can be forthcoming.

[Baroness Neville-Rolfe (Con) [V]]

My Lords, I support my noble friends Lady Noakes and Lady Altmann and the strong case they have made for these amendments. Noble Lords may recall that at Second Reading on 28 January I expressed some doubts about the scale and nature of the penalties in this Bill, which include a civil penalty of up to £1 million. I am still concerned that increasing them, especially the new criminal element, will deter the respectable people we need from becoming pension scheme trustees.

The world has been changed by the challenges of the coronavirus, as we have just heard. According to Patrick Hosking in the Times yesterday, using figures from pension experts Barnett Waddingham, FTSE pension deficits have soared by £45 billion to £210 billion since the start of the year, so that companies that have a deficit are now a good deal further away from closing it. This is an enormous strain on mostly well-run companies and schemes and reflects years of low interest rates caused by QE and turbulent equity markets. Who would want to get involved in pension administration? Yet its success is at the heart of the British savings system and vital to the future livelihoods of millions of hard-working people, often of modest means, up and down the country.

The Bill rightly reflects the need to plug a hole revealed by the Philip Green case and the furious debate in Parliament before Sir Philip was persuaded to pay up. However, as is often the case with legislation that responds to scandals, it is wide-ranging and takes enormous powers. It goes too far in my view towards burdening business at the expense of other stakeholders. The result will be less willingness to become a trustee and more administrative and other costs for pension schemes paid for, in the end, by the unfortunate pensioners, and the risk of more businesses being pushed into the Pension Protection Fund. This is the background to my unease with Clause 107 and why I moved an amendment in Committee with the help of my noble friend Lady Noakes, and why I now support her and my noble friend Lady Altmann with these amendments.

The criminal offences in Clause 107 are widely drawn. They try to catch bad behaviour by anyone who might be involved. But I maintain that this may have appalling perverse effects, injecting great uncertainty into what is permitted behaviour by those involved in pensions administration. My principal concern is with trustees, having been one and knowing what fine judgments one is called to make, but also with financial advisers, actuaries, accountants, insurers, property consultants and even secretarial support, all acting in good faith. It is one thing to provide for criminal sanctions against an employer, but wrong to extend this in such a vague and general way. A number of suggestions were made in Committee as to how one might tackle this, but disappointingly the Government have not listened—or not so far.

These new criminal offences will have a chilling effect on trustees and others involved, as my noble friend Lady Noakes explained, and I ask my noble friend the Minister to agree to think again and to narrow the very wide offences in this Bill to provide some comfort, either in this House or when it proceeds to the other place.

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[Lord Vaux of Harrowden [V]]

My Lords, in moving Amendment 50 I will also speak to Amendment 51 in my name. I thank the noble Baronesses, Lady Bowles and Lady Altmann, for their support and the Minister and officials for the time they have given to discuss the issue on a number of occasions.

Both these amendments relate to a similar concern: shareholders of companies with pension deficits removing excessive value from companies and thereby increasing the risk relating to their pension schemes. We had a long discussion about this in Committee, so I shall try not to duplicate that too much, but I will briefly explain the issue for those coming to this for the first time. I suggest that events since Committee have conspired to make the matter more rather than less relevant.

The Bill introduces a requirement that the regulator should be notified in advance of notifiable events and that the notification should be accompanied by a description of how the notifiable event might impact the pension scheme and what is being done to mitigate that impact. The Bill does not say what those notifiable events will be; they are to be prescribed in future.

However, it is understood that the Government intend these to be, first, the sale of all or a material proportion of the assets or business and, secondly, the granting of security on a debt in priority to a debt of the scheme. An email I received from the regulator describes the purpose of the notifiable event regime as being to act as an early warning system so that it is alerted to corporate actions that may have a detrimental impact on the scheme and that it may otherwise not have been aware of.

The easiest way for shareholders to remove value from a company is through either a dividend or a share buyback. While the regulator will be able to find out about these after the event, it has no way of seeing them in advance. Once the money has gone, it is too late; it is very hard to recover, especially if it has gone abroad. We have seen high-profile examples of companies going under after large dividends have been paid, leaving pension schemes with deficits—BHS and Carillion being just the two most high-profile ones. It is not a theoretical risk and, sadly, recent events have made such situations only more likely.

The Government rightly argue that we should not restrict the payment of normal, reasonable dividends; I completely agree with them. Restricting the payment of normal, non-excessive dividends could have a negative effect on the company and therefore on the pension scheme. Anyway, many dividends end up in pension schemes. It is only excessively high dividends, compared with the deficit repair payments, that I am trying to catch here. Even then, I am asking only that they be notified in advance so that the regulator can consider whether they have a negative impact on the pension scheme. I am not trying to block them, despite some noble Lords wishing that were the case.

Secondly, the Government also rightly argue that we should not overburden the regulator with too many unnecessary notifications. Again, I agree with them, so I have changed the amendment we discussed in Committee so that Amendment 51 now allows the regulator to set the level of dividend at which it should be notified. Share buybacks are a less common action, so I suggest that they should always be a notifiable event.

Amendment 50 simply says that any company with a pension deficit should notify a share buyback to the regulator in advance. Amendment 51 says that a company with a deficit should notify the regulator in advance if the dividend is bigger than the deficit repair contribution and the deficit repair period is longer than a period to be specified by the regulator.

It is interesting to note that if a company borrows more than £50 million under the Coronavirus Large Business Interruption Loan Scheme, the Government forbid it to pay dividends, make a buyback or pay a bonus. They have taken that view presumably because they are worried that if it pays a dividend or a buyback it will increase the risk of non-payment of the loan.

By contrast, we are allowing companies that owe large sums to their pension schemes and deferred salaries to their employees to pay whatever they want without even a notification. That feels slightly like “one rule for us”. I do not think that the Minister will accept these amendments, and I would prefer not to push them to a Division. The Bill allows the Government to prescribe events as notifiable events in the future. The noble Baroness, Lady Stedman-Scott, has kindly confirmed to me that the Government will keep the issue of dividends and share buybacks under review, and take appropriate action if they or the regulator feel that they are becoming a potential problem. If the Minister could kindly confirm that understanding for the record, I will not seek to divide the House over these amendments. I beg to move.

[Baroness Altmann [V]]

My Lords, I am grateful to the noble Lord, Lord Vaux, for moving these two important amendments. I have added my name to Amendment 50, which requires share buybacks to be notified to the regulator if a company is responsible for a pension scheme in deficit.

The case for accepting this amendment seems quite overwhelming. The noble Lord has been extremely reasonable in only requiring notification of a buyback. Equity buybacks are sometimes used by companies to distribute to shareholders what is considered surplus cash where management believes that it has no better use for that money. That suggests that sometimes, management believes that the current share price is undervalued. Of course, the buyback improves reported earnings per share and flatters financial statements, but these measures are sometimes used as a yardstick to determine top executives’ pay or bonuses. Many receive a large element of their compensation in the form of stock options, and a buyback can offset the dilution of existing share values and any potential reduction in earnings per share that might otherwise come from their options. Therefore, buybacks could be considered a ploy to boost reported earnings per share or share price levels.

It should be remembered that although the buyback may increase earnings per share, it does not increase the fundamental value of the company. Even more worrying, sometimes, companies engage in buybacks funded by increased borrowing. One of the reasons given for taking on the increased debt to fund such a buyback is that it is more efficient, because the interest on the debt is tax-deductible, unlike with dividends. However, clearly, this will reduce the financial resilience of the company when the debt must be repaid or the gearing level rises, leaving less money available to fill a pension deficit.

A company’s financial difficulty results from lack of cash, not lack of profits, and for a company which sponsors a defined benefit pension scheme with a deficit, the buyback would allow shareholders to enjoy rewards at the expense of pensioners. Ultimately, if the cash has gone into buying shares, it is no longer available to fill the deficit. The buyback itself cannot be argued to generate future growth, because a company’s investing its cash in the business would be a reason to suggest that it will be better off as a result of that decision. However, where spare cash is simply given to shareholders to boost share prices and potentially boost management remuneration, this requires some oversight by the regulator.

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[Baroness Drake [V]]

My Lords, Amendment 52 is in my name and those of my noble friend Lady Sherlock and the noble Baroness, Lady Janke. The Bill enables the introduction of an ecosystem of public and commercial pensions dashboards. When built, the dashboard service will find and display, for view by all individuals, all the information about their occupation, personal and state pensions in one place. The Secretary of State can mandate all pension providers and schemes, including the state, to release their data on an individual. That mandate will cover the financial data of many millions of people.

The intention is that the dashboard will contribute to better decision-making by individuals about their long-term savings. Unfortunately, the evidence shows that that will not automatically translate into engagement and good decision-making by everyone. Structures will need to exist around the dashboard which support people making choices and protect them from detriment. That is why Amendment 52 is important. The amendment ensures that a dashboard service should not go beyond the finding and displaying for view information on a consumer’s savings into allowing financial transactions to take place through the dashboard before Parliament has had the opportunity to consider the matter and approve this through primary legislation.

The long-term savings market is particularly vulnerable to consumer detriment, because of the asymmetry of knowledge and understanding between the consumer and the provider, consumer behavioural biases, the complexity of products, and the irreversible nature of many pension decisions. There is a plethora of reports from different regulators confirming this. Allowing transactions on commercial dashboards, such as the transfer of assets, could provide new opportunities for detriment. The impact of scams, mis-selling, provider nudging and poor decision-making could increase if an individual’s total savings are displayed in one place, the dashboard allows financial transactions, and the wrap of consumer protection is not fit for purpose. For some vulnerable customers, poor decisions could be more costly if the impact is across all their savings, and if people are scammed, they could be scammed out of everything.

Before transactions are authorised, Parliament needs to understand how the dashboard is driving behaviours, of both consumer and provider, and how consumers will be protected. In this market, the consumer demand side is weak, and, increasingly, regulatory focus is on provider supply-side controls to protect consumers’ interests. Commercial dashboards could make it much easier for firms that have attractive front-end offerings to capture consumer assets through, for example, encouraging early consolidation and the transfer of pension pots. It is to be remembered that pension transaction decisions are mostly irreversible, and poor decisions can be financially life-changing in their impact.

Dashboards are not a silver bullet for removing consumer risk. Most individuals do not proactively engage with their pensions until they have to. When they do, they can be price insensitive and vulnerable to nudging, inertia and judgments detrimental to their retirement income. We now see that vulnerability in the drawdown market following the introduction of pension freedoms, as the FCA has confirmed.

Consumers reveal powerful behavioural biases which have more impact on financial capability than lack of knowledge and information. They take what the FCA describes as the “path of least resistance”, even in the face of information available to them. If someone is looking to consolidate all their savings, rather like Alice and the Drink Me bottle, if there is a button on the provider’s commercial dashboard that is marked “Transfer All Savings”, they are more likely to press it.

The FCA rules have not prevented mis-selling. Regulated advice failed the Port Talbot steel workers. The FCA report on the financial advice market’s support to pensions does not make good reading. In a dashboard service which allows financial transactions, protecting individuals’ data, and who can hold, access and use it, are questions of major importance. This amendment does not argue against allowing financial transactions longer term over the dashboard, but it recognises that the consumer protection issues are of such importance and magnitude that the decision to allow transactions must be preceded by the approval of Parliament. Neither Government nor Parliament can be agnostic on the matter. The state supports the long-term saving system with more than £40 billion of tax relief and mandates employers to enrol millions of workers into a pension scheme.

The Government must ensure that the dashboard service makes a positive contribution to retirement income outcomes for the consumer and the public good of the UK. I am arguing that people should have the freedom to make good decisions and be protected from poor decisions that they cannot reverse. This is something that the FCA often tries to do, and I am sure that if one put the issue to some of those Port Talbot steel workers, they would agree. Some of those steel workers learned a cruel lesson: poor pension savings decisions are irreversible. In Committee on 2 March, the noble Earl, Lord Howe, commented:

“I do not believe that I expressed a categorical Government intention to include transactions on the dashboard. I said that we would make that incremental step only after the most careful consideration and public consultation, and assessment of all the risks. I freely acknowledge that risks exist in that quarter.”—[Official Report, 2/3/20; col. 209GC.]


My case, and the sheer weight of the evidence, is that such are the potential risks that Parliament itself should have its say and that scrutiny by secondary legislation in the affirmative is not sufficient. Furthermore, the very nature and extent of the protections required may, because of their nature, require primary legislation. This is not an area of settled policy and it is a matter of significance for many millions of citizens. I hope that the Minister will accept the amendment. If he does not, I intend to push it to a vote. I beg to move.

[Baroness Altmann [V]]

My Lords, I have little to add to the wise words of the noble Baroness, Lady Drake, on Amendment 52. There are significant dangers should there be an easy transaction button on a pensions dashboard right from day one. However, perhaps I may speak briefly to my own amendments, which have been kindly supported by the noble Baroness, Lady Bowles: Amendments 56 and 59.

Amendment 56 is probing in nature and seeks to amend Section 119 of the Pensions Act 2004 to provide that regulations may be imposed that would require information from occupational pension schemes to dashboards to be accurate and up to date. Further, the amendment would ask the regulator to impose requirements for regular data audits, accuracy checks and error correction reports.

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Given the issues of public good and consumer interest in play here, this amendment asks no more than that the Government, in exercising their duty of care to what will be millions of consumers, ensure that the MaPS service is up and running for a year before commercial dashboards enter the market, and that the Secretary of State has reported to Parliament. I hope that the Minister will accept the amendment. If not, I intend to push it to a vote.

[Baroness Altmann [V]]

My Lords, I want to speak briefly in support of Amendment 63. I have also added my name to Amendment 65. As the noble Baroness, Lady Drake, has just outlined, consumer protection has to be paramount. There has to be significant concern that, once a dashboard is up and running, we will need to learn lessons before further activity takes place. If we have a public service dashboard for a minimum of a year, we will have chances to learn lessons that otherwise might not be learned—particularly in light of such issues as data concerns, types of protected benefits and requirements for MaPS guidance. I am most grateful to the Minister for accepting the concept of requiring MaPS advice or guidance before any transfers. This is an important issue. I therefore hope that the Government will recognise the necessity of ensuring that private dashboards do not start before the public dashboard has been tried, tested and reported upon in Parliament.

The principle of Amendment 68, tabled by my noble friend Lord Young, is right. I would just advise caution on the issue of data accuracy and the lack of data standards, and the fact that it may simply not be possible for a dashboard and the data to be ready in the timescale he is suggesting, but the thrust of it and having an end date is absolutely the right way forward.

[Lord Vaux of Harrowden [V]]

My Lords, I have added my name to Amendment 63 in the name of the noble Baroness, Lady Sherlock. This amendment is very simple. It seeks to ensure a period of a year from the establishment of the publicly operated dashboard before competing commercial dashboards are allowed to operate. This may seem a small point, but it is quite important. Dashboards are a new concept and will include large amounts of sensitive and complex data from many sources. We do not yet know how they will used, whether the current design concepts are suitable in practice and whether changes will need to be made to ensure that they operate well and safely. Therefore, it must make sense for the system to be tried out in one place, with proper controls, and reviewed and reported upon, before we open it up to the commercial world. This period of a year will allow us to see how a dashboard is used and whether any unforeseen problems and consequences arise.

I am grateful to the ABI for its commentary on the amendments to this Bill, but I am afraid that I disagree with it on this matter. The ABI is right that making dashboards as accessible as possible is desirable, but that must be done in a way that ensures that unforeseen consequences are avoided. As I mentioned in an earlier debate today, a bad dashboard is worse than no dashboard. A year’s grace period to ensure that what the noble Lord, Lord Young, called the plumbing is working well, and to make any tweaks, seems a common-sense safeguard.

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[Lord Young of Cookham [V]]

My Lords, I will add a brief footnote to the powerful case made by the noble Baroness, Lady Bowles. She referred to the Railways Pension Scheme. As Secretary of State for Transport from 1995 to 1997, I am familiar with the scheme, which has grown in the intervening years to be one of the UK’s largest funds and which I believe to be well run.

I shared with my noble friend Lady Stedman-Scott the concerns of the RPS; namely, as the noble Baroness, Lady Bowles, has said, that the draft DB funding code that will emerge as a result of this legislation would oblige the various schemes under the RPS to de-risk with lower returns. As the noble Baroness has explained, these would have to be made good by the industry, if it could afford it, or its employees, or the schemes would be closed to new members.

I was encouraged by my noble friend’s helpful reply, dated 17 June, which said:

“Those employers and schemes who are already following good practice and planning for the long term should not need to change and we would not expect such schemes to require significant additional funding.”


However, I shared the letter with the RPS and, despite this, it believes that the powers in the Bill are too loosely expressed and that more specificity would ensure that the subsequent regulations got off on the right track. If the Minister cannot accept the amendment, can he make a commitment that there will be a distinction between open and closed schemes, to be followed up in the subsequent regulations? Will he ask his officials to discuss these concerns further with interested parties in an endeavour to find an acceptable way through as the Bill completes its passage through both Houses?

[Baroness Altmann [V]]

My Lords, I support Amendment 71, to which I have added my name. I have little to add to the excellent words of the noble Baroness, Lady Bowles, and my noble friend Lord Young of Cookham.

I stress to my noble friend the Minister that this is a really important amendment. The Government’s recent White Paper called for pension scheme funding which enables the best deal for members, supports the economy and does not place extra burdens on business. If those are the objectives—and I think they are the right ones—they will be at odds with the draft DB funding code that may emerge from this legislation, which seems to want to drive DB schemes on a path to so-called de-risking, aiming for a particular date of maturity. This concept is simply inappropriate for an open scheme.

The regulatory approach for schemes such as USS or the Railways Pension Scheme would see their ability to invest for the long term, which must be in the members’ best interest, become much more difficult. There does not seem to be sufficient recognition of the difference in liquidity profile and investment horizon of an open, relatively immature scheme compared to a closed scheme. Indeed, this would pose an existential threat to the survival of all remaining 1,000 or so open schemes. In the face of quantitative easing, increasing exposure to gilts and fixed income assets makes little sense while central bank policy is designed to force bond yields lower. Forcing schemes to compete with central banks to buy ever more expensive bonds is the most expensive way to fund these pension commitments.

The Bank of England’s pension scheme is an ideal example. It follows a lowest-risk approach, investing solely in gilts and other such supposedly safe assets. It does not match its liabilities, but it is open and entails a contribution rate of between 40% and 50% of pensionable salary. Should such pension contributions be required without any upside potential for a diversified investment strategy that can take advantage of the wide range of investment options available from infrastructure assets, building housing for rental and other areas where pension schemes with a long-term horizon are ideally placed to take advantage—for example, our own infrastructure, in which other countries’ pension schemes have significantly invested—schemes such as RPMI would require such significant contribution increases that members could not afford it and would opt out, and employers could probably not afford it either.

Therefore, I urge my noble friend to look carefully at this really important issue and to recognise explicitly that there are different needs for open DB schemes relative to those that are otherwise closed.

[Baroness Drake [V]]

My Lords, I speak in support of Amendment 71. Given the hour, the noble Baroness, Lady Bowles of Berkhamsted, with her usual skill, has captured the issues clearly and succinctly. It is clear that there is genuine concern among those running DB schemes which are materially open to new members with strong employers, such as the sections of the Railways Pension Scheme and the Universities Superannuation Scheme. They fear that they will be forced to de-risk unnecessarily, with all the implications that that carries and all the potential detriment for both employers and employees in the scheme.

The amendment seeks to address two issues: first, that it should not be government policy to require trustees of pension schemes materially open to new entrants with strong employer covenants to adopt a strategy that will result in them de-risking their investments unnecessarily and prematurely, for all the reasons that other noble Lords have clearly articulated; and, secondly, that the Secretary of State, in exercising powers under Schedule 10 to make provisions through regulation on the funding of defined benefit schemes, should make provisions that are consistent with the policy in the White Paper statement that running on with employer support could be an acceptable long-term strategy for a materially open scheme. The amendment is consistent with any reading of the government policy in the White Paper, but it seeks to ensure that it happens.