Pension Schemes Bill [HL]

Baroness Bakewell of Hardington Mandeville Excerpts

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

[Baroness Bakewell of Hardington Mandeville (LD)]

My Lords, I thank the Minister for setting out so clearly the arguments for and direction of this Bill. Like all the other speakers, I welcome the regulation of master trusts, their trustees and the way in which their businesses are run. It is vital that we protect those investing their money in master trusts so that they feel secure in the knowledge that their savings are safe. The majority of master trusts are run extremely efficiently and effectively. However, with smaller master trusts beginning to enter the marketplace, it is essential that the Government seek to protect those working for smaller employers and offer them the same protection as those covered by larger providers, such as the People’s Pension, Legal & General and others. Master trusts are the scheme of choice for the auto-enrolment market and it must be fit for purpose for the small as well as the large trust.

As we have heard from the noble Lord, Lord McKenzie of Luton, and my noble friend Lord Stoneham of Droxford, some 6.7 million people are now enrolled in some 84 schemes, with £8.5 billion-worth of assets. It is time that there is protection for members of a scheme where a master trust fails and has to be wound up. This Bill helps to provide that protection.

The People’s Pension represents a market innovation which was not anticipated by previous Governments or by the Turner commission, but they do have concerns. It is important to increase and maintain the success of auto-enrolment. The DWP forecasts that auto-enrolment will cost government £3 billion a year in lower tax revenues by 2050, but it will increase aggregate private pension incomes by £5 billion to £8 billion a year in 2011-12 earning terms and reduce government spending on income-related benefits in retirement by £0.9 billion by 2050.

There is also the risk of cross-cutting policies undermining auto-enrolment. There are concerns that policies from other departments may clash with the motivators found in auto-enrolment. Developing policy confusion could be damaging to consumer saving. Clarity and transparency are essential.

It is important that employees continue to save for their pension and increase their contributions. NEST, referred to by the noble Lord, Lord Monks, is countrywide and has some 3 million customers, each with a small pot. The fund has been running since 2012. The average pot is £300. This is unlikely to fund a pension for its members and a degree of realism is needed. People will not be able to afford to retire with so little in their pots. They will be disappointed, and employers will not welcome keeping on employees beyond their expected retirement age. When are the Government going to do something about this?

I welcome the criteria which the new authorisation regime institutes for master trusts and the new powers for the Pensions Regulator. The five essential criteria are: that persons involved in the scheme are fit and proper; that the scheme has financial sustainability; that the funder meets certain requirements; that systems and processes relating to the governance and administration of the scheme are sufficient; and, last but by no means least, that the scheme has an adequate continuity strategy. All the criteria are extremely important, as we have heard, but we will need to ensure that they are enshrined in the legislation as we move through the Bill stages.

Clauses 20 to 35 deal with triggering events around the responsibilities of trustees and the licensing of master trusts and the possible withdrawal of authority. However, I could not find any reference to what would happen to the pot of money in a master trust which had its authority withdrawn. Would this be returned to the employees or used for some other purpose? I am sure the House will want to probe this in Committee and I would be grateful if the Minister could provide some clarification at this stage.

Part 2 deals with exit penalties. Exit fees were not anticipated in the original legislation. These are set by the providers and have been as much as 5% of the pot which investors are wishing to transfer. The Government have introduced a cap of 1% on exit fees, which is to be welcomed. I am not as sanguine as the Minister about Clause 40, which is very vague. I remain concerned about Clause 40(2). Should the Government grant themselves the right to break contracts? This sets a very dangerous precedent. Are we opening up the way for Secretaries of State to override contracts? People may have legally prepared, signed and executed these in good faith, only to find that they are to be overridden at a later stage without any real justification. Again, this is a subject we will be returning to in Committee.

The Bill contains a great deal which is to be welcomed, but there are some serious omissions. A central advice scheme has already been mentioned by the noble Baronesses, Lady Altmann and Lady Wheatcroft, and others. Also, as part of pension 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. I believe that this was included in the Conservative manifesto for 2015. There was heavy lobbying against this by the pensions industry which claimed it would be hard to set up a secondary market and difficult to provide consumer protection. As we now know, the Government have changed their minds and this has left people with poor annuities which they now cannot get rid of. Consumer protection could be problematic but it is not rocket science. We are disappointed that the Government have reneged on their promises and left people in the lurch. This could be corrected in the Bill and is a big omission.

This is also an excellent opportunity to mention concerns that we have about cold calling and pension scams. I know that my colleague Steve Webb, the previous Pensions Minister, was also worried about this development. When we get to Committee we will probe the Government on their latest thinking on pension scams. In the meantime, I would welcome the Minister’s views at this stage.

In summary, this is a piece of legislation which is largely to be welcomed, as it will provide the safeguards needed for small to medium-sized businesses and their employees. The Bill is very technical in nature. I and my colleagues look forward to debating the issues across the Chamber in more detail at a later date.

Pension Schemes Bill [HL]

Baroness Bakewell of Hardington Mandeville Excerpts

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

Debate on whether Clause 40 should stand part of the Bill.

[Baroness Bakewell of Hardington Mandeville (LD)]

My Lords, on the face of it, Clause 40 on the power to override contract terms appears sensible to most people. While there may be very good reasons why the Secretary of State may wish to override provisions contained in some pension schemes, I believe that the House would want to be reassured that it was absolutely necessary.

People I have talked to about my concerns over this power all say the same thing: the Government are always overriding contracts. In other words, get used to it. However, I find this quite difficult to come to terms with. As noble Lords know, I come from a local government background, where every contract has to go out to tender, even if it is too small to hit the OJEU rules. It is expected that at least three quotes will be obtained. Once initial quotes are obtained, haggling often begins on the bigger contracts, and a lot of lawyers are involved before the contract is finalised, signed and executed. The contract start date is agreed and eventually the service contracted for is begun.

Quite small parish councils also adhere to the rule that quotes must be obtained before a service contract or purchase can properly be made. It is, after all, council tax payers’ money that is being spent by parish, district, county and other local authorities. Due process has to be followed. If a contract that has been correctly drawn up, tendered for, signed and legally agreed were overridden by the local authority in question, there would be very serious consequences—and even, perhaps, central government intervention.

But here we see that the Government are proposing that contracts that have been legally executed, agreed and signed can be overridden summarily by the Secretary of State. Of course we want to be reassured that the interests of pensioners and their pension pots are protected, and we all want to ensure that all steps are taken to make that happen—but do we really need such a draconian step to facilitate this?

I originally felt that this clause set a very dangerous precedent. But I now understand that Secretaries of State do this all the time, so it quite clearly does not set a precedent as the practice already exists. I will therefore confine my comments to the Minister to asking: does he not feel that this is setting double standards for those who hold elected office and are in positions of authority? One rule exists for governance at local authority level and a completely different set of rules exists for central government. Does the Minister feel that this is likely to generate trust and confidence in central government—or, as I feel, that it will do quite the reverse?

[Lord McKenzie of Luton]

My Lords, I will comment briefly. I find it difficult to support this proposition. The noble Baroness drew attention to contracting in local authorities, and we understand that—a number of us have been there. But is not the key issue here that the market does not produce the right result? There is weakness on the buyer side, and given the complexity of the product, you need some specific provision to deal with that. We are dealing here of course with a ban on member-borne commission and a cap on early exit charges. The latter in particular is seen to be an inhibitor to people accessing their pensions—indeed, the evidence is clear that it is an inhibitor. If those issues have to be addressed, then we have to use the mechanisms which are at hand. I agree that causing an override of these contract provisions is not the most comfortable mechanism, but it already exists in relation to scheme details, I understand, between the FCA and contract-based schemes, and this extends it to deal with other contractual arrangements relating to schemes.

I am afraid that this proposition does not have our support. We think it is important that we go ahead and get the ban on member-borne commission and the cap on early exit charges in place as soon as possible. On that latter point, I am bound to say we are somewhat disappointed. We are pleased to see the press release from the Minister announcing a cap of, I think, 1%, or 0% for new provisions. But it is will be October next year before that is in place, which again seems a little bit tardy, because the FCA is moving to get the restrictions in place by the end of March.

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[Lord Young of Cookham]

My Lords, it is quite right that we debate whether this clause should stand part of the Bill, because it is an important one. I hope to persuade noble Lords who have spoken that the powers we are taking are proportionate and indeed necessary in order to deliver the commitments that the Government have made to beneficiaries of pension schemes. As the noble Lord, Lord McKenzie, said, we are seeking here to bring occupational pensions into line with the regime that already exists for other pensions.

In a nutshell, the clause amends existing legislation in Schedule 18 to the Pensions Act 2014 to allow regulations to be made that enable a term of a relevant contract to be overridden to the extent that it conflicts with a provision in those regulations. I emphasise that the power would allow a contract to be overridden only where there is a conflict with a provision in regulations. This ensures that relevant contracts are consistent with the regulations, and provides certainty to the parties involved. It may be helpful if I clarify that Clause 40 is distinct from the previous clauses in this Bill that referred to charges; those clauses all relate to the proposed master trust authorisation regime.

We intend to use Clause 40, alongside existing powers in the Pensions Act 2014, to make regulations to cap or ban early exit charges. Early exit charges are any administration charges that are paid by a member for leaving their pension scheme early when they are eligible to access the pension freedoms, which they would not face at their normal retirement date. The Financial Conduct Authority intends to make rules by April 2017 to cap or ban early exit charges in personal and workplace personal pension schemes. Parliament has already approved amendments to the Financial Services and Markets Act 2000, which broadly allows contracts to be overridden.

Together with the existing powers in relation to charges, Clause 40 will enable us to make regulations that introduce similar protection to members of occupational pension schemes. It will also be used to override contractual terms that conflict with the ban on member-borne commission arising under existing contracts in certain occupational pension schemes. By “commission contracts” we mean the contracts between trustees or managers and a person who provides administrative services to the scheme, which permits the person to impose the member-borne commission charge. Existing contracts are those that were entered into before 6 April 2016. This will complete the ban that already exists for commission arrangements entered into on or after 6 April 2016.

The consultations that we undertook on early exit charges and on member-borne commission showed us that these charges generally arise in contracts between trustees or managers of certain occupational pension schemes and those who provide administration services to the scheme. Our existing powers in Schedule 18 to the Pensions Act 2014 enable us to make regulations that override any provision of a relevant scheme where it conflicts with a provision in those regulations. For example, we have used that power in relation to the appointment of service providers in the scheme administration regulations. The reason why we are taking this power is that this does not extend to the contracts under which the charges arise. Clause 40 therefore extends the existing power in Schedule 18 to allow the overriding of a term of a relevant contract that conflicts with a provision of the regulations. The relevant contract is defined as those between a trustee or a manager of a pension scheme and someone providing services to the scheme. The regulations that we intend to make will apply to charges imposed from the date when the regulations come into force, even where they are charged under existing contracts. We expect them to come into force in October 2017.

As noble Lords may be aware, the pensions market is continually evolving and modernising, and this extends to charging practices. It may be necessary to alter the charges requirements to reflect any changes in the pensions market that may disadvantage members. We intend to consult on the draft regulations early next year. In addition, any potential further regulations made under the power in Clause 40 will be subject to public consultation. The requirement to do this is set out in paragraph 8 of Schedule 18 to the Pensions Act 2014.

Such regulations would also be subject to parliamentary scrutiny through the negative resolution procedure. I note that this House’s Delegated Powers and Regulatory Reform Committee was content with this approach. This allows legislation to be amended reasonably quickly to provide the member protection that may be needed. Together with the consultation, we believe there is effective scrutiny and scope for challenge over the Government’s intended use of these powers.

I would be disappointed if any trustees felt that they had to resign over this. I regard these measures as benefiting scheme members, for whom trustees are acting to defend their interests. In response to the charge that we are interfering with contracts signed in good faith, we consulted on this. We made it clear that it is generally undesirable to interfere with existing contractual rights; it can be justified only in circumstances such as this, where it is necessary to achieve important public policy goals—we have given a commitment to do this—and where the action is proportionate in the public interest. We expect trustees and service providers to work together when renegotiating for amending contracts to reflect implementation of the charge cap, and our consultation and engagement with the pensions industry and other stakeholders on capping or banning early exit charges and spanning existing member-borne commission showed that, by and large, the Government’s intentions were widely welcomed. We continue to engage with industry and stakeholders on those two areas.

I hope that I have convinced the House that the clause should stand part of the Bill.

[Baroness Bakewell of Hardington Mandeville]

My Lords, I thank all noble Lords who have taken part in this short debate, especially my noble friend Lord Kirkwood of Kirkhope. I am reassured by the Minister saying that it is undesirable generally to interfere with contractual rights, completely concur that we must have member protection and welcome the public consultation that will take place in the near future. I am also reassured by much else that the Minister said and am content for the clause to stand part of the Bill.

Clause 40 agreed.

Moved by

[Baroness Bakewell of Hardington Mandeville]

79: After Clause 40, insert the following new Clause—
“Offence of unsolicited communications to members of pension schemes
(1) It is an offence for a person to make an unsolicited telephone call, or to send unsolicited electronic mail or other communications via an electronic communications network, for the purpose of inducing a member of a pension scheme to use their pension savings in a particular way, or otherwise to make changes to their existing pension scheme arrangements.(2) It is an offence for a person to instigate the making of an unsolicited telephone call, or the sending of unsolicited electronic mail or other communications via an electronic communications network, for the purpose set out in subsection (1).(3) A person guilty of an offence under this section is liable on summary conviction to imprisonment for a term not exceeding six months or a fine (or both).(4) In this section, “call”, “electronic mail”, “communications” and “electronic communications network” have the meanings given in regulation 2 of the Privacy and Electronic Communications (EC Directive) Regulations 2003.”

[Baroness Bakewell of Hardington Mandeville]

My Lords, I am pleased that the Government have responded to the online petition calling for cold calling by phone or email for investment or pensions to be made illegal. This is definitely a step in the right direction. This positive change of heart was trailed over the weekend of 19 to 20 November and reiterated in the Chancellor’s Autumn Statement in the other place on Wednesday 23 November. This was welcome, but did not give the level of detail we had been hoping for.

As we are all aware, cold calling on investments and pensions to members of the public often leads to unregulated investments and scams. Banning cold calling would dramatically reduce the number of people falling prey to fraudsters and losing their savings and pensions. There is already sufficient unease among those anxious about their savings and future pensions for this added anxiety to be sufficient to push some vulnerable people over the edge. The scams tend to be presented as unique investment opportunities, such as putting your pension pot into a new hotel in an exotic location or supposedly ethical projects that promise huge returns. It is all too easy for people to be sucked into schemes which will not deliver on the promises made by slick salesmen. They are, after all, looking for absolutely the best deal for their future savings which will ensure them the happy, carefree retirement they have been looking forward to for years.

A recent survey points to the threat of fraud as those near retirement age refuse to seek expert guidance, revealing that almost nine in 10 people miss common warning signs of pension scams. Under the changes announced by the Chancellor, it is assumed that all calls relating to pension investments where a business has no existing relationship with the individual will be forbidden. Similar rules already cover cold calls relating to mortgages. Can the Minister confirm that the pensions issue will be treated in the same way?

It has also been trailed that companies flouting the ban could face fines of up to £500,000 from the Information Commissioner, although the watchdog does not have powers to tackle firms operating outside the UK. Can the Government confirm that they are considering custodial sentences as well as fines for perpetrators of fraudulent cold calling scams? Pensions firms will be given more powers to block suspicious transfers, preventing people’s life savings being transferred without any checks. The rules will also stop small, self-administered schemes being set up using a dormant company such as a sponsoring employer. Research has suggested that scammers could be behind as many as one in 10 pension transfer requests. Do the Government have up-to-date figures for the levels involved?

The Government appear to be acting after the recent petition calling for action was signed by thousands of people, including former Pensions Ministers, the noble Baroness, Lady Altmann, and Steve Webb. Martin Lewis of the website Money Saving Expert, and a number of independent financial advisers, have also requested that pension cold calling be made illegal. The Government’s response is to be welcomed, but a little more detail would have been helpful. Can the Minister say when the consultation trailed in the Autumn Statement will begin? How long will the consultation run for? How quickly after the consultation ends will the results be made public? Will all cold calling targeting pensioners be banned, or only certain schemes?

To ensure that pensioners and the general public retain confidence that the Government are serious about tackling this very serious problem, as much information as possible needs to be in the public domain, not least exactly when the ban on cold calling will commence. It is assumed that this will be once the consultation has finished, but it will be important that transparency exists on how quickly a decision will be made and when the implementation date is due. I look forward to the Minister’s response and beg to move.

[Baroness Drake]

My Lords, I support the amendment in the name of the noble Baroness, Lady Bakewell, and I welcome the announcement in the Budget that the Government will consult on options to address this issue of scams and unsolicited contact, including a ban on cold calling, greater powers for firms and schemes to block suspicious transfers and making it harder for scammers to abuse small self-administered schemes. The compelling findings of Citizens Advice align with those of other organisations. For example, the City of London police report that the amount lost to fraud after the freedom reforms were introduced in April 2015 was £13.3 million and rising. That figure does not even include the money moved out of a pension scheme into another investment vehicle, which means the total amount lost since the reforms is likely to be much higher.

The Pensions Advisory Service has handled many calls seeking guidance from members of the public who have been subject to unsolicited approaches, have been scammed and have lost, or are at real risk of losing their savings. There is the self-employed man who transferred all his savings from a reputable insurance company to a property-based pension scheme, and now all his money has disappeared; the public sector worker who transferred £64,000 of savings to another scheme and has not heard anything since; or the ex-employee of a well-known car manufacturer, who transferred 20 years’ worth of DB pension rights—£20,000 was taken in charges, and now he cannot access the rest of his savings. These cases are just the tip of the iceberg. There are many more desperate cases, involving even bigger amounts.

Cold callers, suspicious transfers and the abuse of small, self-administered schemes all require attention. TPAS experience confirms that scams cover a wide spectrum, from mis-selling, to incompetence, to outright theft and fraud: such as selling a high-risk, unregulated investment to someone who does not understand the implications; encouraging someone to cash in their pot and invest in a high-risk investment within a pensions wrapper; transferring the whole of someone’s pension savings to a small self-administered scheme which is not a regulated financial product, to facilitate unregulated investments; and the use of SIPPs, which are a regulated product, by scammers for unregulated investments. There are many more such examples, and of fraud, through which 70% or more of the pension fund is stolen.

--- Later in debate ---

[Baroness Bakewell of Hardington Mandeville]

I thank the noble Lord for his very positive comments and I thank all noble Lords who have taken part in this debate. I welcome the fact that the Government feel that this is an enormous problem that must have top priority. I also welcome the fact that the consultation will start before Christmas. However, I am slightly nervous about that because it is a well-known ploy to start consultations just before Christmas, when people have their minds on things other than consultations, and to finish them in the first or second week of January. Therefore, I would be grateful if the noble Lord could say that there will be a reasonable period over which the consultation will run.

I look forward to hearing in the 2017 Budget the steps that will be taken, and I hope that implementation will follow soon after, because I agree completely with previous speakers that the quicker this matter is sorted, the better. I also welcome that the Government are considering custodial sentences. I agree with and welcome everything that the Minister has said, and I beg leave to withdraw the amendment.

Amendment 79 withdrawn.

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Moved by

[Baroness Bakewell of Hardington Mandeville]

81A: After Clause 40, insert the following new Clause—
“Secondary Annuity Market for pensions savings
The Treasury must, within six months of the day on which this Act comes into force, take steps to—(a) change the tax treatment in relation to holders of pension scheme annuities wishing to realise the value of their annuities, including by removing the unauthorised payment tax charge; and(b) put in place arrangements to enable individuals to assign their pension scheme annuity to a third party in return for a lump sum to be taken directly, or transferred to an alternative retirement income product; and(c) work with the Financial Conduct Authority to ensure appropriate consumer protection is in place for pension scheme annuity holders as they consider their pensions savings options.”

--- Later in debate ---

[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.

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[Lord Young of Cookham]

My Lords, as we reach the last amendment in Committee, I point out that the Bill has been in the hands of two distinguished psychoanalysts—Freud and his disciple “Jung”. Between us, we have tried to look at the disorders in the Bill and prescribe appropriate remedies.

I thank the noble Baroness for raising this important issue. I understand the strong feelings that she expressed when she moved her amendment. In 2015, the Government introduced pension flexibilities, which gave people the freedom to choose how they use their pension savings. Over 300,000 people have chosen to flexibly access over £6 billion since they were introduced, and the Government are committed to keeping these freedoms in place.

In March 2015, the coalition Government announced proposals to remove the current restrictions on assigning existing annuities and to create the conditions for a secondary market to develop. The proposed reforms were in two main areas—removing the unauthorised payment tax that deters people from assigning their annuity, and working with the Financial Conduct Authority to establish a comprehensive consumer protection package. The Government engaged extensively with industry and consumer groups on how they could establish the conditions for an effective market to develop. It would not have been right to introduce measures before understanding the impact that they might have on consumers and ensuring that the necessary conditions for a successful market were in place. In the course of this engagement, it became increasingly clear that creating the conditions to allow a vibrant and competitive market to emerge, with multiple buyers and sellers of annuities, could not be balanced with sufficient consumer protection. I am grateful to the noble Lord, Lord McKenzie, for setting out so clearly the problems that would have ensued had we proceeded.

On 19 October, Simon Kirby, Economic Secretary to the Treasury, made a Statement in the other place about the Government’s decision not to take this policy forward, which I repeated for your Lordships on the same day. Our investigations showed that many annuity providers were willing to allow consumers to assign their annuities. Of course, the market for annuities is itself undergoing change following the introduction of the pension freedoms. What became apparent is that, at this time, there would be insufficient purchasers to create a competitive market. Without a competitive market, consumers were likely to get poor value for their annuities and incur high costs for selling.

The Government are committed to the principle of giving people the freedom to make decisions about what to do with their money, which is why we have explored in detail how we could allow this market to emerge and protect consumers at the same time. But what has become clear is that the steps the Government would need to take to create demand in the market would undermine protections and increase the risk for consumers. The noble Lord, Lord McKenzie, cited Steve Webb, the Pensions Minister at the time, who said in the context of this decision:

“There did need to be a lot of potential buyers for this market to work”,

and that while the decision is,

“disappointing it is understandable”.

Rather than being to the benefit of British pensioners, this market would instead be to their detriment. It would clearly not be in consumers’ interests to continue with this policy. Only this afternoon, we have had a number of debates about the importance of protecting consumers, and this would be a step in the opposite direction.

I accept that some people will be disappointed, as the noble Baroness explained, although our analysis indicated that only 5% of annuitants would be interested in taking this option forward. While we accept the disappointment, I hope that noble Lords will agree that it would not be right at this time to allow a market to develop when it is likely to lead to poor consumer outcomes. With this in mind, I ask the noble Baroness to withdraw her amendment.

[Baroness Bakewell of Hardington Mandeville]

My Lords, I thank the Minister for his response, which I obviously find extremely disappointing. This is a very serious issue. I understand that there were difficulties in producing a competitive market and that the Government support freedom of choice. However, pensioners will not have freedom of choice while they cannot access the secondary annuity market. I thank the noble Lord, Lord McKenzie, and the Minister for mentioning my colleague Steve Webb. His view is that the policy was abandoned because the Government did not put enough weight behind moving it forward. Had they done so, there might have been a different outcome.

At this time, I beg leave to withdraw the amendment but reserve the right to return to it on Report.

Amendment 81A withdrawn.

Pension Schemes Bill [HL]

Baroness Bakewell of Hardington Mandeville Excerpts

Report stage (Hansard - continued): House of Lords
Monday 19th December 2016 Lords Chamber

[Baroness Bakewell of Hardington Mandeville (LD)]

My Lords, I support this amendment, to which I have put my name, and would like to add to the very eloquent case made by the noble Baroness, Lady Drake; namely that it is very important that we provide protection for members when a master trust fails and give confidence in that regard. In the event of a failure there must be a guarantee backed by the Government. While I accept that we do not expect there to be many failures, there will undoubtedly be some. Therefore, it is necessary to provide protection for that eventuality. This amendment would provide a fall-back position when every other avenue has been exhausted.

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

My Lords, I will address Amendment 6, which was tabled by the noble Lord, Lord McKenzie, and the noble Baronesses, Lady Drake and Lady Bakewell. This is a valuable opportunity for us to discuss member protection, which is clearly at the heart of the Bill and the master trust authorisation regime.

It is not clear why an amendment has been tabled that would require the Secretary of State to make provision for a scheme funder of last resort should a master trust have insufficient resources to meet the cost of complying with the duties arising from a triggering event and to cover the cost of running the scheme on. I simply do not believe this issue requires such a sledge-hammer given all the mitigations against this risk which the Bill introduces, to which I will return briefly later on. The intention behind the amendment is a lingering concern that a failing scheme might not be able to cover the cost of transferring its members’ accrued rights out. However, to require the Secretary of State to provide for a scheme funder of last resort would be a costly and disproportionate response. Unfortunately, the amendment does not provide any details of how such a scheme might be achieved at reasonable cost. It would appear to require quite large-scale infrastructural change—the noble Baroness, Lady Drake, mentioned the idea of creating an institution with a PSO. There would need to be transparency in the schemes to which the facility would apply, and we would need to prevent any moral hazard in its application.

I am aware that schemes have failed in the past, and I understand that in some cases these failures have proven expensive to resolve. However, those failures have almost entirely occurred in schemes offering defined benefit pensions. The risks in those types of schemes are very different and the complexity of their structures can make them much more difficult to wind up than a master trust offering defined contribution benefits. If a defined benefit scheme which has been operating for a long time fails, it is much more likely that it will be more time-consuming and expensive for that scheme to close than it would be for a master trust scheme. In the case of master trusts, the noble Lords have inadvertently blown the risk out of proportion.

On the mitigations I mentioned earlier, the Bill contains a raft of measures which address the same risks that the amendment is seeking to address. The financial sustainability requirement is a key risk mitigation as, among other things, it requires schemes to satisfy the Pensions Regulator that they have sufficient financial resources to comply with their continuity strategy in Clauses 20 to 33 and to run on, following a triggering event. On application for authorisation to operate, a master trust must satisfy the regulator that it has sufficient financial resources, and post-authorisation the regulator has an ongoing duty to monitor the scheme to ensure that it continues to be financially sustainable.

In carrying out its supervisory role the regulator will assess the amount of money that the scheme requires to meet its costs, taking account of its size, the assumptions set out in its business plan, the available assets and the financial strength of the scheme funder. Furthermore, to ensure that any resources are available at the point of need, a regulation-making power enables the Secretary of State to specify requirements that the scheme funder must meet in relation to the assets, capital or liquidity. This power might be used to require certain funds to be put aside and only accessible for specific purposes, and to impose requirements about the liquidity of any capital so that it is easily realisable. Should a scheme fail, Clause 33 prevents the trustees from increasing the charges paid by members during the event-triggering period, so members’ pension pots are protected.

To prevent schemes winding up with the records in disarray and without the financial resource to put things right, one of the authorisation criteria requires schemes to satisfy the regulator that they have appropriate administration systems and processes such as record management, IT systems, and resource planning. Schemes will be subject to regular monitoring.

To pick up the specific concern mentioned by the noble Baroness, Lady Drake, about the impact of an IT system failure on a scheme’s records, the requirement is for appropriate systems and processes, including back-up systems. The Pensions Regulator has not so far come across a master trust experiencing a computer failure; in practice, failures have been due to schemes not being financially viable.

Finally, it is inappropriate for the Government to intervene in the market by making provision for a scheme funder of last resort. First, such an intervention might undermine member protection by creating a moral hazard that disincentivised schemes from protecting their members. Secondly, if the Secretary of State were required to make provision for a scheme funder of last resort, this could disrupt the normal operation of the market by deterring other master trusts, or scheme funders, from retaining public confidence in master trusts and rescuing a failing scheme. We already know of some master trusts that have been consolidated by being taken over by others. In the extreme, the taxpayer could end up having to pick up the tab for failed schemes. However, the essential argument is that Clause 33 protects members’ savings from being used to pay for the costs of winding up or transferring. With that explanation in mind, I urge the noble Baroness to withdraw her amendment.

I now turn to Amendment 23, which may provide some redress for my views on Amendment 6. This amendment introduces a new clause relating to compensation for fraud, and it may provide some mitigation for noble Lords’ concerns. In addition to protecting members’ interests through the master trust authorisation regime, we are ensuring, through the introduction of this new clause, that members in master trust schemes are protected from the risk of fraud. It will allow regulations to be made that modify the provisions on fraud compensation in the Pensions Act 2004 so that they can be more applicable to master trusts and to any other occupational pension schemes to which all or some of the provisions of Part 1 of the Bill apply.

At present, fraud compensation payments can be made to occupational pension schemes where certain conditions are met. These conditions include that the value of the scheme’s assets has been reduced and that there are reasonable grounds for believing that this has been due to dishonesty. Also, all the employers in relation to the scheme must have gone out of business or the businesses must be unlikely to continue as going concerns.

Master trust schemes are occupational pension schemes, and we think it is right that they should qualify for fraud compensation payments and that their members should be entitled to this protection in the same way as members in other occupational pension schemes. However, as master trusts are used, or are intended to be used, by multiple employers who do not need a connection to each other, they would be likely to have difficulty meeting that last condition on the insolvency of all the participating employers. Therefore, our intention is that regulations will remove this employer insolvency requirement for master trusts and add other conditions to make fraud compensation more suitable for these types of schemes. These regulations would, of course, be subject to consultation, which would allow us to engage with stakeholders in developing them.

I hope that the noble Lord, Lord McKenzie, will feel that on balance he has moved somewhat ahead in respect of these amendments.

--- Later in debate ---

[Lord McKenzie of Luton]

My Lords, perhaps I may take the opportunity from these Benches to place on record our thanks to the noble Lord, Lord Freud, for the engagement that we have had on pensions Bills and other Bills over many years. That engagement has always focused on data and evidence. We might have disagreed about their interpretation from time to time but the debates have always been robust. The noble Lord has been assiduous in engaging with Members across the piece, making sure that their points and concerns have been addressed and not just brushed aside.

We will have the chance to say something to the Bill team on another occasion—I hope some of us will still be here at Third Reading—and we will have another debate on Wednesday. However, we wish the noble Lord well in his retirement. I am not sure whether it will be his retirement, as I am sure he will go off to do something intellectual. We look forward to working with the noble Lord, Lord Young, in the future, but from the Labour Benches we express our best wishes to the noble Lord, Lord Freud.

[Baroness Bakewell of Hardington Mandeville]

My Lords, I wish to associate myself and our Benches with the comments that have already been made. We have always found the noble Lord, Lord Freud, extremely accommodating towards us as far as he has able to be so, and I will have something further to say when we come to universal credit. I have taken over this role only fairly recently but I thank the noble Lord for all the help he has given us during the passage of this Bill.

[Baroness Drake]

I thank the Minister for his reply. It is helpful to have his wider statement on the record because this issue of transaction costs is still very controversial. I hope that the FCA’s report increases the Government’s sense of urgency regarding the need to address this issue and to introduce regulation—notwithstanding problems with definition—with master trust regulation benefiting from that as well.

Perhaps I, too, may take the opportunity to make a personal comment because I think this is the last time that I will be talking to the Minister in his current role, although he may not be talking to me at all following the vote. When he was at the Dispatch Box, I always felt that if I had a good argument, argued it well and had a good evidential base, I had a fighting chance that, first, he would listen and, secondly, that he would see whether it was possible to accommodate my concerns. He often made me do my homework and made me work hard on occasions, but that was a fair exchange. However, if I had a good point and good evidence, I knew I would get a fair hearing. That is important in this House. It incentivises one to pursue the argument and the case because one knows that one will get a fair hearing. The Minister is a wonderful example of someone who will listen and consider the arguments.

He has always been friendly, courteous and considerate in giving access to his civil servants and information—very often so that I can improve my knowledge base and not ask awkward questions; on other occasions to fuel my knowledge base to allow me to ask awkward questions. Either way, I was grateful for that.

I hope he takes some rest and has fun—he has worked very hard and deserves some fun—and that we see him back soon, bringing his intellectual skills to the House. I thank him for the statement on charges. I shall still push on transaction charges because millions of people get a rough deal but do not know they are getting a rough deal, which is even worse. I beg leave to withdraw my amendment.