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.