Pensions Bill [HL]

Baroness Drake Excerpts

Tuesday 15th March 2011 Grand Committee

[Lord Freud]

My Lords, I shall speak also to government Amendment 45. The backdrop to many of the measures set out in Part 2 of the Bill is to provide employers with greater flexibility and to ease their burdens. These amendments continue that practice.

With regard to Clause 10, Amendment 44 introduces an amendment into Section 32 of the Pensions Act 2008. The purpose of the amendment is to make it easier for employers, in collaboration with their scheme trustees or managers, to make certain improvements to their occupational money purchase pension scheme and some hybrids to meet the requirements of a certification test. The modification powers in Section 32, as amended by Clause 12, enable trustees or managers to make certain improvements to their scheme by resolution with the employer’s consent to comply with the automatic enrolment requirements. Amendment 44 extends this facility to employers using certification.

Self-certification will provide employers with a straightforward way of ensuring that their money purchase pension scheme satisfies the relevant quality requirements. Employers intending to use self-certification will need to ensure that their scheme satisfies the relevant requirements both at the outset and on an ongoing basis. We have just debated the self-certification option. The point is that this amendment will make it easier for employers, in liaison with their trustees, to make improvements to their schemes in order to comply with the automatic enrolment requirements.

Government Amendment 45 is a technical amendment to Section 30 of the Pensions Act 2008. Section 30 allows employers who are using defined benefit and hybrid schemes to defer the automatic enrolment date for jobholders when certain conditions are satisfied. Where certain conditions cease to be satisfied during the transitional period, the employer must ensure that the jobholder is enrolled into an alternative scheme.

At present, the Pensions Act 2008 restricts the employer to using either another defined benefit or hybrid scheme, or a money purchase scheme, as the alternative scheme. The amendment provides employers using defined benefit or hybrid schemes with greater flexibility around their choice of an alternative automatic enrolment scheme. It will allow employers to choose to enrol jobholders into a personal pension scheme. This is in line with the original policy intent of giving employers maximum flexibility.

Under the amendment, we intend to amend the automatic enrolment regulations to ensure that an employer who intends to use a personal pension scheme for this purpose provides the jobholder with information about the scheme. This mirrors the existing arrangements for money purchase schemes and therefore provides parity. As has already been mentioned, the amendment will ease burdens on employers and provide them with greater flexibility.

To address the concern about whether employers might abuse these amendments, we will monitor trends along with pay and reward packages. If we identify that employers are manipulating the test, the Secretary of State has the power to strengthen the test or, as a last resort, to repeal the legislation. I beg to move.

[Baroness Drake]

My Lords, as anticipated by the Minister, I rise to express reservations about government Amendment 44, which continues to give rise to the anxieties expressed by my noble friend Lord McKenzie. While on the face of it the amendment appears to be somewhat benign, aimed at improving the drafting of the Bill, on more detailed reading it raises anxieties, certainly in my mind. As I understand it, this amendment would allow trustees to change pension scheme rules to enable their employers to meet the regulatory test set by the Secretary of State for the alternative requirement for certifying that their scheme meets the qualifying earnings contribution standard—the alternative requirement regulatory test, which my noble friend Lord McKenzie was addressing in Amendments 42 and 43.

My anxieties are twofold and I will try not to be too technical in addressing them. First, the intention behind the regulatory test for the alternative certification to the normal statutory quality requirement was, I believe, to assist good employers who run good schemes but who use a definition of pay for pension purposes other than earnings. However, either their scheme meets the test or it does not. An assessment against that proposition should stand or fall on its own merits. Having made the concession of an alternative qualification test, surely one cannot allow scheme trustees to change their scheme rules in order that the alternative regulatory test is met. That strikes me as changing the original intention of the alternative test and encouraging arbitrage by bad employers, particularly if that regulatory test is weakened, because if a bad employer—and I know that good employers will not do this—can see the benefit of redistributing pay between base pay and other elements of earnings, they may be able to avoid paying contributions on a segment or proportion of members of their workforce. If we have good employers—and the primary intention of this regulatory test is to allow them to show that they are good employers—I do not see why the proposition cannot stand or fall on that basis and why we need to allow subsequent amendments to the scheme rules.

Secondly, the Bill allows for the regulatory test, as my noble friend Lord McKenzie has said, to make an assessment for an employer’s workforce as to whether it meets the contribution requirement at the aggregate level. However, it allows simply for an assessment for a majority of employees at the individual level and, in that way, the regulatory test can still be met. This amendment appears on the face of it to allow trustees to change their scheme rules, with the effect that some individuals are made worse off, under both the scheme rules and the statutory provisions, because no one has disputed that it is possible for some individuals—maybe up to 5 per cent or more, even on the Government’s own arguments—to be excluded from a contribution to which they might have had access if the statutory provisions had been strictly applied. However, we now find the situation where a group of individuals could be made worse off—not only under the statutory provisions but also under their scheme rules—but where an employer can still meet the regulatory test.

I am also concerned that this regulatory test could be made weaker. The consultation on the regulatory test, as outlined by the Minister, has not concluded. We know that it is ongoing, so we do not know what will eventually be brought forward in the regulations. If the regulatory test becomes weaker, the problem could become worse, because there is an even greater incentive to change the scheme rules to take advantage of that regulatory test. Therefore, I have reservations.

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Moved by

[Baroness Drake]

48B: Clause 16, page 13, line 19, at end insert “, and
(c) the amount available must be no less than that available on the open market option.”

[Baroness Drake]

My Lords, this is a probing amendment to understand fully the implications for scheme members in cash balance schemes that are not contracted out or where members have not accrued benefits on a contracted-out basis. This clause removes the requirement to index pensions that come into payment at a future date under cash balance schemes.

I have two concerns. In the first instance, cash balance schemes usually fall into one of two types. The first is cash balance with guaranteed conversion terms, whereby the pension pot at retirement is defined, based on the proportion of salary set aside each year and the guaranteed rate of interest earned, and the pot is converted to pension on guaranteed terms that are set by the scheme at an agreed point before retirement. Once in payment, the amount of pension is guaranteed. The second type is a cash balance scheme with open market annuity, whereby the pot is converted to pension on open market annuity rates and, once in payment, the amount of pension is guaranteed.

My concern is that, under the open market option, an individual has a choice between a level and an indexed pension, whereas the effect of the clause—on first reading of the Bill—could require an individual in a cash balance scheme to accept conversion of their savings pot into a pension on terms that were potentially less favourable than those available on the open market option, given that they could not have access to an indexed pension. Hence my amendment, which seeks, on removal of the indexing requirements, to anchor the conversion rates in cash balance schemes to being no less favourable than those available on the open market.

My second concern arises from the removal of the indexation requirements from cash balance schemes that are not contracted out, as the Bill states. Given the Government’s aspirations to accelerate the integration of the basic state pension and the state second pension into a single state pension, which will result in all schemes being contracted in, what would be the implications for scheme members who had not yet converted their assured sums into pension from their previously contracted-out cash balance schemes but had a reasonable expectation of indexation? I beg to move.

[Lord Freud]

My Lords, the amendment would require that an annuity without indexation bought by a cash balance scheme member or the pension provided by the scheme must be no less than that available on the open market option. In moving the amendment, the noble Baroness, Lady Drake, raises an important issue.

It is important that individuals can shop around to get the best type of annuity for them at the best available rate. This will affect their level of income for the rest of their lives. This clause, which gives members of cash balance schemes more choice about the shape of the income that they take in retirement, will support this. However, in compelling members to take a pension of no less than that available on the open market option, there arises a practical difficulty.

Annuity pricing is now highly individualised. Most providers offer rates by postcode. Enhanced and impaired life annuities also offer significantly higher rates for those with health conditions or lifestyles that are likely to reduce their life expectancy. This makes it difficult to establish what the right open market rate for comparison should be and very difficult for schemes to establish a workable process to find out what a member is likely to be offered on the open market.

In addition, different types of annuity offer different starting payments. For example, an individual might wish to buy an annuity with a guarantee period. This is likely to give a slightly lower payment, but it gives the member a guarantee that the annuity will continue to be paid if they die before the end of the guarantee period. This is unlikely to represent the best available rate on the market, but is it right to deprive the individual of this choice? For these reasons, I believe that any amendment of this nature would be unenforceable and, as a consequence, unworkable in practice.

I would like to pick up one of the questions that the noble Baroness asked with reference to further reforms to the state pension. It is too soon to speculate about those—certainly, it is too soon for me to speculate about them. We believe that it would be too difficult in practice for schemes to separate out periods of contracted-out service. The same scheme member may have periods of contracted-out and non-contracted-out service. There is also a danger of the possible franking of one benefit against increases to another. All those schemes that have been contracted out on a defined contribution basis no longer have to provide an indexed annuity. Schemes that are contracted out on a defined benefit basis, either where a guaranteed minimum pension is payable or on a reference scheme test basis, have to provide indexation to the relevant level. With that explanation, I urge the noble Baroness to withdraw the amendment.

[Baroness Drake]

I thank the Minister for that response. I have sympathy with what he says because I would be the last person to want to discourage cash balance schemes, as they allow for a degree of sharing and in today’s world one does not want to discourage that. I can see the compelling argument and I understand the point about the annuity pricing market becoming more individualised, which makes it difficult to establish an open market comparator, especially where a scheme may be wanting to set conversion terms. However, I remain concerned, as it is desirable for individuals to have the choice to access indexing, otherwise they are denied an opportunity to lay off some of their inflation risk. Given that in a DC world they bear so much risk, it would be a little sad if the unintended consequence of this Bill was to deprive to a greater extent than currently exists a group of people who would otherwise have exercised an option to go for indexing and to give themselves some protection against inflation.

I did not expect the Minister to speculate on future state pension arrangements, but I flagged up the issue as sometimes these things are forgotten. Those who have worked with me will know that I consistently flag up the impact of removing contracting out from the system, not least in public service pension schemes. Having said that, I beg leave to withdraw the amendment.

Amendment 48B withdrawn.

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[Lord Boswell of Aynho]

I rise very briefly to support my noble friend Lord German, or at least his line of thinking. I have perhaps one qualification or addition to the presentation that he has given, in relation to the role of trustees. I have already declared to the Committee my interest as a pension trustee. I can assure the Committee that my colleagues and I are taking an interest in the matter of ethical and otherwise acceptable investment schemes as part of our dialogue with the fund managers who represent us and the interests of beneficiaries. I think that a little more could have been said about the role of trustees as a necessary link, in most cases, between the former employees and the beneficiaries on the one hand and the investment managers on the other. This is something that we should all be in, and nobody should cop out of it.

My second and perhaps also substantive point is to support my noble friend’s observations about the business utility of all this. I think that the Committee will know that I have a background in a number of issues connected, for example, with disability and other aspects of diversity. In dealing with the private sector I have found over the years that, on the whole, those businesses that take a mature view and consider their long-term interests actually understand the business case for awareness of these considerations. They are not after the big buck. Their reputation and their business attractiveness benefit, with a long-term beneficial result.

When George Cox was chief executive of the Institute of Directors, I remember doing a number of presentations with him on disability issues. He used to come up with the deathless phrase, “We do this kind of thing because we are the kind of company we are”. That seems to me a very good motto. That is the kind of company that as a trustee I would like to invest in, and that as a beneficiary I would like to feel that my trustees and my investment managers were steering me towards. I do not think that this is a matter of political contention; I think that my noble friend has been right to ventilate it.

[Baroness Drake]

My Lords, I have considerable sympathy with the amendment moved by the noble Lord, Lord German. Notwithstanding the impact of the events of 2008-09 on regulators around the world, which are no doubt focused much more acutely on governance, with the shift from defined benefit to defined contribution pension provision, which the noble Lord referred to, and the imminence of auto-enrolment, the design of the default investment funds and the investment principles surrounding them are going to gain more attention. The issue of how shareholders, particularly institutional shareholders, approach their responsibilities as owners of assets is coming under increasing scrutiny by the Government, regulators, the members of pension schemes and those who discharge fiduciary duties on their behalf.

Corporate governance, principles of stewardship and interactions between institutional shareholders and companies are increasingly considered as a coherent whole in exercising ownership rights. As the noble Lord said, defined contribution schemes in money purchase and in personal pension schemes in future shift the risk on to the individual. Although the Myners principles have improved decision-making, achieving best practice in the investment governance of pension schemes—both trust-based and, particularly, contract-based, which I will come back to—still poses a challenge.

We have seen evidence of that concern in the Pensions Regulator’s recently published consultation on investment governance in DC schemes, which included a table of accountabilities. The table aims to define and clarify the roles and responsibilities of each decision-maker in each part of the investment governance chain, but I read it again last night and, unless I missed this, it does not refer explicitly to social and ethical considerations or to exercising voting rights. Close to my heart, NEST, and its predecessor PADA, published their own document on exercising responsible ownership in a low-charge scheme. Discharging this governance in the context of maintaining low charges is equally important.

As the noble Lord, Lord German, referred to, the Financial Reporting Council published the UK stewardship code in July 2010, which is designed to lay out the responsibilities of institutional investors as shareholders and provide guidance as to how those responsibilities might be met. Pension fund trustees are strongly encouraged to report how they have complied with that code. As a conscientious pension fund trustee, I have attempted to do just that, and my own experience suggests—here I concur with the noble Lord, Lord German—that if the code is to bite, trustees will need a great deal more guidance on how to comply with it if box-ticking is not to continue to be the method of compliance with these standards.

The Occupational Pension Schemes Investment Regulations, which the amendment refers to, say clearly that when setting out their statement of investment principles, trustees should identify,

“the extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments; and … their policy (if any) in relation to the exercise of the rights (including voting rights) attaching to the investments”.

It is clear that this is an area where guidance and best practice are growing in importance. Because of the political risk that Governments face, with the biggest experience of asymmetrical paternalism that we are about to see, I bet my bottom dollar that this will grow and grow. If you transfer responsibility to the individual, politically Governments have a responsibility to ensure that government frameworks are up to the job.

Clearly, there are issues around how trustees can fulfil these responsibilities. One issue that we must address—I will not dodge it—is how one can be an effective, active asset owner while maintaining low charges, and how one can effectively monitor stewardship policy when one selects passive funds. Although I am absolutely committed to the highest level of governance at every stage of the investment chain, and believe that the ability of trustees to discharge their disclosure requirements in electronic form will help, these things must always be proportionate, because in a DC world it is the individual who bears the charges. I would not want a scenario in which we say that the good news is that we have gold-plated system of governance on disclosure, but the bad news is that it will cost X per cent. Therefore, we need to look at how all the players, including the fund managers, can raise the overall level of governance.

I come back to the providers of contract-based pensions. With the shift away from DB to DC, we are seeing a big shift away from trust-based DC to contract-based provision. Therefore, if we talk only of a model for how the trustees will discharge their governance function in this area, we will miss an ever-growing part of the pension provision market. A big issue, with which I know others are concerned, is who in a contract-based provision world should accept the fiduciary responsibility of designing the default fund or deciding how investment governance should be discharged. This takes us into areas where the Pensions Regulator has no reach. The guidance and regulatory framework must catch up with the shift from trust-based to contract-based provision, because in a contract-based provision world there are no trustees, unless there is a master trust, on whom to place clearly the fiduciary duty. It is clear that the Government will need to look both to the Pensions Regulator and to the FSA or their successors to raise the governance standards in the way that the noble Lord, Lord German, seeks through his amendments.

[Lord Freud]

My Lords, I thank the noble Lords, Lord German and Lord Stoneham, for tabling these three amendments. They encourage trustees and managers of occupational and stakeholder pension schemes to engage more fully with environmental, social and ethical considerations in the selection and retention of their investments. These are important issues. They resonate with me personally. I remember writing many a happy Lex column in the 1980s on the structural issue. The issue is the separation of the responsibilities of ownership and the attraction of investment returns in the marketplace. Trying to get them back together has proved very difficult. A lot of effort has been thrown at it in the past decade, with the Myners principles and the IGG.

The amendments would have a similar effect on the trustees and managers of occupational and stakeholder pension schemes. Therefore, we should look at the amendments together. There has been a consensus in many previous debates on social and environmental issues that companies perform better when their activities are monitored by shareholders. Therefore, it is important for pension funds and their investment managers to be transparent in publishing their approaches to such issues in their statements of investment principles. That is why this Government, like the previous Government, have been open to suggestions on how to improve this process. In the end, it is a matter for managers and trustees to determine the level at which they engage and what is appropriate for them. It is a statement of the obvious that small schemes, in particular, may not be able to take account of governance issues to the extent that large schemes can.

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In rehearsing this issue, I simply ask my noble friend to update the Committee, if he can, on what is happening in this area. I hope that he can go a little further and give some encouragement that he will work with his colleagues to try to get the matter resolved. As I indicated, the relevant Act has been in place for more than six years. People such as my former constituent are now in their 80s. This matter involves a very small number of people in a very sensitive position who feel that they have been unfairly treated and would like at least a resolution of where they stand and who, to use a fashionable phrase, seek closure on this outstanding issue in what was a very humane piece of legislation, which has been thoroughly successful.

[Baroness Drake]

My Lords, I am very sympathetic to the amendment, which draws attention to the need to bring a practical resolution for those individuals who have not been able to benefit fully from the Gender Recognition Act 2004. I compliment the noble Lord, Lord Boswell, on raising the matter, because the issues facing transgendered people are considered too infrequently. They will appreciate the fact that their concerns are being recognised in the amendment and in the debate.

As noble Lords said, the welcome introduction of the gender recognition certificate in 2005 meant that individuals for the first time could have their acquired gender formally recognised. However, as with all changes of this type, some individuals are caught in the transition process and risk losing out. As the noble Lord, Lord Boswell, indicated, there are no official data on the size of the transgender population, so it is difficult to quantify the number of individuals who would benefit from a resolution in the manner of the amendment. However, it is clear that the number of individuals is likely to be very small. Therefore, it is unlikely to make a substantial financial difference to government expenditure, although it will do for the individuals concerned.

The Gender Recognition Act 2004, which was introduced in 2005, brought in the official process to recognise gender change. For those who transitioned prior to 2005, there was no official recognition of their change in gender, although the DWP, to the extent that it could use its discretion, was often sympathetic in allowing the change to be recognised in some circumstances. Since the introduction of the gender recognition certificate, an individual with such a certificate is are treated as though that is their natal gender. The amendment seeks to ensure that those who transitioned prior to the implementation of the provisions, and those who did so immediately after the Act came into effect, are not disadvantaged.

The primary beneficiaries of the amendment would be male-to-female transgendered people who reached female state pension age before 2007. At present, they are unable to claim their state pension for that initial period. For example, a male-to-female transgendered person who turned 60 in 2005 but got a gender recognition certificate only in 2007 would not have received the state pension until they gained the certificate in 2007. Therefore, they feel that they lost two years of state pension provision given their acquisition of the female gender. Also, as we know, the women's state pension would have been based on a lower number of working years—39 years for women as against 44 for men. The amount that would have been accrued and credited, as well as the time at which it was paid out, would have been different.

The noble Lord recognises in his amendment that there could be losers. Female-to-male transgendered persons would face the reverse issue to the one that I described for male-to-female transgendered people. The aim of the amendment is to ensure that there are no losers. It seeks to implement the provisions to the detriment of no one. I do not know whether the Minister will pick up on that point. It is a not unreasonable position because those most affected, who will be small in number, would have been near to pension age and would have had less time to adjust to the implications of that.

There will be other issues, such as those relating to divorce. When one partner wishes to transition with a gender recognition certificate, the couple cannot legally remain married. They must divorce and become civil partners. That could create winners and losers. The noble Lord, Lord Boswell, is right to say that what he aspires to achieve in the amendment should not be done in a way that is detrimental to the entitlement of anyone affected. I commend the noble Lord for addressing the sense of unfairness to a small group of individuals, and I join him in urging the Minister to address it.

[Lord Freud]

My Lords, the amendment seeks to provide a remedy for a group of older transsexual people who have missed out on full state pension rights because the Gender Recognition Act does not allow for retrospective legal recognition of a person’s acquired gender. This is a very complicated area, as my noble friend Lord Boswell pointed out. He spared us some of the detail when he introduced the amendment, but I should take a little time to outline the issue and give him the up-to-date information on the current position.

A transsexual person is someone who desires to live their life permanently in the opposite sex to that which they were assigned at birth; although “assigned” might be the wrong word. This desire often stems from a medical condition called gender dysphoria. The Gender Recognition Act, effective from April 2005, allows transsexual people, through the granting of certificates, to gain recognition of their acquired gender for all legal purposes. It covers only people who have suffered from gender dysphoria.

It is a general principle of our legal system that the laws relating to legal status should have only prospective effect. This ensures legal certainty and clarity. There was no reason to depart from this principle when the Gender Recognition Act was introduced, as my noble friend will be fully aware. Although the Act established future rights, a question remained over the past.

The position on the equal treatment rights of transsexual people for periods before 2005 was tested in the domestic and European courts. In 2006, the European Court of Justice held that it was discriminatory not to have had a means of recognising a person’s acquired gender, for social security purposes, prior to the introduction of the Gender Recognition Act. However, importantly, the court left it up to the UK Government to set the conditions for granting equal treatment for periods prior to the introduction of the Gender Recognition Act in 2005. The European Court clearly considered that it provided adequate cover for periods after that date.

Perhaps I may give my noble friend more up-to-date figures than those he might have. Records held by HMRC suggest that around 750 people in the UK are likely to gain from the European Court ruling, compared with the figure of 50 that he imagined. Under that ruling, where a person is successful in their equal treatment claim, we would need to make increased state payments on the basis that they had foregone all entitlement from the age of 60 or the date of surgery, if that was later. The costs of making such payments would amount to somewhere between £9 million and £38 million over the lifetime of the award. One can recognise the level of uncertainty surrounding that wide spread.