Pension Schemes Bill [HL]

Baroness Drake Excerpts

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

Moved by

[Baroness Drake]

45: Clause 31, page 21, line 36, after “necessary” insert “or prudent”

[Baroness Drake (Lab)]

My Lords, I shall speak to Amendment 45 and to the other amendments in this group. My noble friend Lord McKenzie will speak to Amendment 47A.

Clause 31, taken with Schedule 1, provides a power for the regulator to pause certain master trust activities once a triggering event such as a wind-up has occurred. That power can be exercised if there is an immediate threat to the assets of the scheme or it is in the interests of the generality of the scheme members. A pause order prevents new members coming in, payments being made, further contributions being received or benefits being paid. That is a sensible provision. The administrative and accounting records of the master trust or of other companies used by the trust to hold investments or provide services may be in a mess. It may not be clear who is entitled to what. Evidence of fraud may emerge during a triggering event. The early years experience of the Pension Protection Fund when accessing schemes that have the mix of DB and DC benefits revealed just how poor the records could be and the problems that that throws up.

The amendments in this group in my name and that of my noble friend Lord McKenzie are directed at how the pause will work in practice. Clause 31(4) restricts the use of a pause order to circumstances in which there is,

“an immediate risk to the interests of members … or the assets … and … it is necessary”,

to act. Amendment 45 adds the words “or prudent” after the word “necessary” to protect members’ interests, as a condition to be met if a pause order is to be made. The intention behind inserting that phrase is to give the regulator greater discretion and an ability to act more cautiously and earlier than is suggested by the word “necessary”—and, indeed, before a risk has crystallised—to allow the regulator to mitigate emerging risks to members and take action when in their informed view it would be prudent to do so. The power to issue a pause order comes into effect only when there is a triggering event, when a failure of some kind has already occurred, which means that the likelihood of a risk to the assets or members crystallising is greater, so allowing a prudent approach in those circumstances seems sensible.

If a pause order is in place, Clause 31 provides that no subsequent pension contributions due to be paid into the scheme by or on behalf of the member or employer can be paid, and any pension contributions deductions from a member’s earnings will be repaid to them. Under the Bill as drafted, the total period during which a pause order can be in place is six months, but the Government have tabled Amendment 52, which will allow the regulator to extend the pause order on one or more occasions, unconstrained by the six-month limit. So, the pause order could stay in place for quite a long time. During the period when the pause order is in place, the member loses the ability to save for a pension through the workplace scheme, loses the tax relief and loses the employer’s contribution due under auto-enrolment. It is harsh on the individual to lose pension savings and interrupt the harnessing of inertia in auto-enrolment, when through no fault of theirs a master trust fails.

Amendment 46 would address that loss to the member by requiring that pension contributions that would otherwise have been due to a member should be held in an escrow account or otherwise under arrangements to be specified by the regulator. Those contributions could be held somewhere safe until the pause order is lifted and then paid into members’ individual pension pots. It would not be necessary for the money held to be invested so as to gain value that reflects what the member would have received if the original scheme had not been wound up. Holding it in a cash fund could be sufficient.

Does the Minister agree that it is harsh and unfair for workers to lose savings in their pension pots under auto-enrolment as a consequence of a master trust’s failure? Will he consider a provision allowing the pension contributions otherwise due by and held on behalf of the scheme member to continue to be paid into an appropriate holding vehicle during the period of the pause order? Clause 31 allows a pause order to prevent the making of payments and the paying out of benefits while it is in place. Depending on how such an order is applied, and for how long, that could pose real problems for some members of the scheme. Amendment 50 would allow payments to be paid for someone in ill health. For example, an older person with debilitating chronic ill health or a terminal illness could be in real difficulty if they were denied access to pension savings that they needed to live on. How is it intended that the pause order regulations will address the needs of people in ill health?

Master trusts will receive pension contributions into members’ pots, but they will also pay out money to members accessing their savings. Where a scheme member has been relying on such payments to live, and may have standing orders in place for their bills, if payments are suddenly ceased they could be in some difficulty. How will the pause order regulations address the needs of those people, particularly pensioners, who are dependent on payments received from the master trust? As I said in opening, the provision for a pause order seems sensible: it is the manner in which that order is operated that could cause unfairness or difficulties.

[Baroness Altmann (Con)]

My Lords, I support these amendments, and I would like to probe the Minister on what the pause order is really meant to achieve. As the noble Baroness, Lady Drake, has just asked, how does he envisage it will work in practice? If a pause order is introduced by the Pensions Regulator, it is likely that an employer will be in breach of its auto-enrolment duties and potentially in breach of contract with its employees. In those circumstances, we could need some of the bulk DC transfer regulations, which we have discussed and I hope we may come to later, to enable a scheme to ensure that such transfers can be made relatively swiftly and without too much expense—perhaps before a triggering event, although the proposal is currently only if there is a triggering event. That would require some of the existing regulations that are made with DB schemes in mind to be undone.

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In conclusion, I hope that noble Lords will support these amendments.

[Baroness Drake]

I thank the Minister for his detailed response to the particular issues I raised in the amendments that I spoke to. However, I do not find the arguments very convincing. The noble Lord said that a pause order would be exceptional—I very much hope it would be, because it would mean that the preceding authorisation and supervision regime had not been very successful. But looking forward, even in an exceptional circumstance, the numbers affected in a failing master trust could be quite significant. It is clear how large the footprint of those trusts will become. What will remain is that it is unfair to the individual during a pause order because the employee loses a contractual and statutory right to contributions, and the employer fails to honour a statutory and contractual obligation to make contributions. Unless the Minister wishes to direct me to a provision in the Bill, I can find nothing that protects the individual or the employer from breaches in those statutory provisions.

Unfortunately, I do not have with me the letter that the Pensions Minister wrote to my noble friend Lord McKenzie and me in response to a meeting of Peers on 8 November, where the Minister conceded that the Government had not fully considered a provision that would allow those contributions to be held in some alternative vehicle while the pause order was in place. As the noble Baroness, Lady Altmann, has said, there is a breach of a statutory obligation potentially arising from a term within this Bill.

The Pensions Regulator need not hold the funds. The Pensions Regulator would clear the arrangements, consistent with any regulations that were set, but the holder of the funds could be an alternative operator or provider, which regulation or the Pensions Regulator could choose to identify. The records that come in from the employer should still be possible because, immediately before the pause order, the employer would have to provide records of contributions collected and paid. No failure is being posed in terms of the employer, so records should be available for reconciliation quite quickly if those contributions are held in some kind of cash account or cash fund.

I note the Minister’s comment that the Pensions Regulator has a discretion as to what payments it does or does not prevent being paid out during a pause order, but it is concerning that we do not have clarity on the policy thinking around how those with serious ill health or real income dependency on their savings would be dealt with in a pause order situation, should they be embraced or potentially embraced by the terms of the order. I fully understand the need for an exceptional power, if evidence of fraud emerges in the records, for the regulator to have some control over payments made or contributions received, but at the moment the way in which it is proposed that this pause order would operate seems unfair on the individuals, puts the employer in breach of a statutory obligation and leaves unclear what protections would be afforded to the most vulnerable who may be impacted by that pause order.

[Lord Freud]

Let me just respond. The difference is that we are trying to get control of an obviously difficult situation. The pause is to allow the regulator to go in and make sure that the situation is sorted. We are not talking about keeping the flow of things going in a normal way; we are talking about a very difficult situation. We are worrying about losing the money that is already there, not about the smooth flow. We are typically talking about a very short period. Setting up large paraphernalia, which the noble Baroness is beginning to drift towards, would not be the point. The real point is to get the funds transferred as quickly as possible.

The noble Baroness asked where the legislation is. I can direct her to Clause 31(5)(c), which states that any contributions not paid over to the scheme are returned to the member, and paragraph 13 of Schedule 3, which ensures that the pause order will not cause employers to fall foul of their legal duties. I hope that that helps the noble Baroness in her consideration of what we are doing.

[Lord Freud]

I am grateful to my noble friend. There are different processes going on and the intention of the pause order is not to be the paraphernalia for sorting out a scheme that is in difficulty. What we are looking at is a process we can go to where we can discuss option 1 and option 2 in order to transfer the funds to a better functioning scheme. While we are doing that, we are pausing it to allow the process to happen. It is important to view the two things on more of a sequential basis than trying to make a big performance of the pause order. It is there for a different reason: it allows us to get on with sorting out the scheme and making the transfers that my noble friend is looking for.

[Baroness Drake]

I thank the Minister. He has said that the pause order will be short, but the problem is that the noble Lord contradicts himself because the Government have just tabled their Amendment 52 which removes the six-month limit on a pause order. That implies that situations are anticipated where the pause order would need not to be short and certainly in excess of six months.

I am certainly not looking for complicated paraphernalia here, although I would suggest that working through whether individuals are due a refund of contributions and sorting out the tax implications of such a refund could indeed be very complicated. My noble friend and I have suggested something simpler. The employer will still have the statutory obligation so it will have its records and collect the contributions. It was a question of having something simple for holding those contributions during the period of the pause order so that they can subsequently be reconciled against the individual members; it certainly does not need to be overly complicated.

I accept the noble Lord’s point that the driving force for a pause order is to deal with a threat to the assets or the scheme members’ interests in general, but in resolving that bigger problem it appears that the detail of the route being taken is unnecessarily unfair in terms of its impact on the statutory and contractual rights of individuals to continue having access to pension savings. I think that we have gone into the detail of this issue at some considerable length in this exchange, but I do feel that the Government have not explained satisfactorily why the contributions cannot be held during the pause order without believing that this needs to be terribly complex. They have not addressed the issue that this will put individuals in a position where they are denied their statutory and contractual rights for a period, and an employer in breach of its statutory duties, and there remains a lack of clarity in thinking about the impact on vulnerable people in the manner in which the pause order is introduced. However, at this stage I beg leave to withdraw the amendment.

Amendment 45 withdrawn.

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[Lord Young of Cookham]

My Lords, government Amendment 57 would allow the Pensions Regulator to issue a pause order to an existing master trust at any point between the scheme submitting an application for authorisation and the decision on the application becoming final, regardless of whether or not a triggering event has occurred in relation to that scheme. Once an existing scheme has submitted an application for authorisation, the Pensions Regulator will have access to a significant amount of new information about the scheme. That information may alert the regulator to members’ interests or assets being at risk in the scheme. Clearly, the regulator will not grant authorisation in such circumstances but it needs to be able to take immediate steps to protect the members.

A decision to refuse authorisation is one which must be taken by the determinations panel. It is right that this is so, but it means that there could be a period of time between the regulator recommending to the determinations panel that the scheme should not be authorised and the panel reaching its decision. During this time, the interests of scheme members need to be protected. The Government’s proposed amendment therefore provides that the Pensions Regulator may make a pause order in relation to a master trust scheme which has submitted an application for authorisation,

“if it is satisfied that—

(a) there is, or is likely to be if a pause order is not made, an immediate risk to the interests of members under the scheme or the assets of the scheme, and

(b) it is necessary to make a pause order to protect the interests of the generality of members of the scheme”.

These conditions mirror those we have just been discussing for making a pause order following a triggering event.

The proposed amendment would introduce an important protection for the members of existing master trust schemes during the period when such schemes are applying for authorisation. In the light of what my noble friend Lord Freud has just said, I too apologise for not making this provision in the Bill as introduced, and I beg to move.

[Baroness Drake]

My Lords, I intervene at least for the record. It is absolutely understandable why the Government seek to extend the pause-order powers to a master trust which has not yet received authorisation if the members’ interests are at risk. I will not repeat the arguments that I made when speaking to Amendments 46 and 50, but they remain valid here. During the period of the pause order which is applied in this circumstance, the issues of what happens to the contributions to which members would otherwise be entitled and how those vulnerable to loss of payments during a pause order are treated remain equally valid under this provision as under the previous one. However, I understand why one would want to extend the pause-order power to an unauthorised scheme.

Amendment 57 agreed.

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[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.

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[Baroness Altmann]

Might I suggest that my noble friend’s amendment is particularly relevant where the master trust has had a triggering event? At the moment, the rules for a bulk transfer of defined contribution benefits do not allow trustees easily to transfer the members’ rights across to another scheme. In many cases it may require member consent or complex calculations that are based on defined benefit schemes and not defined contribution schemes. Therefore, I certainly echo the sentiments expressed by my noble friend about the importance of being able easily to transfer accrued rights across from one scheme to another without member consent. As he rightly said, very often members become a little disengaged from their pension pots and may not themselves want to engage in the idea of transferring across. Somebody else being able to do it on their behalf would make sense.

It may also be prudent to consider the notion of bulk transfers, which I did raise on the first day of Committee, even in the circumstances that there has not been a triggering event. That might more easily facilitate the orderly transfer across of members’ accrued benefits under a scheme in which it is considered likely or inevitable that a triggering event will occur. The Pensions Regulator may then be able to be proactive rather than reactive in being able to protect members’ rights and transfer them across without consent in certain circumstances. I would be grateful to hear my noble friend the Minister’s thoughts on that issue.

[Baroness Drake]

My Lords, as others have referred to, central to the resolution regime for a failing master trust is the transfer of the members and their benefits to another approved master trust. However, for this to be achieved efficiently and promptly, and indeed legally, it would be necessary to undertake a bulk transfer of members and their assets. But as the noble Baroness, Lady Altmann, has detailed, the current rules on bulk transfers would not be fit for purpose for a failing master trust, with its range of different employers and the potential to provide a wide range of benefits and investments to members, who could be either accumulating or accessing their savings. The amendment put forward by the noble Lord, Lord Flight, is an attempt to address that problem and provides a welcome opportunity to address the issues, because they are concerns that are clearly shared by various Members of this House.

The provisions in the Bill and the regulations will need to enable those bulk transfers to take place efficiently and legally. The regulations will need to set out a clear set of rules. Amendment 80 gives the Secretary of State considerable overarching and overriding powers to require the trustees of a failing master trust to transfer accrued benefits. They are extensive powers, but I suspect of an order probably needed to make the transfer regime work in the event of a master trust’s failure.

These powers will give the Secretary of State and the regulator the ability to direct where, potentially, many millions of pounds of members’ money is transferred to. Had we had draft regulations before us, we might have had many questions. I refer in particular to the House having discussed at length the problems that can occur if the administrative records of the master trust are incomplete or in disarray. Even something simple like the lack of a current address for a member can cause delay if a notification is required, I promise. I have been there and bought the T-shirt. It is a nightmare.

Is it the Government’s intention that bulk transfers will be able to take place during a triggering event before all past records are clarified? Post-transfer to the receiving scheme, who will bear responsibility for any administrative errors that existed at the point of transfer? Will there be circumstances where the regulations under this Bill will override other pension regulations in order to effect that bulk transfer? I have one small example. Under auto-enrolment, when members are in self-select funds and are transferred without their written consent, they are from then on treated as having been put into a default fund and the charge cap of 0.75% is applied. I do not want to go into too much detail, but that is to illustrate the question of whether there will be circumstances where the regulations under the Bill will override other pension-related regulations. I commend the amendment because it seeks to address an issue that all of us are aware of if the resolution regime will be based on directing the trustees of failing schemes to transfer their members’ benefits to other master trusts.

[Lord Freud]

My Lords, I hope that I do not have the wrong end of the stick with this. As I see it, my noble friend’s amendment is effectively about individuals being able to move and consolidate their pots, whereas the regime that we have for master trusts is for bulk transfers.

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[Lord Freud]

Now we are moving more closely into what I thought the amendment was about, which is the pot following the member. As my noble friend will know, that mirrors the spirit of Schedule 17 to the Pensions Act 2014. We have not commenced that schedule.

We are looking at another approach, which is the launch of a pensions dashboard. We want to see whether that will work. This would allow people to see their retirement savings from across the industry in one place, which they could consolidate where they felt it was in their interests. The Government will support industry in designing and delivering a pensions dashboard by 2019, with a prototype being developed by March 2017. Clearly, when we know how it works, it will set the context for looking at how best to worry about the problems of being left either in funds that an individual thought were not performing, or wanting to consolidate. It is not necessarily the case that it is always advantageous to consolidate all the different pots, given the way legislation works—in other words, where the member has valuable benefits or lower scheme charges in one or other of those pots.

There is a lot of development here and a lot of change going on. The pensions industry is absorbing a large number of reforms. The Government’s approach is to see how the industry’s plan to have the dashboard will allow much greater flexibility for individuals.

[Baroness Drake]

On rereading the amendment, its first subsection, which states:

“The Secretary of State may make regulations requiring the trustees … to transfer”,

is quite open-ended, so people would choose how to interpret it. The point I want to leave with the Minister is that in the particular instance of failing master trusts—I accept that in other circumstances there is a problem with the bulk transfer terms—the resolution regime is to transfer members and their benefits to another master trust. Existing bulk transfer regulations and legal requirements are not fit for purpose. As they stand, they will not permit the Government to achieve the objective of their resolution regime under the Bill. Although I wish the Government well in having an efficient resolution regime, it is important to understand their policy and thinking on how they will amend the bulk transfer regulations and processes to allow these bulk transfers in a failing trust situation to be undertaken both efficiently and legally. Both aspects need clarification. Certainly, if I may presume, the noble Baroness, Lady Altmann, and I are particularly concerned about the Government’s proposals for reviewing the bulk transfer arrangements in a failed master trust situation.

[Lord Freud]

I shall try to wind this up. I accept the implied—or not so implied—concern of noble Lords that making bulk transfers is more difficult than it should be when there is no regulator process. We are now looking at whether we can simplify those arrangements. I am not in a position to say that there is going to be a consultation, or any major process, but we are looking at that. It is not straightforward, as all noble Peers will accept.

I think I have the answer: master trust bulk transfer provisions will trump existing provisions on voluntary transfers. I hope that is a useful clarification for the noble Baroness, Lady Drake. With that explanation, I urge my noble friend to withdraw his amendment.