Pension Schemes Act 2015 (Transitional Provisions and Appropriate Independent Advice) (Amendment No. 2) Regulations 2017

Baroness Drake Excerpts

Wednesday 29th November 2017 Grand Committee

[Lord Jones (Lab)]

My Lords, I thank the Minister for her measured exposition. I note that in the Explanatory Note the word “survivor” crops up. Does she have to hand a legal definition of “survivor”?

[Baroness Drake (Lab)]

My Lords, I refer to my interests as set out in the register, in particular that I am a trustee of two occupational pension schemes. The regulations have the effect of removing some individuals—currently estimated at 2,360 per annum—from the need to get regulated advice before accessing those pension pots with a safeguarded flexible benefit, such as a guaranteed annuity rate. This is a consequence of changing the valuation process to determine whether such benefits meet the greater than £30,000 trigger for requiring the individual to take regulated advice.

The term “safeguarded flexible benefits”—the subject matter of these regulations—can feel imprecise, however many times one reads the background paperwork. I appreciate that there are problems with getting data from both contract- and trust-based schemes, but it is not always clear which benefits are included and which are not. I acknowledge that schemes may well need to seek legal opinion to get that clarity so they are sure about how they are applying these regulations to their own schemes.

I thank the DWP officials who quite late into yesterday evening were still answering my various questions. I take this opportunity to ask the Minister two questions about which safeguarded flexible benefits are included. In occupational schemes where members have a right under the scheme rules to convert their AVC saving into scheme defined-benefit benefits, does that provision come under these regulations? Is it possible to give greater clarity on which guaranteed annuity rates in occupational schemes would not be considered money purchase benefits?

Moving on to the risk warning process, I recognise that these regulations sit alongside a new requirement for schemes to send members with safeguarded flexible benefits a tailored risk warning about the guarantees their benefits offer before they proceed to transfer, convert or flexibly access them. Such risk warnings are welcome, but I have a series of linked questions for the Minister on the process around those risk warnings. First, why can the risk warning not be issued immediately following receipt of a member request to transfer, convert or directly access their flexible benefits and before commencing to process the member request? If the warning is received as late as 14 days before any live request completes, evidence suggests that by then individuals are well set on a course of action, inertia takes over and risk warnings are less effective. Some schemes run a system where there are warnings in place: the first thing is the warning, before the full process is triggered.

Secondly, will the risk warning be sent to any other potential beneficiary of the benefits, such as parties involved in a pensions sharing order or, as my noble friend said, possibly survivors? This is a duplicate question, in that sense. Why is the warning restricted to signposting the member to free and impartial guidance? Is this not exactly the type of case where a person should be given almost a default access to the guidance service in line with the recent amendment agreed to the Financial Guidance and Claims Bill? Just a written reference to signposting can often get lost in the detail of the information sent to members, and we are talking about safeguarded benefits.

[Lord McKenzie of Luton (Lab)]

My Lords, I thank the Minister for the introduction and explanation of the regulations. As ever, I am delighted to have the expertise of my noble friend Lady Drake alongside me on these occasions.

The regulations derive, as we have heard, from Section 48 of Pension Schemes Act 2015 and are an integral part of the pension freedoms introduced with effect from April 2015. They focus on the requirements on trustees or managers of a pension scheme in Great Britain to ensure that appropriate independent advice has been received before safeguarded benefits can be converted, one way or another, to flexible benefits.

These regulations, as we have heard, sit alongside other regulations, of the negative variety, which concern requirements for schemes to provide risk warnings where members have the benefit of a GAR—guaranteed annuity rate—which they might otherwise be in danger of relinquishing. Together with the transitional provisions for the advice requirements, these are described in the Explanatory Memorandum as a package and we comment on them on that basis.

The requirement to get regulated advice currently operates when an individual’s safeguarded benefits are valued at more than £30,000. It is suggested that the detail of this requires amendment because the basis of calculation is unduly complicated in some circumstances and can lead to situations where the calculation of the advice threshold exceeds £30,000 but the pension pot size is different. Having two different valuations is said to be confusing, and we understand that point.

The impact assessment explains that these complications exist because the valuation regulations currently applied were previously used only by occupational DB schemes and that the circumstances in which they now have to be applied do not generally have standardised processes in place to value GAR benefits in terms of the current value of the future income they offer. As we have heard, the solution offered by these regulations is to adopt the transfer value of the pot in the calculations determining whether the £30,000 threshold for getting regulated advice is reached.

On an ongoing basis, this will save individuals with safeguarded flexible benefits some £11 million per year in advice fees. As we have heard, it will remove some 12,000 people per year from the need to get advice before they access pension pots, although they will be brought within the risk warning arrangements. This seems to be taking matters in the wrong direction. Changing the basis of calculation might be administratively or arithmetically convenient, but what assessment have the Government undertaken of the appropriateness of removing so many people from the benefit of advice?

It is accepted that individuals will no longer have to meet the cost of advice, but they will not be getting the benefit of that advice either. Of course, fewer requirements for regulated advice means fewer fees paid by individuals, but will the Minister remind us about the circumstances in which individuals can access their pension pot to pay for advice, the limits and the tax treatment? Do the Government have any information about the extent to which this is used?

The Explanatory Memorandum makes reference to the potential for inconsistent treatment of members regarding when advice is required when schemes can exercise more generous transfers. Will the Minister tell us how this issue is to be dealt with? We support the concept of risk warnings and the principle of informing members of their safeguarded flexible benefits. This should be the responsibility of ceding schemes and should happen before proceeding to transfer, convert or flexibly access scheme benefits. It should apply to survivors with safeguarded benefits.

We agree that those already required to take advice should be included in the risk warnings. We support there being no de minimis exemption on the basis of pot size. On timing, which my noble friend raised, it is proposed that the risk warning should be sent at least 14 days before any live request completes. Why can the warning not be sent, as my noble friend asked, as soon as a member request to transfer or access the flexible benefits is received?

The Government’s response to the consultation on these matters has confirmed the approach to the content of the risk warning and the inclusion of two comparable pension illustrations tailored to the member’s age, pot size and contribution rate and with details of guarantees available.

Paragraph 44 states that the Government are not convinced of the need to explain the difference between personalised tax warnings and the statutory money purchase illustrations. Will the Minister expand on the rationale for this position?

Can the Minister also confirm that she is confident that there should be no confusion arising from obligations in respect of retirement wake-up packs and personalised risk warnings? The written element of the risk warning is, according to the impact assessment, to include the signposting to free and impartial guidance—Pension Wise currently or SFGB, or whatever it is going to be called, in due course. As my noble friend has said, this is about the weakest indication of support, bearing in mind that many would previously have had to take advice. As my noble friend proposes, is this not the type of situation now potentially covered by amendments to the Financial Guidance and Claims Bill where individuals can be defaulted to the guidance service with an obligation to demonstrate that they have received guidance before proceeding?

We will not oppose these regulations, although in some respects we consider them a missed opportunity. However, they illustrate the complexity of aspects of our pensions system and the importance of ensuring that individuals are fully supported to understand the value of their pension entitlements.