Pension Schemes Bill [HL]

Baroness Drake Excerpts

Ping Pong (Hansard): House of Lords
Wednesday 5th April 2017 Lords Chamber

[Baroness Drake (Lab)]

My Lords, the Bill, in strengthening the regulation of master trusts, is indeed welcome. I noted that a recent release by the ONS on funded pensions and insurance in the UK national accounts referred to the significance of the establishment of DC master trusts, so in general there is increasing recognition of the importance of having fit-for-purpose regulation of master trusts. However, the government amendments in this group raise certain questions that I would like to put to the Minister.

Amendment 2 to Clause 9 simply deletes the provision for a funder of last resort. That is disappointing. Will the Minister update the House on what further action the Government have taken since the Bill was last considered by this House to address the protection of scheme member benefits in the event of a master trust winding up with insufficient resources to meet the cost of complying with and obligations under the Bill? The noble Lord, Lord Freud, implied that there was ongoing work and discussions with the industry, so it would be helpful to know what actions have been taken.

The other government amendments in this group, to Clauses 25 and 34, addressed the issue of allowing, in a wind-up on failure, the transfer of scheme members and their benefits to a receiving scheme that is not a master trust—for example, a group personal pension. While not wanting to disagree in principle with widening the pool of schemes to which transfers can be made, I think that that change to the Bill raises some questions. Given that the Pensions Regulator will be authorising a transfer to a scheme that has not been subject to the master trust authorisation regime, how will it satisfy itself that the receiving scheme on transfer is both sustainable and well governed?

The Bill provides under Clause 34 for a prohibition on increasing or imposing new charges on members by either the transferring or the receiving scheme in order to meet the cost of resolving failure. As a non-master trust receiving scheme will not have been subject to the authorisation regime and the continuity and implementation strategy requirements in the Bill, how will the Pensions Regulator apply the prohibition on increasing charges and police it after the transfer of members to a non-master trust, given that the receiving scheme will not be in its regulatory jurisdiction?

Government Amendment 13 provides for regulations to allow for transfers from a master trust to a contract-based scheme. Given that the transfer will be from a trust to a contract arrangement, do the Government consider that there are any special considerations that the regulations will need to address? If so, what are they?

[Baroness Altmann (Con)]

My Lords, I welcome much of the thrust of the Bill. I am also delighted to see Amendments 3 and 4, which, I hope, ensure that insured master trusts will not be forced to separate from their insurance parent, which would have forced them to face higher costs and reduced the security of their members. I am very grateful to my noble friend for taking on board the comments made during the Bill’s passage through this House.

It strikes me that Amendment 2 should be considered separately from those to which it has been joined. I reiterate my strong concern—notwithstanding the reassurances from my noble friend—about leaving out Clause 9. I understand that there is a view that it is unnecessary and that the new regime will ensure that master trusts have sufficient resources, are financially sustainable and have capital adequacy in place. However, even with new schemes and the best will in the world, capital adequacy tests may prove inadequate. No provision in the Bill would cover members of a very large pension scheme that suffered a catastrophic computer failure and lost member records. The cost of restoring that could be well above the capital adequacy put in place, and nothing in the Bill explains where the cost of restoring those records would be covered. The only place might be the members’ pots themselves, which is not supposed to happen.

I vividly recall assurances given by Ministers on defined benefit schemes during the 1990s, when the minimum funding requirement was supposed to ensure that schemes would always have enough money to pay pensions. No one foresaw the problems evident in the early 2000s, when schemes that had met MFR legislation wound up and ended up without enough money to pay any money to some members on the pensions that they were owed.

Even more concerning than that is that the Bill is being introduced when 80 or so master trusts are already in existence in the market with a huge number of members across the country already saving in a pension. These trusts have not been subject to the capital adequacy test or other tests that the Bill will rightly introduce. What is the protection for members of existing schemes who are saving in good faith? They are not protected at all. That was why I was very pleased that we passed the amendment concerning the scheme funder of last resort. I echo the question of the noble Baroness, Lady Drake: what discussions have taken place with the industry to find a solution to cover the eventuality—we do not expect it and it is, I admit, a small probability—that an existing master trust winds up without enough funding to cover the costs of administration to sort out its records and transfer them over to another scheme? I should be grateful for some information from my noble friend about whether there are ongoing discussions and how the department sees that eventuality being covered: where would the money be found?

On Amendments 5 to 19, I share some of the reservations mentioned by the noble Baroness, Lady Drake, such as the regulatory disparity between a master trust, which would be regulated by the Pensions Regulator—and therefore under its control, if you like —and a master trust transferred under the amendments to a pension scheme regulated by the Financial Conduct Authority. How would the regulatory systems work together when they are under different legislation?

I have other concerns, but I may raise them under the next group.

Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2017

Baroness Drake Excerpts

Thursday 9th March 2017 Grand Committee

[Baroness Bakewell of Hardington Mandeville (LD)]

My Lords, I thank the noble Lord the Minister for his instructive introduction to the order and for the fact that the number of women who are now enrolling has increased considerably. That is very good news.

I welcome the fact that the earnings trigger above which people will be automatically enrolled will remain at £10,000, which seems very reasonable. A lower threshold would bring more people into pensions, but, as the Minister indicated, with a state pension currently providing over £8,000 in retirement, there is obviously a limit to how far the Government want to be enrolling people who earn approximately £9,000, taking into account the cost to employers of setting up schemes, making payroll changes and so on. As has been indicated, the earnings trigger will undergo a fundamental review as part of the automatic enrolment review later this year. It would perhaps be better to wait for that and to look then at altering the trigger threshold.

The lower and upper limits for the band of qualifying earnings, on which contributions are due, are currently linked to the lower and upper limits for national insurance contributions. The order maintains that connection. However, I note that the Chancellor of the Exchequer raised the upper limit for national insurance contributions from £43,000 to £45,000. The order does the same and means that higher earners will be putting pension contributions in over a slightly wider band. That is welcome, but they can of course opt out if they wish to.

Although I welcome the regulations, I flag up my concern about people who have multiple jobs whose individual incomes will be below the threshold but cumulatively above it. They might earn £6,000 in one job and £5,000 in another. Such people are excluded from automatic enrolment; perhaps that can be considered on another occasion.

The Review of the Automatic Enrolment Earnings Trigger and Qualifying Earnings Band for 2017/18: Supporting Analysis report, which was published in December 2016, refers to an important point about the 280,000 people who earn between £10,000, the automatic enrolment trigger, and £11,500, the current tax threshold, who get tax relief. However, they get their tax relief only if it is administered according to the relief-at-source tax system, but not if their tax relief is administered according to another system, the net pay arrangement. That arrangement is somewhat obscure and the Government have failed to address the issue in the order. Those are minor points, however, and I generally welcome the order.

[Baroness Drake (Lab)]

My Lords, I remain concerned that the earnings trigger of £10,000 for auto-enrolment still excludes too many people, particularly women, from the benefit of a pot of savings supported by an employer contribution. I am also a little disappointed that the Secretary of State has not taken the opportunity of the annual review to reduce the trigger. Although it has been held at £10,000 for three years, it is still too high, although this approach is preferable to aligning it with the personal income tax threshold, as happened between 2011 and 2015, which excluded ever more women every year.

Of the 11 million workers in the eligible target population for automatic enrolment, only 36% are female, and 3.5 million workers are ineligible because they earn less than £10,000 in any one job. The impact assessment confirms the disproportionate impact on women, because it shows that simply freezing the trigger at £10,000 will bring an additional 70,000 workers into auto-enrolment, over 52,000 of whom will be women.

The impact assessment reasons that auto-enrolment is in a challenging phase with the rollout to small and micro employers, so the earnings trigger should be held at £10,000. That is an understandable argument but not one that can fairly hold over time as a reason for not lowering the trigger. DWP figures reveal that of those working for smaller employers with 10 or fewer employees, 61% meet the eligibility criteria for auto-enrolment, compared to 90% of workers for large employers with 500 or more employees, and 55% of people employed in the service sector—where there is a concentration of women workers—meet the criteria, compared to between 70% and 90% of workers in other sectors.

The DWP analysis suggests that these discrepancies between small and large employers are largely driven by workers not meeting the earnings threshold. That is a pretty predictable observation. There are nearly 15 million women in work, 42% of whom work part-time. The ONS figures show that the smaller the company, the lower the level of earnings for part-time workers. Sweepingly, anyone working 25 hours or less on the national minimum wage of £7.50 is ineligible for auto-enrolment. The DWP’s analysis also shows that reducing the trigger to the national insurance primary threshold of £8,164 would bring more than 500,000 women—and nearly 750,000 workers overall—into auto-enrolment.

An argument deployed by the Secretary of State in 2011 for excluding lower earners was that the state system itself delivered an adequate replacement rate of income. Indeed, that argument is deployed again in the current impact assessment, which states that the earnings trigger,

“should be set at a level that ensures as many people as possible are eligible for AE without disproportionately capturing those lowest earners for whom it makes little sense to save for retirement”.

Lowering the £10,000 trigger, however, would not disproportionately capture lower earners. Very often, low earners are not low-paid throughout their working lifetime. Earnings are dynamic, but persistency of savings throughout working life is very important. Many women who earn less than £10,000 will, during their lives, have periods of full-time employment on higher earnings and periods of part-time employment on lower earnings, when they are caring. Persistency of saving throughout both periods and retaining the employer contribution improves their financial outcomes in retirement. Many, or most, very low earners are women who live in households with others with higher earnings and/or receiving working tax credits. They may well be workers who should be automatically enrolled.

As to excluding lower earners because the state system delivers an adequate replacement rate of income, “freedom and choice” means that individuals are no longer required to secure even a minimum income stream, and are free to spend all their money as they wish from the age of 55. Securing a replacement income is no longer a requirement of private pensions policy. Excluding so many lower earners from a pot of long-term savings supported by an employer contribution and the tax credits system is not fair because it simply denies them the opportunity to accrue a savings pot and build financial resilience in later life.

Pension Schemes Bill [HL]

Baroness Drake Excerpts

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

Moved by

[Baroness Drake]

6: After Clause 8, insert the following new Clause—
“Scheme funder of last resort
Notwithstanding the provisions of section 8, the Secretary of State shall make provision for a funder of last resort, to manage any cases where the Master Trust has insufficient resources to meet the cost of complying with subsection (3)(b) of that section.”

[Baroness Drake (Lab)]

My Lords, a key purpose of the Bill is to protect the pension pots of ordinary people from being raided in the event of a master trust pension scheme failing. At the moment, the considerable costs, including administrative costs incurred when a failing scheme is wound up and the members transfer to another scheme, are borne by the members themselves through the charges imposed. The intention of the Bill is to prevent that happening in future. It places a capital adequacy requirement on authorised master trusts to have available sufficient resources to meet such costs in the event of failure and provides for members’ pots to be transferred to another master trust. The Government argue that, in the event of a scheme failure, the capital adequacy and transfer regime will always work. There is no provision if it does not.

The provisions in this Bill, while welcome, cannot guarantee that there will always be sufficient resources available to a failing scheme to finance the costs of wind-up or that another master trust will always willingly pick up all the pieces and costs. No regulator is infallible. The amendment introduces a requirement on the Secretary of State to make provision for funds of last resort to manage those instances of failure. It does not prescribe what that provision should be—for example, a pension scheme with a last-resort public service obligation, or an obligation on master trusts for tail-risk insurance. But without such a provision, the Government cannot claim as they have that from the day it becomes law the Bill will protect scheme members and their pots from the costs of managing failure.

The reasons for this amendment are several: the Pensions Regulator will need to rely significantly on the judgment of its supervisors to assess whether a master trust meets the requirements for ongoing authorisation, to assess not only against current risks but also future risks and make judgments on when it is necessary to intervene. It will not be regulating a legacy system but the future evolving and expanding system, covering millions of members for a very long time. The Bill places a prohibition on using members’ pots to fund a wind-up, but that does not mean that it will all sort itself out. If providers go insolvent, who ultimately will ensure that the wind-up and transfer actually happens? Pots could be left in limbo for many months. Even if the trustees have a legal duty to make such a transfer, they will not be able to pay for advice and administrative services to enable it to happen.

The year 2008 taught us that even the grandest institutions with strong reputations can fail. No regulator can guarantee to remove all risk, and the Pensions Regulator is no exception. However exceptional, a situation could arise whereby a failing master trust will not have sufficient resources on wind-up. Regulator assessment of capital adequacy requirements may simply have been wrong. I hope that that never occurs, but the Government cannot guarantee that it will not. Administrative disarray, failure of controls in the outsourcing to third-party administrators, major computer failure or other failures can hike up costs and cause costly delay in wind-up.

I recently read The Prudential Regulation Authority’s Approach to Banking Supervision of March 2016, and paragraph 44 says:

“The PRA’s supervisory judgements are based on evidence and analysis. It is, however, inherent in a forward-looking system that … there will be occasions when events will show that the supervisor’s judgement, in hindsight, was wrong”.

The resolution regime when a trust fails provides for transferring members’ pots to another master trust. The Government are relying on the industry to always step up to the plate, but they cannot be certain that it always will. I am sure that there are master trusts now that are already concerned about what that means and will not want to commit to being part of a panel or carousel of providers which will always guarantee to accept the transfer of members. They may consider the unknown future exposure to costs or the liability for the administrative errors or failures of a failed scheme too unpalatable. They may want to cherry pick, leaving a less-profitable section of the members stranded. It is not difficult to imagine the sorts of problems that could occur. The Government cannot assume that the increase in scale achieved from accepting a transfer of members from a failed trust is a sufficient incentive for another provider to always volunteer to rescue.

--- Later in debate ---

[Baroness Drake]

I thank the Minister for his response and will address some of the arguments he put. The amendment does not introduce a sledge-hammer: it leaves the provision to the Secretary of State. It does not require a large infrastructure to deliver such a provision. It can be as straightforward as requiring master trusts to have tail-end risk insurance. It can use a precedent that is used in many other areas of identifying a provider or operator who carries the public service—

[Lord Freud]

I should make it clear to the noble Baroness that we looked closely at tail-end risk insurance. It works within the legislation and the regulator can accept it. We have not made it a major issue at this stage because, at the moment, no such insurance is available in the market. That may change, of course.

[Baroness Drake]

Perhaps I may finish my point. I understand what the Minister has described but is he saying that the Government will consider a provision such as tail-end risk insurance?

[Lord Freud]

I am saying that the clause is carefully drafted to allow tail-end insurance as part of the capital adequacy when the regulator looks at what is required. We are not in a position to do any more at this stage because that particular insurance is not available in the market. It may well become available in the market as people see the requirement.

[Baroness Drake]

I come back to my point that I am seeking not to tie the Government down to a particular provision or how they choose to interpret it, but to answer the question that no Government or regulator can guarantee that they can remove all risk of regulatory failure. In the Bill at the moment—unless the Minister wishes to contradict me—I can find no provision as to where responsibility would fall in the event of such failure occurring and there is not the funding to deal with the wind-up and the transfer.

I do not accept that it increases the chances of moral hazard. The Bill gives the regulators considerable power to set tough requirements. Indeed, the whole purpose of the regime is to address the moral hazard of introducing a profit motive into a trust-based arrangement. The existing regulation and legislation does not deal with that. However much we iteratively discuss this—I welcome the Minister contradicting me—in the event of a regulatory failure and a trust that does not have the means to finance wind-up, there is nothing in the Bill to show how a member is protected.

[Lord Freud]

I am grateful to the noble Baroness for inviting me to intervene again. Under the Bill, if there are costs, they will not fall on the members, so who is she trying to protect? As to my point about the sledge-hammer, if we could have found tail-end insurance, which the noble Baroness mentioned, it would have been cheaper. Other ways that I can think of are quite expensive. It is not appropriate to suggest a solution that is not available.

[Baroness Drake]

The Government are asserting that the costs will not fall on the member because they have put in place a prohibition to say that the costs will not fall on the member. However, if the member is in a master trust of some size which has to go into wind-up, and there are not the resources to deal with that wind-up, there is no answer to the question of who will bear the costs. An answer has to be given, and this amendment is asking the Government to put in place a provision to give effect to that prohibition and say that there will be an alternative provision to ensure that the costs do not fall on the member. I do not believe that the Minister has answered the questions. There are millions of people with potentially billions-worth of assets under the regime, and this is a fundamental question which remains unanswered.

[Lord Freud]

The noble Baroness has been so generous and I will take the opportunity to go over this because it is slightly back to front from normal. This is not like a defined benefit scheme worth billions of pounds which are at severe risk. This is about the costs of moving the money that is attached to individual people to another master trust. It is a completely different order of risk. I know that she is coloured by what she has seen in the defined benefit world, but this is quite different. It is a much smaller risk. As I have said, in any case the costs do not fall on the members and the mitigation issue is disproportionate.

--- Later in debate ---

[Baroness Hollis of Heigham (Lab)]

My Lords, I hope that my noble friend will pursue this point because, unless the Minister can give a categorical assurance, this is the only way to ensure that the Government take the issue seriously and pursue a remedy that is appropriate to the risk that she has outlined.

[Baroness Drake]

I thank my noble friend for her support. I am not coloured by the defined benefit experience at all because I am quite capable of distinguishing between the two. I am sure that I understand the risk posed in this draft legislation. However, I come back to the point. The Government may wish to assert that the costs of winding-up and transferring could be considerable if the records are in disarray, if no master trust is willing to pick up the pieces, or if other problems occur. The Government can assert as a matter of policy that the costs will not fall on the member, but there is nothing in this Bill to copper-bottom that they will not. I feel that the Minister has not answered that question. I am not proposing a sledge-hammer and I am not tying the Government’s hand, but they must introduce a provision which states that if the policy is to prohibit increasing members’ costs when a wind-up after a failure occurs, in extremis if there is regulatory failure that provision will come into effect. I am not persuaded by the Minister’s reply and on that basis I wish to test the opinion of the House.

--- Later in debate ---

Moved by

[Baroness Drake]

25: Clause 38, page 27, line 11, after “charge”” insert “can include, where appropriate, transaction costs, and subject to that,”

[Baroness Drake]

My Lords, there are four key references to administration charges in this Bill: Clauses 12 and 27, the continuity and implementation strategies for addressing how members’ interests will be protected in a triggering event; Clause 33, the prohibition on increasing members’ charges during a triggering event period; and Clause 40, the statutory override power of any term of a relevant contract on administration charges.

The power of the Secretary of State and the regulator to demand information on, and intervene on, the level of administrative charges, is a key part of the armoury in this Bill for protecting members’ pots. Clause 38 gives a definition of administration charges: that it,

“has the meaning given by paragraph 1 of Schedule 18 to the Pensions Act 2014”.

That schedule relates to the power of the Secretary of State to prohibit or cap administrative charges, as illustrated by the 0.75% cap on charges, excluding transaction costs, on workplace pension scheme default investment funds. But there appears no explicit reference to transaction costs in the definition of administrative charges in paragraph 1 of Schedule 18 to the 2014 Act, and no explicit reference to transaction costs in Clause 38.

The purpose of this amendment is to make it clear that any reference to administration charges in this Bill can include transaction costs, so ensuring that the Secretary of State and the Pensions Regulator have the fullest powers of intervention needed to fully protect members’ charges in master trusts. The transaction costs are an important determinant of the net return into the saver’s pot.

In recent weeks, including since this Bill was introduced into the House, three reports have been published. One addressed disclosure of transaction costs and two provided sustained evidence of continuing dysfunction and weak competition in the pensions and asset management industry. On 5 October 2016, the FCA published a consultation paper proposing rules to improve the disclosure of transaction costs in workplace pensions. Given the potential for multiple parties to be involved in managing pension investments and for transaction costs to be incurred at different levels, the FCA considers it essential that any rules of disclosure,

“enable the flow of information to the governance bodies of those schemes”.

It proposes that all those managing investments should report administration charges and transaction costs to pension schemes and intends to publish its rules in the second quarter of 2017.

On 13 December, the DWP and FCA published their joint review of industry progress in remedying poor-value workplace pensions, following the 2013 OFT report that revealed that more than 333,000 members of workplace pension schemes were still suffering annual management charges in excess of 1%. The review also found that most providers had not fully reviewed the impact of transaction costs in their value-for-money assessments and had no immediate plans for such a fuller review. Providers using in-house investment management services were singled out for particular criticism.

In November, the FCA published its Asset Management Market Study interim report, which provided a hard-hitting critique of the “sustained, high profits” that the industry has earned from savers and pension funds over the years—fund management firms, which three in four British households rely upon to manage their pensions.

The remedies proposed by the FCA include requiring investment managers to adopt an all-inclusive single charge for everything; an up-front estimate of transaction costs; and raising the fiduciary bar for the general obligation to treat customers fairly to a new requirement to act in the best interests of investors. The report also contains a withering critique of “active management”. A recent article in the FT pulled together all the adjectives deployed by the FCA:

“Underperforming, overpaid, too profitable, too expensive, too opaque, too unaccountable and too conflicted”.

The report is quite extraordinary. It compares the net return on a £20,000 investment over 20 years to show the impact of charges. Assuming the same return before charges, in a typical low-cost, passive fund, an investor would earn £9,455 more on a £20,000 investment than an investor in a typical active fund. This figure rises to £14,439 once transaction costs have been taken into account. In an exquisite example of laconic drafting, the FCA reports:

“We find that there is no clear relationship between price and performance—the most expensive funds do not appear to perform better than other funds before or after costs”.

The report makes it clear that seemingly small differences in fees and transaction costs can lead to significant losses for investors over time but finds that more than half of ordinary investors are still unaware that they were paying fund charges, let alone what they are.

I hope that the Government will force a pace on transparency and act to control unfair fees and transaction costs incurred by people who are saving, often through their workplace pensions, and an increasing number through these master trusts. But insofar as the Bill addresses the authorisation, supervision and resolution regime for master trusts, this amendment makes it clear that any reference to administration charges in any provision in the Bill can include transaction charges, so ensuring that the Secretary of State and the Pensions Regulator have the fullest powers of intervention needed to protect members’ savings in master trusts, particularly during triggering event periods. I beg to move.

[Lord Freud]

My Lords, the effect of Amendment 25 would be to widen the definition of administration charges for the purposes of Part 1 of the Bill, so that it is capable of including transaction costs. It may be helpful if I explain that we considered the inclusion of transaction costs when developing this policy. We concluded that the provision that has been made in the Bill under Clause 33, including prohibiting an increase in administration charge levels after a triggering event, was sufficient to minimise the risks faced by savers in master trust schemes.

The term “administration charges” may prompt Peers to believe that the prohibition in Clause 33 applies to only a narrow range of costs and charges faced by members. This is not so. Among the charges intended to be caught by the administration charge definition are fees on set-up, entry, exit, and regular and ad hoc fees paid not only to administrators but also many fees paid to governance bodies, regulators, asset managers, investment consultants, lawyers, accountants, auditors, valuers, bankers, custody banks, platform providers and shareholder service providers.

In the majority of cases, trustees do not currently have access to information about transaction costs. Including them within the scope of the prohibition under Clause 33, therefore, would place many trustees in a difficult position. I can assure noble Lords that we acknowledge the need for improved transparency and understanding by trustees about the transaction costs which the members of their schemes will bear.

Noble Lords will remember that, during the passage of the Pensions Act 2014, my department accepted a legal duty to make regulations requiring that transaction costs would be given to members of occupational pension schemes and be published. The Financial Conduct Authority took similar duties with regard to workplace personal pensions at the same time. Again, I acknowledge and thank my noble friend Lord Lawson for his input into the process of developing that part of the Act. I appreciate that some Peers may be disappointed that we have not yet discharged that duty, but in mitigation I should explain that there has never been a single agreed definition of transaction costs nor a way of calculating them. We have made progress in defining transaction costs, but until recently we made less progress on a way of calculating them. This is because many transaction costs are not explicit costs which appear on a scheme’s balance sheet but implicit “frictional” costs from trading, which need to be calculated. The wide variety of approaches to calculating transaction costs are not simply disputes about the odd one-hundredth of a percent but quite significant differences in methodology, which can result in transaction costs differing by a factor of five.

We clearly need to ensure that trustees of occupational schemes and the independent governance committees of workplace personal pension providers have complete, consistent and standardised cost and charges information before they can report it to members; at this point, they do not. The key stepping stone to putting this information into the hands of trustees and independent governance committees was laid down when the Financial Conduct Authority published in October of this year a consultation on proposals requiring asset managers to disclose information about transaction costs to trustees, and a detailed methodology for calculating those costs. Following the outcome of the FCA’s consultation, we currently plan to consult on the publication and onward disclosure of costs and charges to members in 2017. In conclusion on this point, I can assure Peers that we remain wholly committed to discharging this duty in the course of this Parliament. We want pension scheme members to have sight of all costs and charges, regardless of how they are incurred, and to give members the confidence that there are no other hidden costs and charges.

The noble Baroness, Lady Drake, made us aware of the interim findings of the FCA’s Asset Management Market Study, published last month, which found weak competition in the market and proposed remedies through the introduction of an all-in charge and standardised disclosures to all investors. These are timely findings, because noble Lords may also be aware that the Government announced this month that they would be examining the level of the 0.75% charge cap on administration charges in the default funds of schemes used for automatic enrolment and whether some or all transaction costs should be covered by the cap. This work will be undertaken in 2017 as part of the review of automatic enrolment. It will involve comprehensive engagement with a wide range of stakeholders, including asset managers, which will be important given the potentially complex nature of transaction costs. The outcome of the 2017 exercise will help to determine whether there is a need to amend the definition of administration charges in Schedule 18 to the Pensions Act 2014, and at that point we will consider whether we should also cover transaction costs in the master trust legislation.

I reassure noble Lords that in practice we do not believe that transaction costs are a loophole that will be exploited to drive up charges to the detriment of members. Noble Lords will be aware that the vast majority of defined contribution pension schemes, including master trusts, are invested via investment platforms in pooled funds in which the trustees of the scheme will be just one among many investors. Given this pooled and intermediated nature of pension fund investments, it is highly unlikely that a triggering event experienced by just one of the investors in the fund would drive up the ongoing transaction costs from remaining invested in the fund. Taking these points into account, it does not appear necessary to bring transaction costs into the charge prohibition measure in the Bill.

Before I conclude, I ought to acknowledge that this is the last time I will stand before your Lordships on a Bill as a DWP Minister, although it is not quite my last appearance in the role, because we will have some fun on Wednesday discussing universal credit—I hope we will. On Third Reading in the new year, and when the Bill potentially returns to the House for further consideration after it has been looked at by the Commons, I will be leaving your Lordships in the very capable hands of my noble friend Lord Young—the junior member of the Freud/“Jung” combo. I thank him for all the support and time he has given me, and I am sure that noble Lords will continue to afford him the same courtesy and patience that has been displayed thus far.

--- Later in debate ---

[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.

Amendment 25 withdrawn.

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.

--- Later in debate ---

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.

Pension Schemes Bill [HL]

Baroness Drake Excerpts

Committee: 1st sitting (Hansard - continued): House of Lords
Monday 21st November 2016 Lords Chamber

Moved by

[Baroness Drake]

27: Clause 12, page 8, line 2, after “charges” insert “, including any cap on those charges,”

[Baroness Drake (Lab)]

My Lords, I will also speak to other amendments in this group. This amendment would require a continuity strategy should a triggering event occur to set a cap on the charges that can be applied to members’ savings. Amendment 42 sets a similar requirement on an implementation strategy when a triggering event has occurred, and Amendments 28, 39 and 54 introduce an explicit provision that members’ funds cannot be used in whole or in part to pay for the costs of any wind-up of a failing master trust. That provision is to apply to the continuity strategy when a transfer-out and wind-up is triggered, and when an unauthorised master trust, on or after 20 October 2016, is subject to a wind-up. Indeed, all the amendments in this group in my name and that of my noble friend Lord McKenzie are probing to test the strength of the scheme members’ protection when a master trust fails.

The key function of the Bill in addressing weaknesses in the regulation of master trusts is to protect members from bearing increased—indeed, potentially unlimited—costs, so draining their savings pots when a master trust fails. The Bill introduces a prohibition provision, Clause 33, to protect members from funding increased costs in the event of a scheme failure. The prohibition is on both master trusts and the receiving scheme increasing charges, introducing new charges or charging a member for transfer during a specific period in which the scheme is at risk.

However, Clause 33 does not make it clear how and on what premise the charges it will be prohibited from exceeding will be set or determined in the first instance. To use my own simple language, members are protected by a prohibition from the imposition of additional charges above a charges baseline, either by the master trust or the receiving scheme on transfer in a triggering event, but it is not at all clear what that baseline is, how it is set or, indeed, if it is fair value. The amendments in this group seek a cap on the charges that can be applied to members’ savings should a scheme fail, underpinned by the provision that members’ funds cannot be used in whole or in part to pay for the costs of wind-up and transfer occurring as a result of a trust failing.

The parameters and restrictions on the use of members’ funds to meet the cost when a master trust fails need to be set out more clearly in the Bill. Such a restriction is too fundamental to leave to regulations and/or the Pensions Regulator’s discretion. To illustrate my point, the protection for members against meeting additional charges on wind-up and transfer in a triggering event are referenced in three main clauses. Clause 12 provides for a master trust continuity strategy, which is a requirement of authorisation, to set out how members’ interests will be protected if a triggering event occurs, including the level of charges that can apply. Clause 27 requires a master trust to submit an implementation strategy, which must set out how members’ interests will be protected when a trigger event actually occurs, including the levels of administration charges that will apply. Clause 33 sets out how the prohibition on increasing member administration charges will operate during the trigger event period, and provides that the Secretary of State may make regulations about,

“how levels of administration charges are to be calculated”,

and,

“how to determine … the purposes for which charges are increased or imposed”.

There is plenty of process here but nothing in Clauses 12, 27 or 33 informs what the actual quantitative level of member protection will be against increased charges on scheme failure; nor does the Bill say whether members will be protected from bearing, or will have to bear, any wind-up or transfer costs. Indeed, the level of protection for the member against increased charges on scheme failure can be revisited on three important occasions under different provisions in the Bill relating to triggering events. What is the Government’s policy on the considerations that will be taken into account when the Pensions Regulator authorises the level of administrative charges to be borne by the member on scheme failure under Clauses 12 and 24 and Schedule 2? Are there any circumstances in which some of the administration charges or transfer costs arising as a result of a triggering event can be passed on to the member, and what will be the limit on the charges that can be passed on to them?

In the current drafting, there seems to be no join-up with the Occupational Pension Schemes (Charges and Governance) Regulations 2015, which incorporate the value-for-money assessment. There is nothing in the Bill to cover what happens if a scheme fails to comply with these regulations. Would it impact on the authorisation process or lead to the withdrawal of authorisation? It may be that these points will be covered off in new regulations, but it is unclear how regulations made under the powers in the Bill would knit together with the existing charges and governance regulations.

The regulations supporting Clause 12 on the continuity strategy, which sets out a requirement about the level of charges that will apply in a triggering event, are subject to the negative resolution procedure. I am conscious that we are bouncing this ball on negative and affirmative resolution procedure but, again, there is a prohibition on increasing charges and various incidents where the charges that cannot be exceeded are set out. Yet we have no sight of the draft regulations, so we do not know the Government’s thinking on this. Again, this is an appeal as to why, in the first instance, the regulations should not be subject to the affirmative procedure.

This is an important matter that is at the heart of the level of protection the Bill seeks to provide to members. It is one thing to say that there is a protection, but understanding what that protection is in quantitative and real terms is important. Because we have not seen the draft regulations and do not know the policy intention, that is difficult to assess. That is why Amendment 30 provides for the first regulations to be subject to the affirmative resolution procedure. Given the importance of this matter and the lack of detail before the Committee, why is it not appropriate to apply that procedure in the first instance?

[Lord Flight (Con)]

My Lords, Amendment 29 and 40 are amendments to opposition Amendments 28 and 39. They would both add after “members’ funds”,

“, beyond the normal capped pension scheme charges,”.

The point is really very simple: without this change, the opposition amendments would have the undesirable —and I think unintended—effect of hampering the orderly exit of the sponsor. I am sure that is not the intention behind them.

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[Baroness Drake]

I thank the Minister for his detailed reply. I should be honest and say that I do not think that I have absorbed all the detail that he presented, and I will read the Hansard in detail to follow it through. In my defence, as one would expect in preparation for a Bill such as this, I spoke to pension lawyers, and there was a clear view that the parameters and restrictions on the use of members’ funds to meet the costs when a master trust fails were unclear and needed to be set out more clearly, so I am not alone in not understanding exactly how the prohibition clause works, and therefore what quality of protection is afforded. I simply say that others are unclear what the Bill provides.

I took one or two things from what the Minister said. The information charges provided on the implementation strategy are key. They are the driver against which it is assessed. It is on additional charges that one applies the prohibition; it identifies the charges in the implementation strategy which it is prohibited from exceeding. That needs some reflection.

I was a little confused by one point in the Minister’s response. He referred to default funds. Of course, the cap on default funds is 75 basis points, but the nature of his reply was that if the scheme was running a default fund on 50 basis points, one could rise to the cap to fund the administration charges. Reassurance on that point would be really helpful.

[Lord Freud]

I hope that I made it absolutely clear that we will look back at what was actually being charged to ensure that it was an annual effective rate of 0.5%. There is no space to try to get the next 0.25% once a triggering event has happened. You are left at the level at which you have been charging historically, and there will be a way of assessing that rate, which means that both the original amendment and my noble friend’s amendment to it fall away, because there is another method of maintaining the level of charges.

[Baroness Drake]

I thank the Minister for that clarity; that is quite reassuring in respect of one point, but I think that my noble friend and I will probably want to reflect on the detail of the Minister’s statement. It is also helpful that he has confirmed that the implementation strategy information charges are key in deciding the charges and the prohibition that applies. We will reflect on what is in Hansard, but I beg leave to withdraw my amendment.

Amendment 27 withdrawn.

Pension Schemes Bill [HL]

Baroness Drake Excerpts

Monday 21st November 2016 Lords Chamber

Moved by

[Baroness Drake]

18: After Clause 8, insert the following new Clause—
“Scheme funding: triggering events
Where—(a) a triggering event under section 21 occurs; and(b) the scheme has insufficient resources to meet the costs mentioned in section 8(3)(b); and(c) a prohibition under section 33 applies;the Secretary of State shall make provision for a compensation fund or for the funding to be provided by another source as a last resort.”

[Baroness Drake (Lab)]

My Lords, Amendment 18 proposes a new clause that, put at its simplest, seeks a compensation fund or provider of last resort when a master trust fails and there are not enough resources to meet the costs of wind-up and transfer. It is the in extremis protection, ensuring a last line of defence for members’ funds if the capital buffer required under Clause 8 or the proposed continuity option provisions in Clause 24 fail.

Setting regulatory operational capital requirements for master trusts is important but does not guarantee the security of members’ benefits or rights. I am sure the Minister will reassure us that the Government intend to be robust. The trouble is that we are not sighted on the robustness of the capital adequacy or transfer-out regimes—indeed, neither is he at this point—because so much of it is still left to further policy decisions and regulations. Concepts such as “sustainable”, “sound” and “sufficient financial resources” are undefined in the financial sustainability requirement in Clause 8. There are no draft regulations for us to consider. There is no provision in the Bill for what happens if the regulatory regime fails to ensure that sufficient financial resources are available in the event of a master trust failure.

The Constitution Committee points out in its letter to the Government of 11 November that Clause 24, dealing with wind-ups and transfers-out, is an example of the Bill delegating the power to make regulations that will determine substantial policy issues when a draft of the regulations is not available and the Government have yet to determine their policy. This regulatory regime will be applied to an existing market that has developed in a variety of ways. The Government cannot guarantee that they will have time before its introduction to create and hold the benign behaviours needed to protect scheme members. The impact assessment acknowledged uncertainty about the Bill’s impact because substantive policy decisions will not be taken until the secondary legislation stage. Indeed, such is the amount of further work to be done that the authorisation regime will not come into effect until 2018. The Bill does not make clear what happens if no potential receiving scheme is able or willing to accept the benefits of the members on transfer. The scheme records may be in disarray. The actual costs of wind-up and transfer will not be known or knowable in advance.

Under Clause 33, there are prohibitions on the charges the master trust and the receiving scheme can impose on the members transferring, or on imposing any new charges to meet costs for which a receiving scheme is liable but which were originally incurred by the transferring scheme or as a result of the transfer. If the actual costs of wind-up are very high, the terms of the clause may deter other suitable master trusts from accepting a transfer in whole or in part.

The impact assessment explains that the prohibition on increasing member charges during wind-up and transfer will work because the money to pay for these costs will be met by the access to funding or capital reserves held in accordance with the new financial stability reserve requirements in Clause 8. Yet no regulator can guarantee that those will always be sufficient. Indeed, the impact assessment reasoning is restated by the noble Lord, Lord Freud, in his letter of 14 November. However, neither the Bill, the impact assessment nor the Minister’s letter inform us what would happen if, in a particular failing master trust, the capital reserve requirements proved insufficient for whatever reason. The Bill proposes no contingency plan for the failure of a master trust the records of which are in disarray, which has insufficient financial resources to comply with its duty when a triggering event occurs, and for which no master trust is willing to accept transfer of members’ benefits. What will happen in those circumstances? How will all the members’ funds be protected against increased charges? What liability for or immunity from the past provider’s mistakes will a receiving scheme have? What plans do the Government have for ensuring that bulk transfers between master trusts can legally proceed in an efficient and timely manner to ensure continuity of coverage for members of failed master trusts?

The suggested timetable in the Bill indicates that the new regime will come into full effect in 2018, after most remaining employees have auto-enrolled, so it will be some time before it is in place. However, the retrospective casting of the Bill—which I support—means that for existing unauthorised schemes, the scheme funder is liable for wind-up and transfer costs when a triggering event occurs on or after 20 October 2016. What if that funder has insufficient resources, is a limited liability company or is insolvent? Where would wind-up and transfer costs be recovered from?

In his letter of 14 November, the noble Lord, Lord Freud, comments that in such a situation,

“we would expect the normal considerations in terms of insolvency and court proceedings to apply to this financial debt as to any other”.

That prompts a series of questions for the Minister. What does that mean? Who would bring the proceedings and how would they be financed? If the members of such a master trust were transferred, would the receiving master trust be covered by the prohibition in Clause 33 on increasing charges? The noble Lord, Lord Freud, further comments in that letter:

“We do not expect the number of trusts who will find themselves in this position … without solutions for their members to be high. We anticipate that the market will wish to consolidate”.

That leads to a more general question: how exactly is it to be determined which is the appropriate master trust to be the receiving scheme in a wind-up under Clause 24? How will a potential receiving scheme be identified? Presumably, the regulator will not leave it to other schemes to do some self-organised divvying up. It could be problematic under competition law for a panel of providers to self-organise the divvying up of schemes. Will there be a formal regulatory allocation process, and if so, what will it be?

People need to be reassured that the Bill will provide them with protection in practice. At the moment, that ultimate reassurance is not there. The amendment does not prescribe the model but it fixes the principle of a last resort provision. I recognise that work needs to be done. There are matters to be considered—how to protect against moral hazard; how to ensure that market players do not game the process to cream off the best members; the need to look behind a triggering event to identify evidence of cherry-picking; and the funding underpin for a last resort provision—but there is a compelling need for a compensation or last resort provision, as proposed in the amendment. Without it, the Government cannot credibly assert that the Bill will do what is claimed in the opening line of the Explanatory Notes: protect all savers. I beg to move.

[Lord Flight (Con)]

My Lords, it is actually extremely unlikely—in fact, virtually impossible—that members will suffer if the manager of a master trust gets into difficulties. The assets attributable to the pension fund members are segregated from the assets of the manager. How valuable or otherwise they are will depend upon how well they have been managed and, if there is more than one fund choice, which fund people have chosen.

Secondly, it is clear that the Pensions Regulator will and is intended to play the brokerage role. If it perceives that a master trust manager is in trouble, it will quickly sort out who is going to take over that business. It has value because fees are attached to managing the money, which other master trusts will happily pay. There is even some source of revenue coming back to the master trust in trouble as it is bailed out.

I am afraid that this sort of plaintive request for a compensation fund does not have my support. I thought we had collectively agreed that we did not want another compensation fund. Adding it at the end, almost out of principle, when the chances of it ever being used are virtually zero, is not particularly constructive.

--- Later in debate ---

[Lord Freud]

My noble friend has put very bluntly what I was trying to say in a subtle and gentle way. If the landlord or another supplier to the scheme finds itself out of pocket, for instance, that is what will happen. It will go through the normal insolvency process, but it is not the job of the Pensions Regulator or the Government to be concerned about that. Our concern is purely with the members’ pots. Are they protected and is there a process to transfer them to someone who can look after them properly? I hope that is what I have been able to explain in an overlengthy reply. I hope it has enabled the noble Baroness to withdraw the amendment.

[Baroness Drake]

I shall try to pick up some of the Minister’s points. There was a lot of detail in his reply. I am conscious of the time. I shall start with the risks that we are trying to mitigate; there seems to be a lot of confusion about them. The risk this Bill is trying to mitigate is that the costs associated with managing scheme failure and winding up the scheme fall on the members, so their pots are drained to pay for them. Their pots are not protected. We are talking not about the equivalent of a DB benefit provision or a Financial Services Compensation Scheme provision on an annuity, but about the specific risk that the Explanatory Notes and all the associated documents from the Government in support of the Bill identify that it is seeking to mitigate. Members’ pots should not be raided to pay for a master trust failure.

The Minister set out in great detail how the authorisation regime, the supervision regime and the scheme failure resolution regime will work very effectively to protect the members against that risk. That was very clearly laid out. I complimented the Explanatory Notes and other documents at Second Reading. It is possible to clearly follow the regime proposed. However, the regulatory regime cannot ensure that the capital adequacy and supervision regime will always ensure sufficient resources in the scheme to finance the cost of failure in respect of wind-up and transfer costs. That is the risk we are trying to deal with. It is not the function of a regulator, whether it is the PRA, the FCA or anything else, to eliminate all risk. It cannot possibly do so, unless there is an unlimited guarantee from the taxpayer always to remove risk in a regulated system.

This amendment seeks to address what happens when the regulatory system around capital adequacy or resolution through transfer of another scheme does not work. As the noble Baroness, Lady Altmann, said, at the moment there is only one place to go, which is back to the members’ pots, which will be drained.

If I heard the Minister correctly, he said that there would be no liability for debt placed on the receiving scheme in a transfer situation, so he is saying that if there are insufficient resources in the failing master trust they cannot be offloaded on to the receiving scheme on transfer. They are still floating around to be paid for, so we cannot put them there and we cannot put them on the financial resources in the capital adequacy regime because that has failed, so we are still waiting for someone to pick up these costs because the only thing exposed at the moment is the members’ pots. In that situation, no regulator can guarantee whether there is a suitable master trust that will pick up all the members. It may want to cherry pick some and leave a rump behind. We do not know how this will play out. What has to be possible is that the capital adequacy and supervision regime does not always work and, if there is any one occasion when it does not work, the prohibition clause—Clause 33—cannot work because prohibition on increasing member charges when a failure takes place can operate only if someone provides the resources to fund that prohibition on increasing the charges.

There is no provision in the Bill or in any other policy document from the Government that states that, if a scheme fails in extremis and there are not the resources in place, there is no one to fund the prohibition order on increasing charges as a result of managing that failure other than the members’ pots.

[Lord Freud]

I want to be very clear. There was a useful dialogue between me and my noble friend Lord Flight. I would like to repeat what I said. I am not saying that no one will lose money if something goes wrong; what I am saying is that it will not be the members because their pots are protected.

We have bankruptcy or insolvency proceedings for other people when they get into financial trouble, but that is a separate matter. The members are protected. What we are worried about in this Chamber is the position of the members, and Clause 33 provides that fundamental protection. It is not open to the failing scheme funder to raid those pots; that is prohibited, and we have a regime to prevent it happening.

Just because someone somewhere loses money around this process does not mean that we need a compensation regime. I want to make that utterly clear, because there seems to be a concern to see that nobody can lose money. If people mess things up, they may lose money—but members will not lose money.

[Baroness Drake]

I accept the clarification from the noble Lord. The amendment—which at this stage is partly probing, although underlying it is a principle that is a matter of substance—was not intended to prescribe the model. It does not say it has to be a compensation fund—it could be a provider of last resort—but there needs to be an explicit provision in the Bill that makes it clear what happens to protect the members’ pots when the supervisory and capital adequacy regime fail in a failing master trust. I do not believe that the Bill addresses that at the moment. I am not arguing for a particular model; I am arguing for a principle of absolute clarity as to how members’ protection against exposure to meeting the cost that I described—the risk that the Bill seeks to mitigate—will be addressed in an in extremis position.

It is not a plaintive request—I say to the noble Lord, Lord Flight, that I am not a plaintive request person. I am standing here quite firmly because potentially 7 million people are going to be affected and, over time, there will be trillions of pounds under management. This matter is worthy of interrogation, rather than us simply hoping.

[Lord Flight]

The issue is an administrative one, in that you have people’s pension fund money, and the manager has got into trouble and, let us say, gone into liquidation. What administration would make sure that a new manager takes over and continues to investment-manage those pots of money? There have been suggestions that the Pensions Regulator himself should be empowered, or maybe required, to act as a broker with regard to such arrangements, but that problem has not yet been solved. That, surely, is the practical issue, not people losing money out of their pension pots.

--- Later in debate ---

[Baroness Drake]

I thank noble Lords for the supportive argument on the point that I am trying to make. I should pull this to a close. It is not that the proposals in the Bill around authorisation, supervision and resolution on failure are, of themselves, something one would want to challenge—although there is the issue of how they and some of the policy will work in practice—it is what happens in the situation that the noble Baroness, Lady Altmann, set out, when one has a failure, costs are incurred in dealing with that failure and insufficient financial resources are available. How are the members’ pots protected in those situations? The reasoning in the impact assessment is that the prohibition in Clause 33 works because there will always be financial resources to fund it, but it is not clear, in the terms of the Bill, that there will always be financial resources outside of accessing the members’ pots. However, I beg leave to withdraw the amendment.

Amendment 18 withdrawn.

--- Later in debate ---

[Baroness Bakewell of Hardington Mandeville]

My Lords, I thank the noble Lord the Lord Speaker for putting the House right on that; the error was pointed out to me this morning. I shall speak briefly to the amendment.

All the information requirements relating to scheme processes as set out in Clause 11(4) are integral to a thorough assessment of a master trust’s capacity to run a scheme effectively. Therefore, it should be mandatory for regulations to include provision about the regulations. Master trusts must be effectively run so that members can be sure that their money and futures are secure. Security around master trusts is key to their success. It is much too important to be left to possible regulation; it needs to be enshrined in the Bill. I look forward to hearing what the Minister has to say about the amendment, and I support all the other amendments in the group.

[Baroness Drake]

My Lords, I shall speak to Amendment 21 and other amendments in the group. Amendment 21 would make it a process requirement under Clause 11 on authorised master trusts when making investment decisions to consider,

“environmental, social and governance risks”,

Most investments in master trust schemes will be longer term and therefore exposed to longer-term risks. Consideration of those risks, which include such factors as climate change, unsustainable business practice and unsound corporate governance, is integral to the long-term sustainability of the investments held. The assessment of these risks should not be seen as an ethical extra but, rather, potential vulnerabilities to the sustainability of the scheme which should be properly understood.

The Pensions Regulator code of practice strengthened guidance for trustees on consideration of ESG risks, but it is not legally binding and there is no direct penalty for failing to comply. At a recent pensions conference, Andrew Warwick-Thompson, the executive director of the regulator, warned trustees against complacency when assessing ESG issues within portfolios. He commented that the regulator expects trustees to take ESG issues into account, saying,

“I would urge any trustee or asset manager out there who still thinks these things don’t matter to wake up and smell the coffee”.

He referred to research by Professional Pensions which showed that only 18% of responses from trustees, fee managers and pensions professionals thought trustees should be obliged to take ESG issues into account.

If many in the industry are reluctant to make an assessment of ESG risks, it is hardly an auspicious basis for optimism that a voluntary code will work. As the regulator himself commented:

“We need to guard against complacency here”.

There is increasing evidence showing that companies which perform well on ESG produce better returns for investors. Poor corporate practice has a real effect.

Master trusts have already grown exponentially against the background of a regulator having insufficient powers, relying instead on exhortations to trusts to embrace the voluntary master trust assurance framework. That did not work. With this Bill the Government are trying to put things right. The regulator expects ESG risk to be assessed. The amendment moves beyond expectation to a process requirement that trustees actually consider these risks. I ask the Minister: will the requirements under Clause 11(4)(d) include a specific requirement to assess ESG risks?

Amendment 22 requires an authorised master trust to have processes in place for the identification, reporting, managing and minimising of any conflict of interest. How to manage conflicts of interest in a master trust is an, as yet, unresolved problem. It is difficult to assess how this Bill will resolve it because of the policies still to be decided. In 2012 the Pensions Regulator, when investigating potential conflicts of interest in master trusts, commented:

“It is very hard to understand how and when they are acting as agents of the provider and when they are acting in the best interests of the member”.

In 2013 the then Office of Fair Trading raised concerns that some trustee boards were not sufficiently independent of the master trust provider to avoid conflicts of interest and always act in beneficiaries’ best interests. The Occupational Pension Schemes (Charges and Governance) Regulations 2015 introduced stricter requirements on master trusts and although welcome, they are not sufficient to address potential conflicts of interest. Trustees of occupational pension schemes are required to have a process in place to identify and manage any conflicts of interest and there is a regulatory DC code which recommends minimum controls. But they do not meet the conflict of interest challenges in a master trust.

Market pressure, combined with sound regulation, are important tools in the fight against conflicts of interest. The only trouble is that in the pensions market there is little pressure coming from the supply side, the scheme member—a proposition we have rehearsed so many times in debates in this Chamber and in the other place.

The Government’s impact assessment identifies the particular risks that master trusts pose, which compellingly support specific regulation for identifying, reporting and managing conflicts of interest. Master trusts develop new types of business structures which alter the relationships between members, employers, trustees and providers, on which occupational pension law and regulation is largely based. There is no requirement to include member or employer representatives on the board, and providers have a significant influence over who they appoint.

Many master trusts have been set up with a profit motive—something that existing occupational pensions’ regulation does not cater for. As the OFT observed, this is a concern and a complex area as these companies have obligations to their shareholders and other stakeholders and, as with any company, seek to make a profit. IFAs and fund managers may be part of the provider group that set up that master trust.

The trust deed in a master trust can inhibit the trustees from acting in the best interests of members if the rules fetter their powers. The master trust multi-employer characteristic can increase complexity and, with it, the potential for conflicts of interest. The products they provide are not covered by ECA regulation.

Pension Schemes Bill [HL]

Baroness Drake Excerpts

Committee: 1st sitting (Hansard): House of Lords
Monday 21st November 2016 Lords Chamber

Moved by

[Baroness Drake]

4: Clause 1, page 1, line 13, leave out subsection (2)

[Baroness Drake (Lab)]

My Lords, I refer to the interests that I recorded at Second Reading. I will speak also to the other amendments in this group. In part, these amendments are probing to understand what happens to non-money purchase benefits in master trusts under the Bill.

Clause 1(2), taken together with other clauses, means that the Bill applies only to money purchase benefits provided through a master trust, and excludes non-money purchase benefits. This means that potentially some of the members’ benefits provided by these schemes, including retirement products, are excluded from key protections in the Bill. On first consideration of that clause, it does not seem fair or sensible to exclude certain members’ assets from all of the Bill’s provisions. Master trusts can provide a variety of services both to employers under auto-enrolment and to individuals exercising pension freedoms. The master trusts may provide at-retirement products, such as annuities, guaranteed draw-down, and investment products which include some form of guaranteed rate of return. Annuity payments, for example, may be paid to the member but the actual annuities supporting those payments may be held as an asset of the scheme rather than in the name of the member. How are savers protected in that situation? Pension freedoms have seen the annuity market shrink, and they may radically transform the market for guaranteed income products. Pension savers will still have an appetite for some form of guaranteed product. The Bill will not apply to non-money purchase benefits, so it is unclear what happens to those benefits and, importantly, the assets backing them, when the master trust fails.

Master trusts are innovative. One such trust, for example, allows members to add in other savings and assets such as ISAs and property used for funding retirement. I read that, of the approximately 100 master trusts, only 59 are being used for auto-enrolment. Some have blossomed on the back of pension freedoms. Regulation should anticipate that master trusts will expand further into the decumulation market of retirement products. The exclusion of non-money purchase benefits raises three important issues. It is not clear what happens to the treatment of all non-money purchase benefits, and the assets backing them, in the event of a wind-up or other triggering event occurring. Will those members’ benefits be protected against funding the costs of a triggering event, and how, and where, will they be transferred on exit?

The Government’s position is that all the requirements in the Bill bite only in relation to money purchase elements in the scheme because other legislation protects non-money purchase benefits. But will all retirement products with an element of guarantee be covered by the PPF regime? I doubt it. Master trusts are not regulated by the FCA, so where does the saver look for protection?

The continuity strategy required under Clause 12 in the event of a wind-up will have to set out how the interests of members of a scheme in receipt of money purchase benefits are to be protected in a triggering event, but it appears that it will not have to set out how members in receipt of non-money purchase benefits will be protected. Such a requirement would at least clarify what range of member benefits were in the master trust; Amendment 26 in this group addresses this issue. Will master trusts be required to set out how members with non-money purchase benefits will also be protected if a triggering event occurs?

Amendment 16 provides for any assessment of a master trust’s capital adequacy backing money purchase benefits, required under Clause 8, not to take account of resources related to benefits other than money purchase benefits. There is only a brief reference—in Clause 38(2)—to both money and non-money purchase benefits being included in a master trust account. How will this work in practice? Will master trust accounts have to be disaggregated by type of benefit? Will requirements be imposed to identify the assets backing money purchase benefits, those backing non-money purchase benefits and any cross-subsidies between the two? Is it the intention that none of the assets backing non-money purchase benefits could be used to fulfil the requirements for financial stability under Clause 8 or to meet costs arising from a triggering event, including wind-up? The Bill raises uncertainties as to the treatment of the different categories of benefits at authorisation, ongoing supervision and when a triggering event occurs.

Finally, Clause 8, to which Amendments 16 and 17 are directed, is the capital adequacy provision clause. At Second Reading, several Peers expressed concerns about the adequacy of these provisions. The terms used are rather open-ended and will require implementing instructions, of which we have yet to see a draft. Concepts such as “sustainability” and “sound” are undefined, and the Bill does not include any explanation of what is meant by a scheme having sufficient financial resources. Even the reference to a scheme holding sufficient resources to continue running as a scheme for between six months and two years means that there is a big gap between the minimum and the maximum requirements. Yet the capital adequacy regime is intended to be the cornerstone or linchpin protecting members in a master trust in the event of its failure.

I will return to these arguments in more detail when we reach Amendment 21 in my name and that of my noble friend Lord McKenzie, but they are compelling reasons why Amendment 17 seeks regulations under Clause 8 to be subject to the affirmative rather than the negative resolution procedure set out in the Bill.

[Lord Freud]

My Lords, I am grateful to the noble Lord and the noble Baroness for tabling these amendments. Amendments 4, 16 and 26 relate to the question of how non-money purchase benefits in a master trust are dealt with and affected by the new regime, and Amendment 17 raises the question of the appropriate parliamentary procedure for regulations under Clause 8.

I will first deal with the question of non-money purchase benefits, as we have given a great deal of thought to it in developing the Bill. Amendment 4 seeks to amend Clause 1(2) so that the provisions apply to non-money purchase benefits in master trust schemes. Amendment 16 seeks to ensure that the Pensions Regulator does not take account of resources which relate to non-money purchase benefits in assessing whether the scheme has sufficient financial resources.

Amendment 26 seeks to ensure that master trusts set out the protections for non-money purchase benefits in their continuity strategy. Many master trusts will be money purchase schemes—that is, they will provide only money purchase benefits. However, a number provide both money purchase and non-money purchase benefits, and we therefore need to make provision to take account of this. As we have previously discussed, it is important that we do not create a loophole for schemes that offer mixed benefits. However, the policy intent is to specifically address certain risks that apply to members in master trusts related to the nature of the structure and funding of these schemes. These types of risk are managed in different ways in relation to non-money purchase benefits, and it is the risks around money purchase benefits that the Bill is focused on addressing.

--- Later in debate ---

It will, of course, always be open to Parliament to debate any regulations made under this power, but requiring all such regulations to be debated as a matter of course, particularly in view of the fact that some of the changes to be made may be relatively minor, does not seem proportionate. It is for these reasons that we think that the negative procedure is appropriate. However, I appreciate the concerns expressed by noble Lords and I will consider the matter further. In particular, I will consider the proposition that the noble Baroness makes elsewhere in her amendments that the first set of regulations should be subject to the affirmative procedure with the negative procedure for amendments thereafter. I hope that I have helped to answer the concerns raised, and I invite the noble Baroness to withdraw her amendment.

[Baroness Drake]

I thank the noble Lord for his detailed and helpful comments. I hope I have followed them all but I will read Hansard at leisure to make sure that I have captured them. In terms of money purchase, I completely accept that one would not want to create a regime that allows arbitrage between a weaker regime and a stronger one on non-money benefits, and I agree that it needs to be proportionate. My main concern is that given that everyone, including the Government, recognises that a key risk with a master trust is the members having to bear the cost of failure, then if there are assets of different types of members in that master trust, it is very important to have clarity about how the risk is shared or borne and the rules that apply. It is helpful that the Minister has confirmed that the Pensions Regulator will not be able to take into account the assets backing non-money purchase benefits when assessing financial resources and capital adequacy because it is the first time that we have had that clearly confirmed. However, I am still a little unclear as to how that will translate into equal levels of confidence when an actual triggering event occurs, and what will be the rigour around clarity as to which asset belongs to each benefit class. If I may presume, it would be helpful to the Committee to have a note or a letter setting out the thinking on that because it might address some of the issues which have certainly been of concern to my noble friend and me.

On the matter of capital adequacy and the amendment to Clause 8, I am anxious not to anticipate what I think will be a larger debate around Amendment 21. I do not want to run the risk of repeating myself, but it is the debate about what happens if a capital adequacy regime fails and the resources are simply not there. I will try not to go there, but the Minister’s comments have been helpful. There is still a lack of confidence about how the key concepts will be interpreted under the regime. When the phrase “more flexible” is used, I tend to have an instinctive reaction that it could actually reduce the level of confidence rather than increase it. More flexibility does not always produce good outcomes. If the Minister could consider that regulation should be subject in the first instance to the affirmative procedure rather than the negative one, that would be really helpful because people are struggling. They do not want to hold up the Bill but the capital adequacy regime in Clause 8 is so integral to the linchpin the Government are providing that people are anxious to understand it. That would be a helpful concession if the Minister is able to make it. I am happy to withdraw the amendment.

Amendment 4 withdrawn.

--- Later in debate ---

Turning to the specific questions about what other regulatory provisions might kick in if part of Part 1 is disapplied, we would disapply only if we did not think it was proportionate to apply the regime due to other existing protections in place. Finally, I recognise that Clause 39(1)(b) gives the power to disapply all or part of the provisions. We do not currently envisage disapplying part of the regime, although this debate has raised some interesting points around certain schemes and we need to allow for future developments in the industry. I hope that clarifies in part some of the issues raised by the noble Lord, Lord McKenzie, and that he might consider withdrawing his amendment.

[Baroness Drake]

I listened carefully to what the Minister said. Clause 39(1) has two parts, (a) and (b). Paragraph (a) would apply some of the modified applications in respect of schemes that are currently not master trusts, while paragraph (b) would disapply some of the provisions in respect of schemes that are already recognised as master trusts. There is no question of their identity under Clause 39(1)(b): they are master trusts. The Minister said that the Government’s policy was that they would not modify any application on the authorisation criteria for master trusts, or that they would modify those criteria for existing master trusts only if there was an alternative regulation in place somewhere else. Are we therefore talking about a substitution, so that the authorisation criteria for master trusts would be modified only if there was a pre-existing regulation or piece of legislation that met the part that it needed to play? Is that what I understood him to have said?

[Lord Young of Cookham]

The noble Baroness has accurately summarised what I said. We would use this clause to disapply only if we did not think that it was proportionate to apply the regime due to other existing protections in place.

Pension Schemes Bill [HL]

Baroness Drake Excerpts

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

[Baroness Drake (Lab)]

My Lords, I begin by drawing attention to certain of my interests. I am a trustee of the Santander and Telefónica pension schemes. I am on the board of the Pensions Advisory Service, on the board of Pension Quality Mark, a trustee of Byhiras and a member of the Delegated Powers Committee.

Like everyone else, I welcome this Bill. The Explanatory Notes are excellent and the impact assessment helpful, albeit unfinished given the substantive policy decisions still to be made. My focus is whether the authorisation, supervision and wind-up regime is sufficiently robust to deliver the Bill’s focus to protect savers.

The master trust model is an important part of a sustainable workplace pension system. If regulated well, it should allow trustees with a fiduciary duty to look after members’ interests, create scale and provide access to pension savings and products at low cost. But master trusts have grown rapidly while inadequately regulated, from 0.2 million members in 2010 to well over 4 million in 2016 and rising to 6.6 million by 2030—billions of pounds from millions of workers. I doubt that anyone anticipated just how quickly the structure of master trusts would evolve.

Low barriers meant that market entrants set up trusts on minimal requirements, into which people were auto-enrolled before an optimal DC proposition and market structure were put in place. The NOW: Pensions master trust CEO, Morten Nilsson, was shocked at how easy it was to set up a master trust—it involved only sending a form to HMRC and to the Pensions Regulator.

Debate on competition focuses on freedom for providers to enter a market created by harnessing inertia. But that competition cannot deliver an effective market because the demand side—the saver—is too weak. The worker does not choose the product, and complexity and conflicts of interest weaken their position.

As the impact assessment acknowledged, master trusts expose members to specific areas of risk. Master trusts can introduce a profit motive into a trust arrangement, but they fall outside FCA regulation. A master trust is set up by a provider raising concerns about the independence of trustees. In a traditional trust, trustees can replace their administrators or investment managers, but in a master trust they may not have that power. Currently, if a master trust fails, as the noble Baroness, Lady Altmann, spelled out, the costs are crystallised and met from members’ savings. There is no Pension Protection Fund for defined contribution savings.

Their multi-employer nature means lower individual employer engagement. They are growing in part because employers want to outsource pensions or discharge legacy DC trusts. They can increase complexity, exacerbate the principal-agent problem and when operating at scale mean a greater shock on failure—all compelling reasons for why the Government are right to introduce the Bill.

But I have concerns about the robustness of this regime. Many of those will be pursued in Committee, but I shall make some overview comments. Pension pots are a 30 to 40-year project for the individual, so ongoing supervision has to be robust. Yet paragraph 59 of the impact assessment concedes that,

“substantive policy decisions will not be taken until the secondary legislation stage”,

the timetable for which is unknown. So the House is blindsided on how robust certain key provisions will be.

In his opening speech, the Minister referred to the Government’s approach to the use of delegated powers, stressing that the detail needs to accommodate different structures, not one size fits all. That argument has merit, but only in part. Why is the negative procedure needed so often? There are major policy issues to be determined. We are not sufficiently clear about the Government’s thinking on: the robustness of capital adequacy and what happens if it fails; how profit motive and fiduciary duty are resolved; the sufficiency of the systems; member engagement; and how those charges which it will be prohibited to exceed will be set in the first instance.

The last 10 years have revealed that once highly regarded institutions tumbled from their esteemed positions as a result of weak governance and inadequate scrutiny. The most highly respected names on a master trust list need ongoing assessment for long-term quality of governance. Recent debates prompted by corporate behaviour at BHS raised concerns about the adequacy of the Pensions Regulator’s powers and its willingness to deploy them. We await the Government’s response to those debates to understand how the lessons learned may inform master trust regulation.

Master trusts can introduce a profit motive and the scheme founder can limit the powers of the trustees, yet there is no explicit requirement on those trustees to put in place processes for identifying and listing conflicts of interest and how they are to be resolved.

In the Bill, the capital buffer is the last line of defence to protect members’ money from being drained when a master trust exits the market, but no system of regulation can remove all risk, and that raises a series of questions. How robust is the definition of “self-sufficiency” underpinning the capital adequacy requirement? What happens if it proves not to be adequate in a given trust? How ring-fenced or guaranteed is that capital buffer? What if the scheme funder becomes insolvent? How frequently will the Pensions Regulator monitor a scheme’s capital adequacy? Who will meet the wind-up costs in extremis? How solid is the protection that members’ funds will not be run down? As no protection fund is being proposed, should there be a pay-as-you-go levy system? Will there be a provider of last resort to take over the processes and costs of winding up and to accept bulk transfers? What action will the Government take, and how quickly, to simplify the bulk transfer process? Members in master trusts deserve to be given clear answers to all of these questions.

On Royal Assent, transition to the new authorisation regime will be demanding. For example, some master trusts will not apply for authorisation and will pre-emptively leave the market. The retrospective provision in the Bill to prohibit increasing member charges on wind-up is welcome, as it is commonplace for master trust deeds to allow for such costs to be borne by the members. But some of these trusts have set up business with little capital at risk if things do not work out. What are the member protections in this situation? These trusts do not support only automatic enrolment; they provide in-retirement products too—they have quite a wide remit.

The Bill allows for regulations on the sufficiency of master trust systems and processes, but how robust will they be? We are referred to them in the Bill, but we are only referred to matters that will be taken into account. We are unclear as to where the line will be on the minimum prescriptive obligations that will be applied. The Bill is undemanding about governance on investment decisions and there is no mention of this in the impact assessment.

As my noble friend Lord McKenzie and the noble Lord, Lord Stoneham, have detailed, the Bill is insufficient in what it says about member communication and member engagement. These trusts have the potential for huge scale, but there is no explicit requirement for transparency on how workers’ money is invested and stewarded. The Government seem to be reluctant about this, so I join my noble friend Lord McKenzie in asking the Minister, in terms of the consultation exercise run by the Government on requiring transparency on the part of pension schemes about investments, when we will get a response because it closed in December 2015. We could be heading towards two years before we know what the answer is.

Many private pension policy issues are outstanding—several noble Lords have referred to them in the debate, and all of them are compelling and worthy of attention—but auto-enrolment has been transformational. Millions of people are saving, but not because they made an active decision; it is because they had to do nothing. The DWP and the Pensions Regulator have done a good job, but we should recognise that thousands of employers have undertaken their new duty and auto-enrolled their workers in a manner that has kept the opt-out rates low. Employers are a powerful influence on people saving because employees trust their employers, but the thrust of recent government policy seems to invite or exacerbate employer disengagement from pensions.

The complexity in private pensions now, and indeed in any long-term investment product available to the ordinary saver, fed in part by the detailed regulation needed to protect weak consumers, means that it is heading to near impossible for people to understand all the detail. Together with the noble Baroness, Lady Wheatcroft, I hope that it will not be long before the revised proposals for financial and pensions guidance are revealed. For pensions guidance to be meaningful, it needs to be independent and impartial. If it is, it can go much further than guidance from a product provider fettered by its product suite.

The guidance also needs to be specialist, as savers’ low level of knowledge means that guidance needs to diagnose the issues as the consumer’s presenting question is often not the underlying matter that needs to be addressed. It also needs to mitigate market failures which cannot and should not be resolved by making people pay for expensive advice. Our private pension system harnesses inertia on the way in and maximises individual responsibility on the way out. Savers remain insufficiently protected in the first instance and are lacking in empowerment in the latter.

As so many noble Lords have said, there is much to be done. I am very keen to drill down into the robust regime for master trusts being proposed in this Bill because these organisations are going to grow in scale. They will have under their management billions and billions of pounds of ordinary workers’ money, so it is important that at the least we should get the Bill right.

Pensions Act 2014 (Consequential Amendments) Order 2016

Baroness Drake Excerpts

Thursday 8th September 2016 Lords Chamber

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

My Lords, you will recall a previous set of consequential amendments connected to the introduction of the new state pension, together with a set of affirmative regulations that were discussed in February this year. This order makes a small number of further such consequential amendments. They do two things.

First, they ensure that existing administrative arrangements which are designed to facilitate the annual uprating exercise will continue to operate as they do now. Secondly, they give appeal rights to decisions about national insurance credits that count for new state pension purposes.

Article 2 amends provisions of the Social Security Administration Act 1992 which deal with alterations in the payable amount of certain income-related benefits: income support, income-based jobseeker’s allowance, income-related employment and support allowance, universal credit and pension credit. These provisions allow the income-related benefit award to be adjusted without the need for a further decision if the adjustment is due to uprating—whether it is the benefit itself that is being uprated, another benefit is being taken into account, or both. They also enable the decision-maker to take account of the new rates from the uprating date in determining new awards that begin before the uprating order has come into force. These are long-standing administrative easements which help to ensure the effective operation of the annual uprating exercise.

As your Lordships know, where a person is a member of a couple, their entitlement to benefits can be affected by their status as a couple. Therefore, where a working-age income-related benefit is in payment for a couple but the non-claiming partner is a pensioner, the benefit income could include state pensions. The amendments made by Article 2 simply ensure that business as usual will continue where a person’s benefit income includes new state pension. The forthcoming uprating exercise which will determine the rates to be applied from next April is, of course, the first to apply to the new state pension.

National insurance credits which count for new state pension purposes are provided for under Part 8 of the State Pension Regulations 2015. These are new regulations, made under a new power inserted in the legislation by the Pensions Act 2014. The policy is that decisions made in relation to these credits should, as is the case with decisions made in respect of existing credits awarded under the old credits regulations, have the right of appeal. As the law stands, they do not. The amendment being made by Article 3 gives that appeal right. This amendment should have been in place from 6 April 2016 but, unfortunately, it was overlooked. Having identified the omission, we have acted as quickly as we could to put it right. This is why the order will come into force on the day after it is made.

My officials have been working closely with HMRC, which administers credits on DWP’s behalf, to devise a workaround. Once the order has come into force, HMRC will be revisiting the decisions made before it came into force. Where fresh decisions are made, they will carry an appeal right. There will be no substantial difference in outcome between an original decision, had it been appealable and successfully appealed, and a fresh decision that is successfully appealed. A successful appellant will have credits awarded to them. I should stress that to date there have been no appeals. That there have been no appeals is understandable. First, this issue relates only to decisions made in the period between 6 April 2016 and the date the order takes effect, which is around five months. Secondly, it only affects credits which a person has to apply for.

The practical impact of the gap in the law is restricted to decisions about credits which a person has been able to apply for since 6 April 2016. These include new credits to cover past periods in which a person was accompanying their Armed Forces spouse or civil partner on service overseas. Ordinarily, credits awarded for the tax year 2016-17 would be taken into account only in the assessment of new state pension awards made on or after 6 April 2017. However, the new credits for Armed Forces spouses and civil partners could affect awards made this year. A further mitigation is that before a disputed decision can be appealed, it goes through a process of mandatory reconsideration. So the decision-maker has to look at it again and if, on reflection, they consider that the decision should be changed then it can be revised, without the claimant having to go through an appeal process.

We also know that in relation to the new credit for an Armed Forces spouse or civil partner made under Part 8 of the State Pension Regulations 2015, out of 1,647 applications which have been decided up to 5 September 2016, 324 were refused—and of those refusals, 201 were because the tax year in question is already a qualifying year for other reasons.

Finally, based on data from last year—2015-16—about credits decisions made under the 1975 regulations, we know that only a tiny number of disputed credits decisions actually proceeded to appeal.

So with the change in the law imminent, and if they are needed, we anticipate that the contingency arrangements we have put in place will be required for only a very small number of cases. I can also confirm that, in my view, this statutory instrument is compatible with the European Convention on Human Rights. I hope this gives noble Lords reassurance that while it is accepted that justice may be delayed, it will not be denied. I beg to move.

[Baroness Drake (Lab)]

My Lords, it is unfortunate that there has been an oversight in providing a right of appeal in respect of certain decisions on NI credits for the new state pension, but clearly it is recognised that this SI seeks to correct that.

However, I am a little confused because, as I understand it, the decisions potentially impacted by the oversight in relation to the appeal relate to credits for, in certain circumstances, people caring for children under 12, carers and spouses and civil partners of members of Her Majesty’s Armed Forces. It would be helpful if the Minister could clarify exactly which classes of credits were impacted by this appeal oversight, because it is difficult for the layperson to work it out. In particular, will he say whether that category or class of credits includes applications for credits from those caring for at least 20 hours a week, including grandparents?

The concern has to be over the extent to which the omission of a right of appeal may have affected individuals’ access to such credits and whether this SI addresses that sufficiently. Again, it was quite complex trying to follow what exactly was the answer to that question. Is it possible for the Minister to confirm or indicate the number of claimants who have been denied a right of appeal to date as a result of this omission—that is, the population denied that right rather than those who sought, in the absence of that right, to appeal?

The oversight concerning an appeal embraces all decisions on the relevant credits made between 6 April 2016 and the date when these regulations restore a right of appeal. The Explanatory Memorandum refers to minimising,

“the period when there is no right of appeal”,

for these certain classes of credits, but I am not sure how that impacts the individuals who may have sought to exercise a right of appeal during the period. Does this mean, for example, that all those who made applications for such credits which failed will automatically be written to and told that they now have a right of appeal? I am not quite sure how they will be addressed under this SI. It would be helpful to have that clarified.

As the Explanatory Memorandum observes, some credits are posted automatically while other credits must be applied for: for example, the credit for caring for at least 20 hours a week. The omission of an appeal sits alongside what appears to be government reluctance to report on the success of measures to improve the take-up of claimable benefits. The noble Baroness, Lady Altmann, as Pensions Minister, commented that it was regrettable that the number of carers claiming for NI credits was still so low—so I will take this opportunity to ask the Minister whether it is possible to be advised on how many carers claim such credits and the number the DWP estimates could be eligible for such credits, so that we have some idea of what the noble Baroness, Lady Altmann, was referring to when she referred to the regrettably low number of claimants.

My final point is on the uprating of the new state pension and the consequential adjustment to income-related benefits. Sections 150, 150A and 151A of the Social Security Administration Act refer to uprating by no less than earnings or prices. There is no reference to the triple lock in the new state pension. I cannot miss this opportunity, given that there has been much speculation and comment about the longevity of the triple lock, not least from the Government’s previous Pensions Minister. Can the Minister confirm the exact extent of the Government’s commitment to retaining the triple lock?

Given the introduction of universal credit, over time the adjusting of income-related benefits to take account of the uprating of the new state pension will largely be in respect of awards of universal credit and pension credit. The experience of the poorest pensioners will continue to be influenced by the extent to which the uprating of the pension guarantee credit is comparable to, or less generous than, that applied to the new state pension. Can the Minister confirm the Government’s policy for the uprating of pension credit, not least over the course of this Parliament?

[Lord Kirkwood of Kirkhope (LD)]

My Lords, I will make a short contribution to this debate. I think the House is grateful to the Minister for coming forward with these two corrections to omissions. It is reassuring to hear, if I understand the Minister accurately, that these things have been caught in time, so that there has been no real loss to individuals. Like the noble Baroness, Lady Drake, I would like more reassurance, because it was quite a complicated explanation. I think the Minister said that no results in terms of loss of appeals to national insurance credit were discernible.

It would be valuable if the Minister could take careful note that some of us might like to come back to monitoring this in the uprating debate next spring, so that we will have a better chance to look at all the downstream consequences of the changes. In addition, I would like to hear a little more reassurance about paragraph 12 of the Explanatory Memorandum, Monitoring and Review, which says:

“We will not monitor these changes specifically, but will do so through established customer feedback processes”.

I wonder what that means and how meaningful it is when these changes might be affecting tiny numbers, but the tiny numbers might be significantly affected. I am a bit nervous about leaving this to customer feedback. Will the Minister take that point on board?

On another process point, I have always been amazed at the extent of the expertise available to the professionals in the department, the Pensions Directorate and the Pensions Agency, its predecessor. They were expert at coping with this immense detail. The regulations contain two omissions, and that is two omissions too many. They may be relatively minor in their extent, but, as I keep saying to the Minister, the ministerial team has to make sure that there is enough resource in the department to ensure that parliamentary draftsmen get all the details they need, so that omissions are not made in future. The department continues to suffer staff cuts in a way that puts unreasonable pressure on the experts who are good enough to provide us with the regulations that we consider here in Parliament. Will the Minister reflect on that?

It may be that these are two completely one-off exceptions. I hope that it is not the beginning of a trend. Those of us in Parliament who look at these things will be watching very carefully. I do not blame the professionals in the department: if they are underhanded in terms of dealing with the immense volume of ineffably complicated minutiae of legislative proceedings and provisions, they need all the help that they can get.

Again, I welcome the fact that this seems to have been picked up in time, but if the Minister could give us some more reassurance about winners and losers, even if it takes him over the coming months until the next uprating in the spring, I am perfectly content to support these regulations. I support the points raised by the noble Baroness, Lady Drake, but I am perfectly happy to support these regulations and allow them to go forward.

--- Later in debate ---

[Lord Freud]

I will confirm this in writing, but my impression is that there is a right of appeal in these circumstances. It may be that there was no gap in the legislation. I will confirm that, but that is my starting position for 10.

[Baroness Drake]

Before the noble Lord sits down, I just want to take advantage, if I may, to ask about the issue of pension credit. It has been confirmed that it will follow the earnings link, which we know is in the legislation. But in recent times we have seen increases in pension credit greater than what is required by legislation in order to ensure that the poorest pensioners do not receive a smaller increase than those receiving state pension. Given the kind of statements made in the Budget in 2015, is the disposition of the Government still to say that there will be a focus on the poorest pensioners through pension credit and that they will not feel constrained to stay only within what the legislation says but may go above it in order to protect those poorest pensioners? I am interested so I am pushing the Minister on this point.

[Lord Freud]

I always love to answer the noble Baroness in a positive way, but I am not in a position to speculate on the precise levels in any particular year. We do not have long to wait until we see some of the figures. I am feeling incredibly confident about my last answer, almost to the extent that a letter is not required on this particular point. With that response, I beg to move.

Motion agreed.

Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2016

Baroness Drake Excerpts

Monday 14th March 2016 Grand Committee

[The Minister of State, Department for Work and Pensions (Baroness Altmann) (Con)]

My Lords, this order, which was laid before the House on 8 February 2016, reflects the conclusions of this year’s annual review—required by the Pensions Act 2008—of the automatic enrolment earnings thresholds. The review considered both the automatic enrolment earnings trigger, which determines the point when someone becomes eligible to be automatically enrolled into a workplace pension, and the qualifying earnings band, which determines the earnings levels in relation to which the enrolled employee and their employer have to pay contributions into a workplace pension.

The order sets a new upper limit for the qualifying earnings band and is effective from 6 April 2016. The earnings trigger and the lower earnings limit are not changed within this order. The lower earnings limit remains as set in the Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2015. The earnings trigger also remains that set in the Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2014.

Automatic enrolment continues to make workplace pension saving the “new normal”. The proportion of those enrolled who later choose to opt out remains low, at 9%, according to the Employers’ Pension Provision Survey 2015, which is well below the original programme assumption of 28%. Our new awareness campaign, launched in October 2015, Don’t Ignore the Workplace Pension, builds on previous campaigns that sought to normalise pension saving among individuals and is designed to prompt employers—small and large—to find out about their duties and the process of automatic enrolment.

Automatic enrolment continues to bring into its target group those least likely to save for retirement. Low-paid workers and women, who are often likely to be low earners, have traditionally been underrepresented within workplace pension savings. Since 2011 the private sector has seen a 24-percentage-point increase in eligible female participation in workplace pensions, and in 2014 there was no gender gap in participation, with 63% of both eligible men and women participating.

This positive trend is expected to continue as we enter automatic enrolment’s most significant stage: the phased rollout to small and micro employers from now on. Last year saw the successful staging of the first tranche of small and micro employers. Over the next 12 months, more than 700,000 small or micro employers are projected to have started enrolling their employees into a workplace pension. Many tasked with this legal duty are not commercial enterprises but individuals who employ single members of staff, such as nannies, home helps or personal care assistants. At this crucial stage of implementation, it is therefore more important than ever that when deciding the thresholds for joining and contributing to a workplace pension we strike the correct balance between minimising the administrative burden on employers and ensuring that as many people as possible save in a workplace pension.

To describe the impact of the order, I turn first to the qualifying earnings band. This sets the earnings levels within which an automatically enrolled employee and their employer have to pay a proportion of the employee’s income into a workplace pension. Past reviews have generally linked this to the national insurance bands and this has been uncontroversial. As I signalled in my Written Ministerial Statement on 15 December 2015, the lower limit for the qualifying earnings band will remain unchanged and aligned with the national insurance lower earnings limit of £5,824. This order will align the qualifying earnings band upper limit with the new national insurance upper earnings limit of £43,000. By maintaining the alignment with the national insurance thresholds, both at the point where contributions start for low earners and are capped for higher earners, the overall changes to existing payroll systems are kept to a minimum. This decision therefore both ensures simplicity and minimises the administrative burden of compliance for employers in 2016-17.

The order does not change the earnings trigger. This remains at the value set in the 2014-15 order. This trigger is the earnings level at which individuals are eligible to be automatically enrolled into a workplace pension scheme by their employer. We have decided to maintain the existing automatic enrolment earnings trigger for 2016-17, so it will remain at £10,000. Due to anticipated wage growth, and with maintenance of the earnings trigger, we expect that an additional 130,000 individuals will now meet the earnings criteria and be brought into the automatic enrolment population. Of these, we estimate that 71%, or around 91,000, will be women. Individuals earning below the £10,000 earnings trigger but above the lower earnings threshold will still have the option to opt into a workplace pension and benefit from their employer contributions, should they wish.

In conclusion, the decision to maintain the earnings trigger at £10,000 will increase the number of low earners and women who meet the earnings criteria, and who are therefore automatically enrolled into a workplace pension. This decision will increase the total numbers saving into a pension and total savings. It is expected to further increase the number of women eligible to enrol, or be re-enrolled, into a workplace pension.

The decision to maintain the alignment of the lower and upper earnings qualifying bands with national insurance contributions thresholds maintains simplicity, and ensures that there are no new potential administrative burdens on employers at a crucial stage of the programme’s wider rollout. The order therefore ensures that automatic enrolment will continue to provide greater access and opportunity for more individuals to save into a workplace pension with the help of their employer, and those enrolled will have a chance to build up meaningful pension savings. I commend the order to the Committee.

[Baroness Drake (Lab)]

My Lords, these regulations provide an annual event for me. While I consistently recognise the success of the department in rolling out auto-enrolment, and we have all been pleased by the power of inertia to sustain low levels of opt-out, in previous years I have been increasingly frustrated by the number of women being excluded from auto-enrolment because of the rather aggressive way in which the earnings trigger was increased. Last year I came with a little more humility and was pleased to see that the earnings trigger was being maintained at £10,000 rather than tracing the tax threshold, and of course I am pleased that it is being maintained at £10,000 again. Those are the positives, and I am a “half full” person, but even a “half full” person still wants the extra half-glass that remains empty. I continue to remain concerned that only 38% of the eligible auto-enrolment population are women. In my view, that is still too low. A core principle in designing the new private pension system was that it should work for women, and I do not think that that principle is being met with in that percentage level.