Pension Schemes Bill [HL]

Baroness Garden of Frognal Excerpts

Consideration of Commons amendments & Ping Pong (Hansard) & Ping Pong (Hansard): House of Lords
Tuesday 19th January 2021 Lords Chamber

[Lord Vaux of Harrowden (CB) [V]]

My Lords, we had lengthy discussions on Report around the concern that a one-size-fits-all derisking policy could render uneconomic otherwise healthy defined benefit schemes which remain open, and which are not close to maturity. The noble Baronesses, Lady Bowles and Lady Sherlock, have already described the issue in better detail than I ever could, so I will not repeat the case, but it would be a great shame if a laudable intent to derisk had the unintended consequence of leading to the premature end of healthy, well-run defined benefit schemes, which are of particular importance to lower-paid employees. I know that this is not the intention of the Government, as the Minister has just restated; I am confident that the Minister will be able to set our minds at rest by confirming the points asked by the noble Baroness, Lady Bowles, and that Divisions on Motions 4A and 4C will not be necessary.

As this is likely to be the last time I speak on the Bill, I hope the House will not mind if I take the opportunity to put on record my thanks to the Minister for her open and collaborative approach throughout its passage. She and her team have been extremely generous with their time and I am very grateful to them all. I am also grateful to all noble Lords for their patience as I have fumbled through my first involvement in amending a Bill; I have learned a lot from them. The Bill has been an excellent demonstration of the depth of expertise that resides in this House and of how well the House can work across parties to improve legislation. As the Minister said after Third Reading

“we collaborated, we talked, we listened and we made the Bill better.”—[Official Report, 15/7/20; col. 1671.]

I agree with her and, as I said earlier, I very much look forward to that same collaborative spirit continuing into the discussions on the regulations that will put the flesh on to the skeleton of this Bill.

[The Deputy Speaker (Baroness Garden of Frognal) (LD)]

Noble Lords in the Chamber have indicated that they wish to speak. I call the noble Baroness, Lady Altmann.

[Baroness Altmann (Con)]

My Lords, I congratulate my noble friend the Minister on introducing this group of amendments and particularly thank her, the Bill team officials and the Pensions Regulator for engaging with us in such a collegiate manner. The co-operativeness and openness that have been shown to all noble Lords across the House have been hugely welcomed and already commented upon; I reiterate that this approach has improved the Bill and that this will continue into the future when it comes to the regulations. I congratulate the noble Baroness, Lady Bowles, the noble Lord, Lord Vaux, my noble friend Lord Young of Cookham, as well as the noble Baronesses, Lady Sherlock and Lady Drake, on the way in which we have all been able to co-operate on this important issue.

I briefly express concerns about the MaPS dashboard being sidelined and the data-security issues that may be involved in the dashboard, as well as, importantly, the fairness issues that will be dealt with in regulations of CDC schemes. Having dealt with that, I turn to Motions 4A and 4C. It is important that my noble friend can provide reassurance that scheme-specific approaches that have endured so far will be preserved. As the noble Baroness, Lady Bowles, has outlined—echoed by the noble Baroness, Lady Sherlock—there are issues on which I am confident my noble friend will be able to reassure us.

--- Later in debate ---

I believe and fervently hope that my noble friend the Minister will confirm the Government to be in agreement with the issues raised by the noble Baronesses, Lady Bowles and Lady Sherlock, and the noble Lord, Lord Vaux, about avoiding what might be called reckless conservatism or counterproductive caution, so that our £2 trillion worth of defined benefit scheme assets can feed into the rebuilding of our economy and support sustainability both of the schemes and of the environment. I once again thank my noble friend and her team for all their hard work on the Bill, and thank colleagues across the House for all the work they have done.

[The Deputy Speaker (Baroness Garden of Frognal) (LD)]

I call the noble Lord, Lord Davies of Brixton.

[Lord Davies of Brixton (Lab)]

My Lords, I draw the attention of the House to my entry in the register of interests.

I need to ask the indulgence of the House because I accept that it is unusual for a Member who has not contributed at any previous stage of a Bill to intervene at this stage. However, I was not a Member of the House then, and so I was unable to take part. It will be recalled that the Bill was introduced almost exactly a year ago, and it is almost exactly a year ago that I was first aware that I would be joining your Lordships. I watched the entire progress of the Pensions Bill—with only slight exaggeration—like a child locked out of a sweet shop. I so much wanted to take part in the debate and discussions. I am not suggesting for one moment that the incredible work by my noble friends on the Bill has not been effective; I just would have liked to have been with them.

It is also worth mentioning, since the House places some stress on being a repository of expertise, that on Clause 123 I can claim considerable expertise because I am a fellow of the Institute and Faculty of Actuaries. In the course of my actuarial work I was a scheme actuary and I produced valuations, and that is what this clause is about. Since this is the first time that I have had a chance to speak when I have not been subject to a three-minute time limit, I am tempted to speak for a long time about scheme valuations, but I will spare your Lordships that.

Before I get to the substance, I thank the Minister. As I say, I have watched the debates, and I pay tribute to the way in which the Bill has been handled. I highlight that the introduction of what I still think of as collective DC is an excellent move forward and of considerable importance, as is—although of course there is more to be done—the work that has been done on the dashboard.

Turning to the amendments, I strongly support what is proposed here. The issue is the valuation of open defined benefit pension schemes. Real concern has been expressed by employers and trade unions representing their members about such schemes that the changes foreshadowed in the regulatory regime by the legislation will not work for such schemes, and the result will be higher costs and lower benefits. I am glad to see that a response has been made on the behalf of the Pensions Regulator, assuring us that it is not saying, “Don’t worry, just trust us with it all”, and making various commitments about how open defined benefit schemes will be handled. Well, why not put such assurances into the legislation? I certainly hope they will be included in the regulations.

At this point, it is worth acquainting the House with some evidence that the Institute and Faculty of Actuaries has presented on this clause. It said:

“Any employer that has left their DB scheme open to new entrants to date is highly likely to have done so as a conscious choice, and usually with strong support from members and associated trade unions. The risks inherent in DB are typically well understood not only by the employers but also by the scheme’s members, and their trade union representatives. These schemes should therefore not necessarily be treated the same, or need the same level of security, as closed schemes. In our view it is critically important that viable and successful open schemes are not caused to close through adverse legislative change or guidance from The Pensions Regulator.”


I fully endorse what the institute says there and what has been said by previous speakers, with which I concur. What is notable about what the institute said in that statement is that it emphasises how pension schemes emerged from the employment relationship. One thing that really worries me about leaving it to the regulator is that there is not a single person on the board of the Pensions Regulator who has any experience of employment or industrial relations, or at least not significant enough for them to put it in their biographical details.

I have one final point. This debate is about open schemes, as others have mentioned. I do not want anyone to think that the situation is that there is no more debate to be had about closed schemes. The noble Baroness, Lady Altmann, mentioned the issue of closed schemes. I concur with what has been said there, and that we have to get that right as well; there is more debate to be had on that issue. It is not just about open schemes. So there will be a continuing debate, but I hope the Minister will be able to give us some reassurance about the treatment of open schemes.

[The Deputy Speaker (Baroness Garden of Frognal) (LD)]

I call the noble Baroness, Lady Janke, whose name was left off the list inadvertently.

[Baroness Janke (LD) [V]]

My Lords, it is a great pleasure to follow the noble Lord, Lord Davies. No doubt we will welcome his expertise and experience into what is already a considerable group of experts and knowledgeable people in your Lordships’ House.

I support the amendment of my noble friend Lady Bowles. I pay tribute to her for the way in which she has pursued this matter with great skill and tenacity by working across the parties and seeking agreement on a way forward. There is clearly a problem for open DB schemes, as has been expressed to us already, particularly by the railway workers’ union but also by other pension funds. Clearly, as my noble friend has said, it is unrealistic and wrong for the same restraints to be imposed on open DB schemes that are not destined for closure in the immediate future as those imposed on closed schemes. As others have said, if that were to be the case, currently open DB schemes not on the path to maturity would suffer and may close as a result, with dire effects for their membership and a considerable impact on the wider economy.

I very much welcome the Minister’s opening statement, in which she indicated her willingness to ensure that open schemes not on the path to maturity should not be prevented from making more beneficial investments. I hope the five points clearly outlined by my noble friend Lady Bowles will form the basis of the future operation of these healthy open schemes, as the noble Lord, Lord Davies, referred to.

I too record my thanks to all those who have contributed to the Bill, such as the ministerial team, who have provided information and expert advice, and noble Lords who have demonstrated their knowledge, experience and expertise in considering the Bill. They have shown how this House has not only provided scrutiny and challenge but enabled improvements to the legislation and benefits to those who will depend on this in future.

I thank the Minister and her colleague in the other place for their willingness to keep an open mind and not only to listen but to take on board suggestions and use their best endeavours to address the issues raised by Members. I also thank all the teams supporting Members, particularly Sarah Pughe in the Lib Dem office, who has provided us with marvellous support. I very much look forward to the Minister’s response and hope that it will reassure my colleague that she is able to let this matter move forward and that her concerns will be listened to and acted upon.

[The Deputy Speaker (Baroness Garden of Frognal) (LD)]

Does anyone else in the Chamber wish to speak? I think probably not.

[Baroness Stedman-Scott (Con)]

My Lords, I will first respond to the question of my noble friend Lady Altmann on long-term horizons. The scheme funding measures in the Bill, together with secondary legislation and a revised scheme funding code of practice, seek to support trustees and employers to manage this scheme funding with a focus on longer term planning. As now, the scheme’s liquidity requirements, investment timelines and the amount of risk each scheme can support will depend on factors including its maturity and the strength of its employer covenant. Trustees can and do invest in illiquid assets such as infrastructure, and our measures do not seek to discourage such investments where they are appropriate.

I also thank the noble Lord, Lord Davies, for his contribution. The thought of being locked out of a sweet shop gives me more heartache than your Lordships will know. We will do our very best to make sure that it does not happen again. We welcome the noble Lord to the House and have no doubt that he will add a lot of expertise. He has joined the formidable band of brothers on pensions and we are very glad he is with us.

I am very grateful to the noble Baronesses, Lady Bowles and Lady Sherlock, for their amendments. I am also grateful to all those who have contributed to the debates we had relating to schemes that are open to new members. They have been highly influential and have helped us refine our thinking on how schemes in these circumstances should be treated. The Government are very sympathetic to the thinking behind these amendments, but there are good reasons why we do not want to deal with these matters on the face of the Bill.

One of the main drivers behind our reforms to the scheme funding arrangement is the desire to be able to more effectively tackle the small minority of schemes and employers who push the flexibilities of our scheme-specific arrangements further than is appropriate, to the detriment of their members. As the detail of the arrangements is necessarily complex, there is a real risk that attempting to deal with it in primary legislation will inadvertently weaken the funding regime as a whole and undermine the ability of the Pensions Regulator to tackle the very issues that these reforms were designed to address. Rather, we think that the best place to deal with these matters is in regulations—following a full consultation. That way, we can work closely with the full range of interested parties, effectively calibrate the system and get the right balance between member security and employer affordability. By placing such matters in regulations, we will retain the flexibility in the future to adjust the relevant parameters should the evolving economic situation demand it.

What I can do now is set out some key principles of how we will proceed with framing the secondary legislation, which I am happy to put on the record and am confident will provide noble Lords with the reassurance they are looking for. Much of our original thinking was driven by the fact that most schemes are closed and maturing, but we completely accept that we need to be clearer about our thinking on other important groups of schemes. These are the schemes that continue to admit new members. Many of these schemes will not be maturing in the same way as closed schemes and some of them will be admitting sufficient new members to avoid maturing at all. A genuinely scheme-specific approach has to recognise the characteristics of such schemes and treat them appropriately. I am therefore grateful to the noble Baroness, Lady Bowles, and others for helping us to focus our thinking on these schemes. Let me make it clear now that the Government, having further considered the debate on the Bill and feedback from the pensions industry, fully intend that the defined benefit funding regime will remain scheme specific, and any bespoke approach should build on this foundation. This regime will continue to apply flexibility to take account of individual scheme circumstances.

The department confirms that detailed provisions for ongoing defined benefit funding, including any necessary assessment criteria and metrics, will be set out in regulations and in the Pension Regulator’s defined benefit funding code of practice, which will acknowledge the position of open and less mature schemes. As noble Lords have said, Ministers at the DWP have gone to great lengths to make themselves available to those who have pressed them on the position of schemes that remain open to new members. Both Ministers and officials have had extensive discussions with interested Peers, and others, including on schemes that remain open to new members. I also understand that interested Peers have been able to discuss these matters in detail with senior officials at the Pensions Regulator. This has been a highly productive engagement and, as I have said, it has been instrumental in guiding us to a better and more refined policy position. That is something I expect to continue.

Prior to the publication of the draft regulations, the Government can commit to an engagement programme with interested parties, including a range of schemes. These will include those remaining open and immature. They will launch a consultation document informed by this engagement. The Government will also publish a regulatory impact assessment of the draft regulations and the Pensions Regulator will publish an impact assessment alongside its revised funding code. These will include analyses of different de-risking approaches on members and sponsors of all schemes, including those that are open or immature, and those that are not targeting buyout.

We absolutely do not want to see good and viable defined benefit schemes close unnecessarily. We want them to be treated on their merits in a truly scheme-specific regime. We have said that open schemes should be able to provide the same level of security for members as closed schemes. I want to make it absolutely clear that this does not mean that they necessarily need to invest in the same way. We simply mean that members in an open scheme should be able to enjoy the same level of confidence that the benefits they have worked hard to build up will be paid in full, as for members in a closed scheme. We completely agree that open schemes that are not maturing and have a strong employer covenant should not be forced into an inappropriate de-risking journey. We will ensure that such schemes and employers which can support a higher risk and higher expected reward investment strategy can continue to invest in this way. If they are already doing the right thing, they should not need to significantly increase contributions as a result of these new measures.

The Government accept that for some schemes, depending on the circumstances, de-risking is not the best way to safeguard members’ benefits. Member benefits can be best safeguarded by an appropriate integrated risk management strategy determined after careful analysis by the trustees, which takes account of time horizon, liquidity, employer covenant and appropriate diversification.

This is the way that we intend to proceed as, with the help of close engagement with interested parties, we work on the regulations that will set out the detail of how the funding regime will operate. I hope that what I have said reassures noble Lords of our intentions and that the noble Baroness will feel able to withdraw her amendment.

[The Deputy Speaker (Baroness Garden of Frognal) (LD)]

My Lords, I have not received any requests to speak after the Minister, so I now call the noble Baroness, Lady Bowles of Berkhamsted, to reply.

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, I am not normally a speaker on DWP matters—I am usually in the business and Treasury box—but, after a first foray on this Bill, or into this sweet shop, as the noble Lord, Lord Davies, would put it, maybe I should come again.

I thank all those who have spoken in this debate. The issues have already been explained and the Minister in reply has given the reassurances that were sought. Before I formally withdraw the amendment, I thank the Minister for the way in which these proceedings have been conducted, for her geniality and openness and, similarly, thank the officials from the department and the Pensions Regulator, and everyone for tolerating me.

As has been said, the issues are complex and interlinked. I am grateful to hear the Minister say that the debate around this has been influential and has refined thinking. I acknowledge that some employers will abuse the system and, because of its complexity, I accept that the Government do not want to put words into the Bill that are hard to change and which might give rise to unintended consequences. Of course, I would have preferred to see a little something there, but I understand the reasoning. I accept that there will be good consultation around the regulations and that all of us are looking for the same results.

I thank again noble Lords who have spoken today and supported me in my previous endeavours and all those who gave their expertise in earlier stages of the Bill. I am pleased that we are joined by the noble Lord, Lord Davies of Brixton, and think that we will benefit from his presence greatly in future. Others who have also assisted include my noble friend Lord Sharkey from these Benches, as well as the noble Baronesses, Lady Drake and Lady Young. I also thank the various pension schemes that have been generous with their time and information, so we were able to look at the sort of spread of assets and risks that they were talking about and did not come to this debate without a good basis of information; we knew that our arguments were supported.

It has been a good co-operative effort. I doubt that it is the end of the story, as there will be more consultations and things to watch. I hope and expect that the engagement with noble Lords by the Minister and the department and our co-operation with one another will continue. For now, I beg leave to withdraw the Motion.