Pension Schemes Bill [HL]

Baroness Stedman-Scott Excerpts

Committee stage & Committee: 1st sitting & Committee: 1st sitting : House of Lords
Monday 24th February 2020 Grand Committee

[Lord McKenzie of Luton (Lab)]

My Lords, in moving Amendment 1 I will speak also to Amendment 34. The latter seeks to insert into the regulations’ objectives the promotion of DB schemes. Amendment 1 adds as one of the things that TPR may take into account when considering an application for a collective money purchase scheme the potential impact of such a scheme on the DB landscape. Together, the amendments are a peg on which to hang a discussion about the position of DB schemes and their future, especially outside the private sector, and to see what more might be done to sustain them for future accrual.

As the White Paper reminds us, DB schemes currently have 10.5 million members, with £1.5 trillion under management—a not insignificant component of the pensions landscape. Notwithstanding this, DB schemes continue to close to future accrual or membership. Hitherto, the alternative has been some DC scheme, and now there is the prospect of CDC schemes in the future.

In times past, DB schemes were the stalwarts of the occupational pension system. Things looked good, with seeming scope for regular improvements in benefits and with surpluses and contribution holidays available. Indeed, were there not concerns at the Treasury about the system being used for tax shelters? These halcyon days have diminished through a combination of factors: more realistic actuarial assumptions; increasing longevity of members; impacts of inflation; falling asset prices; and, probably, less effective collective bargaining.

Much of the content of the Bill is about maintaining and building confidence in the DB system, but with a stronger regulator, and improving scheme funding rules. We support this approach. It is a pity that the Bill did not include a framework for consolidation but we note that this is to come. Perhaps the Minister will give us a timeline on that.

Although DC schemes remove longevity risks from employers, they are generally characterised as having lower contribution rates, doing nothing for our chronic undersaving. The Minister in the other place has declared that he does not want to see the advent of CDC as being a channel to further closures of DB schemes. In particular, he clarified that the Bill’s proposals do not provide a back door to converting DB rights into CDC rights and are not intended to encourage public service and/or DB schemes to convert their accrued benefits.

Can the Minister say how this intention is manifesting itself in the Bill? The data that have been presented to us show that CDC schemes can generate a pension income significantly above that of a DC arrangement, but of course this is not guaranteed. The question arises as to whether the lure of higher returns could be a catalyst to more DB schemes closing to future accrual. There are restrictions that make this difficult, at least at the moment—single or associated company arrangements being but one. Can the Minister say what mechanisms might be contemplated to deflect such moves, if it is the business of government to do so?

The briefing makes it clear that an employer remains within its rights to close an existing DB scheme to new accruals and to offer pensions on a different basis going forward. We know that it has become common for employers to close DB schemes and to open DC schemes in their place, but the briefing note says that CDC schemes should be seen in this context, as a new option for employers looking to develop their pension offering. Closing DB schemes could indeed be such a channel. I beg to move.

[The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Stedman-Scott) (Con)]

I thank the noble Lord, Lord McKenzie, and the noble Baroness, Lady Sherlock, for tabling these amendments. Taken together, they seem to explore the Government’s response to the continuing decline of defined benefit pension provision in the UK. I will address the specifics of these amendments but, first, it may help if I talk about the Government’s approach to workplace pensions in general.

The Government’s priority is to promote pension savings for later life through workplace pensions. However, it is for employers to decide what form of provision to make. This is part of their remuneration strategy to recruit and retain quality employees. The Government’s role is not to tell employers what sort of pension to provide, but to promote workplace pensions and to set some minimum standards. That is why we require employers to automatically enrol all eligible employees into a qualifying workplace pension scheme and to make a minimum contribution to that scheme.

The majority of defined benefit schemes are now closed and, as a result, the defined benefit landscape is changing. Most schemes are maturing with fewer contributing members and more receiving pension benefits. The Government’s 2017 Green Paper and 2018 White Paper did not seek to prevent changes to the pension landscape, but to protect the interests of the large number of members who will still rely on defined benefit schemes for their retirement income. That is what the scheme funding measures in this Bill do.

Before the introduction of automatic enrolment in 2012, the decline in defined benefit pensions was not matched by increases in other types of pension. Overall, therefore, pension participation was in decline. Automatic enrolment has been hugely successful: over 10 million people have been automatically enrolled into a workplace pension and the decline in participation has reversed. The number of eligible employees participating in a workplace pension increased from 10.7 million in 2012 to 18.7 million in 2018.

Amendment 1 seeks to put a duty on the Pensions Regulator to take into account the impact on defined benefit schemes when considering an application for authorisation of collective money purchase schemes, also known as collective defined contribution—CDC—schemes. Given the term CDC is widely understood, I shall use it throughout these debates. While the Government do not think they should tell employers what sort of pension they should provide, beyond setting some minimum standards, they want to foster innovation, so that employers have real choices in the type of pension they offer.

I know that concern has been raised that CDC schemes will replace defined benefit schemes. The noble Lord, Lord McKenzie, raised this at Second Reading. I want to be clear that the Government do not see CDC schemes as a replacement for defined benefit schemes.

Royal Mail, the employer actively looking to set up a CDC scheme, does not believe that either. Indeed, it has always seen its CDC scheme as an alternative to its individual defined contribution schemes. To manage cost and risk, employers are moving away from defined benefit schemes towards individual defined contribution schemes. CDC schemes should be seen in this context. For example, Royal Mail has been working on a CDC scheme in partnership with the Communication Workers Union because both sides felt that it served Royal Mail employees better than an individual defined contribution scheme. I am sure that noble Lords will recognise what a positive message this sends about CDC schemes.

Royal Mail is not alone. There is growing evidence that many employers with defined contribution schemes want to provide their employees with a pension scheme that provides an income in retirement. CDC schemes are a new opportunity for employers and employees to choose a pension scheme that works for both. I point out that the Bill includes clear safeguards for existing defined benefit pensions: Clause 3 prohibits public service pension schemes being CDC schemes, and Clause 24 prohibits accrued defined benefits being converted into CDC benefits. Therefore, accrued defined benefit pensions cannot be put at risk by the existence of CDC pensions.

I understand the desire to ensure that members in good-quality defined benefit schemes continue to have access to guarantees from their employer, but the amendment could have unintended consequences for members. If the amendment meant that a CDC scheme could not be authorised, it seems likely that the employer would close its defined benefit scheme and offer an individual defined contribution scheme instead. It is important that the decision on whether to authorise a CDC scheme is based on the criteria and information relating to that scheme. It would not be fair on employers or employees to cloud the issue by linking the authorisation to consideration of other types of schemes. Requiring the regulator to make judgments about different types of schemes would also have implications for its role.

Amendment 34 provides for a new objective for the Pensions Regulator: to promote the membership of defined benefit schemes. The regulator exists to protect workplace pensions in the UK. It makes sure that employers put staff into a pension scheme and pay money into that scheme, and that workplace pension schemes are run properly. It does not matter whether members are in a defined benefit scheme, a defined contribution scheme or a CDC scheme—the regulator’s role is to protect their scheme.

As I said in my introduction, the Government’s priority is to promote pension savings for later life and set minimum standards for employer-provided workplace pensions. The Pensions Regulator is required to ensure that those minimum standards are met. The Government do not consider it appropriate to task the regulator with promoting particular types of pension schemes. This could undermine its role as the regulator of workplace pensions in the UK generally. It is for employers to decide what type of pension they provide; employers who provide defined benefit pensions need to be genuinely able to afford the costs and bear the risk. Promoting defined benefit pensions to employers which may be unable to do this would conflict with the regulator’s other objectives, such as protecting members’ accrued benefits and minimising the risk of calls on the Pension Protection Fund.

The noble Lord, Lord McKenzie, asked why superfunds are not in the Bill. Developing a new regulatory framework for them is a complex task. We are working hard across government and with relevant stakeholders to build consensus on the right approach. We aim to publish our response to the consultation shortly; it will set out in more detail our proposals for a future legislative framework. Once that it is complete, we will look to legislate as soon as we can.

I hope that the noble Lord, Lord McKenzie, and the noble Baroness, Lady Sherlock, recognise that the Government’s approach is sensible and proportionate. I urge the noble Lord to withdraw the amendment.

[Lord McKenzie of Luton]

I thank the Minister for that full reply. We never intended to press the amendments anyway. As I said at the start, it is an opportunity to have a discussion about where the Government are going, particularly on DB schemes.

I am still a little unclear. I quoted one of the briefing papers which the Government provided in preparing for this debate. It referred to a new option for employers looking to develop their pension offering going forward, which seems inconsistent with what we had understood to be the commitment made earlier by the Minister: that the Government do not want CDCs to undermine the existing DB regime. There seems a risk of doing that, and that in many ways was the tenor of the reply she gave: it is not up to the Government, it is up to employers. Of course we accept that there is a role for employers, but is there not an obligation to work with employers to ensure that the best type of arrangement is available? Historically, that has been DB schemes.

Is not a test for this the extent to which we are saving enough as a nation? We do not save only through pensions but saving through pensions is clearly a very important part, particularly as the Minister instanced the auto-enrolment provisions, which we agree have been a huge success. One might just reflect for future policy that they were conceived under a Labour Government, with the legislation prepared under a coalition Government and introduced under a Tory Government. Perhaps there is an example in pensions policy of how we might better work together on other matters.

I will summarise my concerns. It is good that CDC schemes are available to provide, generally, a better return than can come from a straight DC scheme. It is not all upside, as we shall discuss in other amendments, but it is important that we do not lose sight of the benefits available under a DB regime which, apart from other things, had contribution levels way above pretty much anything that arises under a DC scheme. That should concern us all: the level of saving that is taking place.

Having said that, I do not know whether the Minister wants to come back.

[Baroness Stedman-Scott]

I thank the noble Lord for the observations he has made. I am thrilled that noble Lords agree that auto-enrolment has been a great success and a great way for people to save for their retirement. The role of government in all this is to encourage saving through automatic enrolment, pensions and other savings vehicles. The noble Lord has raised some valid points. I will take them back to officials and, if we need to write to him or meet him to talk about them further, that is what we will do.

[Lord McKenzie of Luton]

I thank the Minister for that. I stress, in agreeing about the success of auto-enrolment, that it was started off by a raw junior Minister in the DWP getting that early legislation through.

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[Lord McKenzie of Luton]

This has been a good debate. I think we are minded to support this measure. I am not very clear in my mind as to precisely how Royal Mail is tackling this issue at the moment, and if the Minister were able to deal with that in her response that would be a help. One thing that has come through from the Government’s own thinking about this is that wherever we end up on it, there must be specific rules. This should not be just a matter of trustees’ discretion; it should be clearly set out in the rules. I shall wait to hear what the Minister has to say.

[Baroness Stedman-Scott]

I thank noble Lords for tabling these amendments linked to fairness. Concerns about fairness often arise in respect of CDC. I fully understand noble Lords’ interest in this important matter. I share their commitment to ensuring that members of CDC schemes are treated fairly. However, I do not agree that the amendments proposed are necessary to protect members.

Ensuring that members are treated fairly has been a central part of our work on CDC since we began. We have been mindful of the problems that other countries have experienced—for example, in their approach to adjusting benefits—and we have learned from them. Envisaged regulations under Clause 18 will mean that scheme rules will require that there is no difference in treatment between different cohorts or age groups of scheme members when calculating benefits and applying benefit adjustments. If they are not compliant, the scheme will not be authorised.

Noble Lords have previously expressed concern that a significant number of older members might choose to leave a CDC scheme shortly before retirement and that this may pose a risk to younger members. Noble Lords will note that one of the authorisation criteria in Clause 12 relates to the soundness of the scheme design. It is intended to protect members from being enrolled in ill-considered and poorly designed schemes which are unlikely to remain viable over the long term.

It is important that due consideration is given by employers to a scheme’s viability at the design stage, including to how the benefits aspired to will be affected by significant potential events, whether this is a reduction in investment returns or in membership. Envisaged regulations to support the design requirement will aim to ensure that sufficient evidence is provided to satisfy the regulator that appropriate stress testing of the scheme’s design has been undertaken and that a suitable strategy is in place for monitoring and reacting to threats to a scheme’s viability. These are complex matters, so we will consult thoroughly on what the regulations should require in this respect and more widely. We want to ensure that the scheme design is subject to appropriate scrutiny by the regulator at the initial application stage and on an ongoing basis. I am happy to discuss the scheme design requirements in more detail when we reach the relevant clauses.

My noble friend Lady Altmann mentioned cash equivalent transfer values. We propose that a member’s transfer value will be calculated by reference to the present value of the assets currently held that are needed to pay the anticipated pension whenever that is due. That means that, if every member chose to leave at the same time, they would get the present value of their anticipated pension. Nobody would receive anything that was due to anyone else, as the valuation process means that the assets and the cost of all the anticipated pensions should always be in balance. It also means that a member transferring and a member staying always keep the present value of their rights in the scheme and nobody receives anything more than is due to them from the scheme, whether they stay or go.

The noble Lord, Lord Sharkey, asked about the impact of cross-subsidisation on younger members in CDC schemes. Such members may get less value from flat-rate contributions if they decide to transfer out of the scheme before retirement. It is important to remember that pension schemes are long-term saving vehicles, designed to deliver an income in retirement. Our focus is on the long-term benefit of a CDC pension scheme for the scheme members. While CDC benefits are money purchase benefits, a CDC scheme’s purpose is to provide a variable income for life in retirement for its members and not a transferable cash sum.

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[Baroness Bowles of Berkhamsted]

I would like to intervene at this point because a lot has been spoken about. When there is a calculation of the percentage of the value of the assets for an individual transferring out, which is done on various actuarial calculations, will those actuarial calculations be able to take into account long-term market risk so that there is an element of the fact that if you are withdrawing at a time of high markets, you may be getting more, as I said, than would have been your long-term due? If there is no such mechanism, have we learned nothing from mutual funds running on net-asset value, where there are runs and the people who are slowest to move and get their money out are the ones who are trapped with low value? We have invented things such as gating mechanisms to cope with that. There is potentially such a thing as a run on a pension fund, so how will we guard against that?

[Baroness Stedman-Scott]

The noble Baroness is renowned for her forensic abilities. I am advised that we will need to write to her on that particular question. In fact, we are meeting this week, and I hope we can get her an answer that is accurate and share it with other noble Lords, if that is acceptable.

I recognise and share noble Lords’ concerns. I assure your Lordships that the Government are not oblivious to the potential risk in CDC schemes. I hope my explanation has reassured your Lordships that our proposed legislative framework is designed to ensure that both employers and trustees are alive to these threats when designing their CDC schemes, and that the Pensions Regulator is able to undertake appropriate scrutiny both before and after granting authorisation. With that, I urge the noble Lord to withdraw his amendment.

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The effect of the amendment is to place the members in the CMP scheme in a comparable position to those in a master trust, by adding the employer to those parties to which the regulator can specify requirements to provide funding to meet the financial sustainability requirement. It is my understanding that Royal Mail, on its own discretion, intends to make a contribution to some form of financial sustainability, which is welcome if correct. The Bill, however, provides the enabling legislation for all future CMP schemes and, as such, the Pensions Regulator should be given the power to specify the requirements that an employer should meet in respect of the financial sustainability requirement. The amendment would explicitly give the regulator that power. I beg to move.

[Baroness Stedman-Scott]

I thank noble Lords for tabling the amendments. I turn first to the proposed amendments to Clause 14. The fundamental aims of the financial sustainability requirement are to avoid disruption to members through CDC schemes failing because of inadequate financial planning or resources and to ensure that, if a scheme experiences a triggering event, the costs of dealing with that and continuing to run on the scheme for an appropriate time can be dealt with. These costs may include costs of transfer and wind-up, if that arises.

As these will be new schemes, it is possible that the up-front costs of establishing and running a CDC scheme may not be covered in full by the charges paid by members. Similarly, if a scheme experiences a triggering event, it might also find that it has insufficient resources to meet the cost of resolving that event without further recourse to members’ funds. The financial sustainability requirement is intended to protect against these risks.

It is envisaged that there will be a variety of mechanisms for financing these costs. As the noble Lord, Lord McKenzie, identified, those are likely to involve support from establishing and connected employers. We will consult on this matter before bringing forward regulations, but a range of options is likely to be available—for example, an amount held in escrow or contingent assets.

Envisaged regulations made under Clause 14(3) will ensure that the regulator has sufficient evidence to satisfy itself that the financial sustainability criterion is met and that members are protected. We intend that these regulations will require evidence of any financial commitment by the establishing employer or connected employers and that the scheme has access to the financial resources it needs, including in the event of employer insolvency. If the regulator is not satisfied that the scheme is financially sustainable, the scheme will not be authorised to operate by the regulator, so it is in an employer’s interest to ensure that its scheme meets the envisaged requirements. We do not intend to require CDC schemes to hold a minimum level of capital to meet relevant cost. If authorisation is to work effectively, the Pensions Regulator must be able to consider the risks posed by each scheme to determine whether adequate mitigations are in place. I believe that that is a fairer and more effective approach.

I turn to my noble friend Lady Altmann’s amendment. It would add to the illustrative list of what regulations may require the regulator to consider when deciding whether the processes used to run the scheme are sufficient to ensure it is run effectively. I appreciate the importance of good systems—

[Baroness Altmann]

I thank my noble friend. Before we finish on this topic, I hear what is being said but what I was trying to achieve with Amendment 5 was to avoid repeating the mistakes already extant in automatic enrolment schemes. We are setting up a brand-new system, and there seems to be nothing in the current processes which would require checks on data accuracy. The processes mentioned in Clause 16 include records management, in subsection (4)(d), while subsection (4)(b) recommends standards for IT systems’ “quality”. However, there are no processes to verify on an ongoing basis a regular audit of whether the data are correct. We know that data are currently incorrect in a large number of auto-enrolment schemes. Even the modern ones are full of errors.

I am trying to introduce something that would help us learn from experience and avoid repeating the kind of mistakes that we know have arisen. They are not intentional mistakes, but if we put in place right from the start processes which require data audits and, potentially, capital buffers as well, against mistakes that have not been foreseen, we will set up a more robust system for the longer term.

[Baroness Stedman-Scott]

I thank my noble friend for her intervention. My understanding is that CDC schemes are obviously new and will not carry any legacy data issues, which should lower the initial risk. The focus will be on not cleaning old data but establishing strong processes for loading, managing and maintaining data, with regular checks to ensure that quality is maintained. If that does not answer my noble friend’s point in the way she would like we can deal with it when we meet later in the week, if that is acceptable.

I appreciate the importance of good systems and processes. However, the proposed addition to the illustrative list is unnecessary, as we already envisage that appropriate requirements relating to the accuracy of member data and record keeping will be included in regulations. Schedule 5 of the illustrative CDC regulations provides an early indication of our thinking in respect of member records. However, we will consult to ensure that what is included in the regulations is appropriate and that sufficient scrutiny is applied. We also want to ensure that any requirements are proportionate.

In conclusion, I hope that my statements today and the illustrative regulations deliver sufficient reassurance of our commitment to ensuring that CDC schemes are financially sustainable and that systems and processes for member data are sufficient and effective. With that, I ask the noble Lord to withdraw his amendment.

[Lord Sharkey]

I should like to ask one or two questions about the buffer concept. It seemed to me that a lot of what was being described was the equivalent of a buffer in some ways, but it was not entirely clear how it would be produced, brought forward and exercised. It was not entirely clear to me whether the members of any proposed CDC scheme would be given a choice or say in whether the scheme should go ahead without buffers, as the RM scheme will, or whether it should include buffers. It seems to me that there is merit in consulting the workforce about which they prefer.

In paragraph 1.3 of the consultation response the Government said:

“We do not want to preclude or legislate against buffers in CDC schemes—there are perfectly good reasons why employers and workforces may wish to provide for a scheme that mitigates volatility in this way, and we agree that a buffered scheme could be appropriate in some circumstances.”


Those circumstances might very well include avoiding frequent and disconcerting changes in benefits but also the provision of wind-up or restructuring costs, even if that does somewhat impact intergenerational fairness. My request is for clarity about this cloud of assets or obligations that might substitute in some way for capital. I am not clear about how that will happen. It would be good idea to make sure that in any future schemes the workforce is consulted about whether or not they prefer a buffer.

[Baroness Sherlock (Lab)]

May I, too, seek clarification? I was not entirely sure what the Minister was saying about where the money could come from for a buffer. I think I understood her to say that the regulator would not approve a scheme unless the sustainability criteria had been met and that they could be met only if an adequate amount of money was placed in, for example, escrow. Is she saying that a scheme would be approved only if the regulator was satisfied that enough money had been provided up front by the sponsoring employer to fund the continuity options in the event of a triggering event? If so, why does she not simply accept this amendment? That is all it says.

[Baroness Stedman-Scott]

I shall turn first to the point raised by the noble Lord, Lord Sharkey. The funding of future inflation increases provides the headroom funding that is required. The answer to the question asked by the noble Baroness, Lady Sherlock, is yes, the money would be in an escrow account if needed.

[Baroness Sherlock]

So could it never be the case that in the event of a triggering event, such as a wind-up, an employer pulling out or an employer downsizing, money would have to come from members’ contributions to fund the continuity option? I am sorry to push this, but this kind of clarity is important.

[Baroness Stedman-Scott]

Noble Lords must forgive me for turning to my friends. This is my first Bill. The answer to that question is no, it should not be.

[Baroness Bowles of Berkhamsted]

Now I am confused. In the previous group, when we were talking in anticipation about buffers and intergenerational fairness, the Minister said that there would be headroom funding. I understood that to be up front, getting the scheme up and running, but the Minister then said that that was going to be spent. I do not think she said what it was going to be spent on, or have I got the wrong end of the stick?

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[Baroness Stedman-Scott]

Let me try to be helpful and to placate noble Lords on this: money needed to wind up should come from the employer. A scheme would not be authorised if it did not have this financial sustainability from the employer. Is that helpful?

[Lord Sharkey]

But the scheme does not include a buffer and I am still not clear about the money. If it is going to come from the employer, where does it say that they have to do that? All we are talking about is a notion of fairness, but people may disagree about what that means.

[Baroness Stedman-Scott]

I think the original question was around the consultation we are going to do on this. This will be resolved in the consultation.

[Baroness Neville-Rolfe (Con)]

I think this shows that it is important that we understand what the statutory instruments in this area are going to look like. It will obviously lead to a clearer conversation if the Government are able to move on that. The second thing is that, in my experience, things do not necessarily go the way you expect. When I sought my pension estimate before I retired, I ended up a year later getting a less generous pension than I had anticipated, perhaps because things had changed on the underlying demographics—health or whatever. We have to be quite careful to take account of the complexity of these things in the sorts of SIs that we make. Clearly, we need to consult on them for that very reason.

[Baroness Sherlock]

On a final point of clarification, if I have heard the Minister correctly—and I will read the record—I think she is trying to reassure us that she will consult and that this will be dealt with in regulations. The problem is that Clause 14(4)(b) states that regulations may include provision,

“specifying requirements to be met by the scheme relating to its financing, such as requirements,”

et cetera. All this amendment does is insert the words, “or by an employer”, because of the concern that the Bill may allow regulations to be made requiring the scheme to put money in. We want to be sure that the Bill will require the employer, rather than the scheme, to provide the money. That is why the amendment is written as it is, accepting that the Government will have to work out what is in the regulations and then what the regulator actually did as a result. Are the Government confident that the wording of the Bill will allow them to place a requirement on the sponsoring employer to do what the Minister has described?

[Baroness Stedman-Scott]

I am advised that we are confident that that will be the case.

[Baroness Altmann]

In that case, I seek clarification on what would happen if the employer became insolvent. There would still be the same problem that members’ pots would be needed to cover the costs of wind up, because they could not be got from the employer. If there is not a capital buffer up front and we rely on waiting to recover it from the employer, we may still end up with the same kinds of errors that we had in defined benefit schemes, where there was nobody to get the money from and the members ended up with potentially no pension.

[Baroness Donaghy (Lab)]

In the absence of knowledge in this area I have had to resort to listening to the debate. I think the consultation is important. We need to be clear what the headroom is, what the buffer is and whether the headroom is to take account of inflation, as the Minister says. Taking account of inflation has nothing to do with sustainability, emergency action or catastrophes of other kinds, so we need clarity about, first, what questions are asked in the consultation and, secondly, what responsibility is taken.

It is all very well saying that the regulator will look at this and make sure it is sustainable, but I am not sure that the history of the Pensions Regulator gives me a good night’s sleep. I apologise if I have got it wrong, but there seems to me to be a bit of confusion about what this headroom or buffer is for, who takes responsibility for it and how the Pensions Regulator will keep a look out. It is not clear to me that statutory instruments will do it. However, if the Minister is confident that they will, we need to see them.

[Baroness Stedman-Scott]

Our job is to give noble Lords comfort and to clarify matters, which we must do. I am advised that if there were to be an insolvency of an employer, that would be anticipated up front when the scheme was established and some provision would have to be made for the risk of it happening. It would of course be part of the ongoing monitoring.

With regard to the helpful suggestion from the noble Baroness, Lady Donaghy, about the questions in the consultation, I might be getting myself into trouble—I am very good at that—but maybe we could write to noble Lords who have taken part in this debate and ask for their opinions about what questions should be included.

Apart from those matters, if there are any other points that I have missed out, or if I have not done as good a job as I should have, we will write to all noble Lords to clarify.

[Baroness Sherlock]

Would the Minister be kind enough to write in any case, clarifying the helpful points that she has made here? They came in bits, so it might be useful to have a note setting them all out together, if that would be okay.

[Baroness Stedman-Scott]

I am happy to make sure that that happens.

[Lord McKenzie of Luton]

I beg leave to withdraw the amendment.

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[Lord McKenzie of Luton]

The noble Lord, Lord Sharkey, has made a powerful case on these provisions and we look to support him. There must at least be a strong reason to say why they cannot be pared down and need to be as wide as they are. If there is an argument for them, at least they should be pared down. In so far as whether this is doable—the noble Lord said he is not sure what the answer is—in some of these areas, I am not sure that we know what the question is, which is deeply worrying. These things need to be sorted out because, as they stand, they are going to undermine a scheme that generally has a lot of support, particularly our support, in principle. I would like to get it back on track, so that we can deal with it, deliver it and not be waylaid by these very real concerns over delegated powers.

[Baroness Stedman-Scott]

My Lords, I recognise the expressed concerns over the regulation-making powers in Part 1 of the Bill and how they might be used. There has also been comment on the principles underlying the choice of negative or affirmative procedure for some of the regulations. This is why we have shared illustrative draft regulations to help noble Lords understand how we intend to use these powers, but the secondary legislation to be made under the proposed delegated powers can be laid before this House in final form only after Royal Assent, in accordance with the procedures set by Parliament. This House will have the opportunity then to scrutinise the secondary legislation.

There are important legal principles at stake before the proposed delegated powers can be exercised properly. In many instances, the Government will wish or have promised to consult further on the technical substance, particularly in Part 1. There are instances where there may be a statutory requirement to consult because of a connection to existing legislation. There are instances where there may be a need to await the outcome of consultation being undertaken by the regulator or where consultation is needed with professional bodies. Finally, there are instances where proposed delegated powers are sought to enable the Government to react to future developments.

Where there is an intention, promise or legal requirement to consult on the substance of secondary legislation, the legal position is clear that the Government cannot prejudge the outcome. Had the Government purported to draft all the secondary legislation at the same time as drafting the Bill, that would have entailed, inevitably, prejudging the substance without the benefit of any necessary consultation or consideration of the eventual wishes of Parliament. Likewise, it is more appropriate to consult once the Bill is passed, so as not to prejudge the intentions of Parliament.

Those are the points of principle. I will now deal with the point that the provisions intended for future secondary legislation could, nevertheless, be written into the Bill, at the inevitable cost of delaying introduction. This approach is consistent with the approach to previous pension schemes Bills, recent examples being the Pension Schemes Act 2017 and the Pension Schemes Act 2015. As with those Acts, the provisions in the Bill embody the fundamental policy.

Provisions of a more technical nature, or which are by their nature liable to change, are delegated to secondary legislation. This staged approach has two benefits. First, it enables flexibility to ensure that the legal framework remains appropriately tailored to developments in the pensions industry. Secondly, it provides legal certainty more quickly and enables those affected to prepare for changes to the law. This is important for the pensions industry.

I note that comment has been made on the propriety of affirmative procedure on first use only. I take this opportunity to make it clear that the Government do not accept that the practice of specifying an affirmative procedure on first use is licence to use those provisions inappropriately at a future stage. The reason for affirmative on first use then negative is that a decision on when the scheme design is sound will be critical to the effective running of the scheme and to safeguarding members. Therefore, it is important that when first determining these matters the regulations are subject to full debate. Further use of the powers is likely to be limited to adapting matters the regulator will be required to take into account in the light of operational experience, so the negative procedure would be appropriate.

With respect, this House is called to scrutinise the scope of the proposed delegated powers and the parliamentary oversight of those powers. The Government can, of course, give this House assurance as to their future intentions in using these delegated powers. To assist the House, the Government have produced illustrative regulations relating to Part 1. I hope this illustrates both the way delegated powers in that part are intended to be used and the limitations in pre-empting their use.

Clause 18 provides for CDC schemes to be required to have rules for how the current value of CDC scheme members’ benefits must be calculated and adjusted each year and for powers for government to make provision about those rules. It is therefore a very important clause for ensuring that all members of CDC schemes are protected from inappropriate calculation methods, with all benefits calculated equitably, with no differentiation on the basis of age, gender and so forth.

The amendment moved by the noble Lord, Lord Sharkey, would significantly reduce the Government’s ability to ensure that all members of CDC schemes are treated fairly. For example, scheme rules could discriminate against certain members on the basis of age, and the Government would have limited powers to react swiftly to stop this unfairness.

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[Lord Vaux of Harrowden]

I have a question regarding the first-time affirmative point. I think the Minister said that the second use on the negative basis is likely to be limited to the uses that she talked about, but she did not say that it would be used only in those circumstances. Obviously, this could go on beyond the current Government. If she is not prepared to remove the first-time affirmative aspect, would she at least be prepared to consider limiting those secondary usages to the limited situation that she has described?

[Baroness Stedman-Scott]

I thank the noble Lord for that important point, which we will certainly consider.

[Lord Sharkey]

Before I come to the meat of the matter, may I ask what it means to “confer discretion” on a person?

[Baroness Stedman-Scott]

It would be very helpful if the noble Lord would repeat that for my officials.

[Lord Sharkey]

I am delighted to repeat it. What does it mean to “confer discretion” on a person?

[Baroness Stedman-Scott]

As I understand it, it means to delegate powers.

[Lord Sharkey]

If that is what it means, and I am sure it does, then we are giving the absolute, unrestricted authority for delegation of any power to anybody at all. That seems to me to be slightly wider than is normal.

I shall move on. I will have to read tomorrow’s Hansard very carefully to understand exactly what the Minister said, but there were several points that struck me as really quite controversial. One of those is about Clause 51. The Minister said, and she is obviously entirely correct, that you cannot set up a multi-employer CDC scheme by regulation if you remove Clause 51. Yes, that was the point of my amendment: it seemed wrong to introduce multi-employer CDC schemes by regulation. That is also exactly what the DPRRC said. It is wrong, or inappropriate, to do it that way: that was the whole point of my amendment. I do not think it is a substantive response to that to say, “Well, if we accept it, we cannot do it.” That was the point of the amendment.

I thought I also heard the Minister say that one of my amendments—I cannot now remember which—would adversely affect the ability to reduce intergenerational fairness because it would remove a delegated power. I am not at all certain, having thought about it, that it would have that effect, but in any case we have already heard very strong arguments for intergenerational fairness mechanisms being in the Bill. I did not hear in the Minister’s reply a lengthy argument against the view of the DPRRC that the powers in Clause 47 are inappropriate. I understand their absence is inconvenient, but it does not address the central argument put forward by the DPRRC that it is inappropriate to create these new schemes entirely by regulation.

To make a general comment about the framework Bill, a lot of what is going on seems to be effectively cutting Parliament out of meaningful participation in critical aspects of scheme design. I understand that there is a need for a strong element of a framework Bill when you are dealing with these kinds of pensions, but it seems wrong to deploy them so widely that Parliament itself is effectively cut out of the process. Parliament is cut out. No matter how many times we mention secondary legislation in this debate, it is clearly the case that we cannot amend and do not reject secondary legislation. It is difficult to see exactly what our participation in secondary legislation would amount to. Having said all that, I beg leave to withdraw the amendment.

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[Lord McKenzie of Luton]

My Lords, we should thank the noble Lord, Lord Young, for bringing this amendment which, as he said, mirrors other aspects of pensions legislation. I was unclear whether this sits alongside the pause and triggering events or would supersede it. I hope the former, as it would be the quickest and easiest way to deal with it. Intrinsic to the wording are challenges that have been met in other pension environments about how to deal with or define “advice”, “adequate” and all that, but it is not beyond the wit of noble Lords to cover that off.

[Baroness Stedman-Scott]

My Lords, this amendment would mean that a member of a CDC scheme would be unable to transfer their share of the collective assets to another pension scheme, with a view to acquiring flexible benefits or accessing them flexibly under the pension freedoms where this was permitted by scheme rules, unless they had taken regulated advice. I welcome the interest of the noble Lord, Lord Young, and that of my noble friend Lady Altmann, in this area and agree that taking advice can play an important part in helping to ensure pension scheme savers make informed decisions about their pension savings. This includes whether to access them flexibly under pension freedoms or transfer their savings to another pension scheme, with a view to acquiring flexible benefits.

This is why we introduced the advice requirement under the Pension Schemes Act 2015 for members with safeguarded benefits. These are benefits, for example defined benefits, that contain a promise about the rate or amount of pension income that the member will receive in retirement. The advice requirement ensures that members with safeguarded benefits worth more than £30,000 must take regulated advice before they can flexibly access their benefits under the pension freedoms or transfer their pension savings to another pension scheme, with a view to acquiring flexible benefits.

Pensions transfer advice is highly specialised, involving a full assessment of a member’s financial circumstances and a personal recommendation. This helps the member to understand the potential implications of surrendering benefits, where the amount of pension that the person will receive under the scheme is guaranteed by the employer. Pensions transfer advice can be offered only by advisers whose firms have the relevant permissions set out by the Financial Conduct Authority, along with professional indemnity insurance. This comes at a premium, because it is restricted to those prepared to take on the business, and can be expensive. By setting a financial level at which the requirement is triggered in relation to safeguarded benefits, we have sought to ensure that it is applied proportionately. It may not be cost effective for members with smaller amounts of pensions savings to take and pay for such advice.

It is also worth noting that collective money purchase benefits, as a subset of money purchase benefits, are “flexible benefits” for the purposes of the provisions of the Pension Schemes Act 2015. As such, a CDC scheme could decide to allow members to access their share of the collective assets flexibly under the pension freedoms. Before such an option is offered in the scheme’s rules, we intend for trustees to consider fully the potential impact this might have on other scheme members and on the ongoing viability and sustainability of the scheme. For example, if significant numbers of members crystallise all or some of their benefits shortly before retirement, this might impact the scheme’s viability. As part of the authorisation regime, the Pensions Regulator must be satisfied that a scheme’s design is sound, and that such impacts have been considered and appropriately planned for, so that the scheme design meets the authorisation requirements.

We envisage that regulations in support of the scheme design criterion will require evidence that there has been appropriate consideration of risks relating to pension flexibilities, and that action has been taken to mitigate such risks. The ongoing requirement for review of the scheme’s viability report should ensure the scheme monitors any impacts arising from pension flexibilities. These are complex matters; accordingly, we will need to consult thoroughly on what the regulations might require in this respect.

CDC provision is new and the nature of CDC benefits is very different from defined benefits, to which the existing advice requirement relates. As I have explained, pension transfer advice is highly specialised. As CDC schemes are new and only one employer has so far committed to establishing such a scheme, it will likely take time—until more CDC schemes are in place—before advisers consider entering this new market. It will also take time for advisers to develop the necessary expertise to offer appropriate and effective transfer advice to members of CDC schemes. We would need to work closely with the Financial Conduct Authority, which will regulate these potential advisers, to determine what effective or quality advice might look like.

As I have said, CDC is a new provision. Even if we were to set a level—for example, £30,000—at which a requirement could apply, it may take time for members’ funds to grow to this level. I can assure the Committee that my officials will monitor this situation as these new CDC schemes bed in. Once it is clearer that an advice requirement for CDC schemes is warranted, for example because members’ funds have grown significantly, we will still need to work out what the appropriate financial level is for triggering the advice requirement in CDC schemes and how that requirement would work best in practice. At that time, we will engage with the industry and stakeholders to work out these details, and we will then consult on the proposal that has been developed. Subject to the outcome of that consultation, we will seek to legislate to implement the requirements.

In the meantime, we will require CDC schemes to provide their members with appropriate information to help them to understand how their scheme works. For example, we would want the communication that the trustees send to a member who has applied for a transfer to contain the estimated value of their share of the collective assets and to outline the potential implications of transferring out of the CDC scheme before normal retirement age. Member communications at joining and near retirement will also signpost CDC scheme members to the guidance that is available from the Money and Pensions Service. The Money and Pensions Service is responsible for providing guidance to people with pensions, and that will include members of CDC schemes.

I hope my explanations have reassured noble Lords that until a CDC advice requirement is needed, members with collective money purchase benefits will still have access to information and guidance to help them to make informed choices. For the reasons that I have set out, I urge my noble friend to withdraw his amendment.

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[Baroness Bowles of Berkhamsted]

There is nothing that needs to be added; it has already been said. I just want it to be noted that I, too, support the principle behind the amendment.

[Baroness Stedman-Scott]

I thank noble Lords for raising these amendments that relate to events which can occur in an authorised CDC scheme and which must be notified to the Pensions Regulator. The amendment in the names of the noble Lords, Lord Hutton and Lord McKenzie, would require the trustees of an authorised CDC scheme to notify the regulator where a person assumed a role that was subject to the fit and proper persons assessment. This notification would be required within two weeks of the change. The regulator would be required to assess whether the new person met the fit and proper persons requirement. Where it was not satisfied, the amendment would require it to consider withdrawing authorisation from the scheme.

The fit and proper persons requirement is set out in Clause 11 and is one of the authorisation criteria. The aim is to ensure that only suitable people are involved with a CDC scheme in order to protect the interests of members. It is also worth noting that the Bill already includes a power in Clause 30 for the regulator to withdraw a scheme’s authorisation if it is not satisfied that the authorisation criteria are met. The regulator will need to be satisfied that this is the case on an ongoing basis, including that the fit and proper persons requirement continues to be met. Some events would still warrant consideration by the Pensions Regulator because they could affect the ability of an authorised CDC scheme to continue to meet the authorisation criteria.

Clause 28 covers such “significant events”, which must be notified

“as soon as reasonably practicable”

to the Pensions Regulator. The draft illustrative regulations that we shared with noble Lords, and which have been placed in the House Library, provide an indicative list of potential significant events. Noble Lords may be reassured to know that the event in their amendment is contained in the illustrative regulations. We will work with the Pensions Regulator and others to develop the CDC significant events; we will also consult on the draft regulations in due course.

Amendment 11, tabled by the noble Lord, Lord Sharkey, would mean that the decision of any employer or relevant former employer

“to withdraw from the scheme”

would automatically be considered a triggering event. It may be helpful to point out that the triggering events listed in Clause 31 are already intended to capture withdrawal events that pose a significant risk to the future of a CDC scheme. For example, the withdrawal by the employer from a single employer-established CDC scheme or the largest employer in a connected employer scheme may trigger the winding up of a scheme. The withdrawal may also have arisen as a result of employer insolvency. In this scenario, it is clear that such a decision could risk destabilising the scheme. As such, it should be treated as a triggering event and be subject to greater scrutiny and oversight by the Pensions Regulator to ensure that the trustees are taking all necessary steps to address the issue and protect members.

Not every withdrawal of an employer, however, may pose such a significant threat to the scheme. For example, the impact of a small connected employer deciding to withdraw from a CDC scheme may be minimal on the viability and sustainability of the scheme; it may not warrant a decision to wind up the scheme as a whole. Such an event would be more appropriately dealt with as a significant event. We intend that such events should still be reflected in the continuity strategy, so that the regulator is aware that this risk has been considered and planned for.

We propose that regulations would provide for such events to be a significant event, which would need to be notified to the regulator. Such a notification will allow the regulator to engage with the trustees to ascertain the impact on the scheme’s viability and continuity, and whether this should lead to a formal triggering event or other regulatory action. This approach allows the regulator to retain appropriate oversight of withdrawal decisions and resulting actions, while providing some flexibility and proportionality in approach where the withdrawal of the employer is not expected to impact significantly on the scheme. I am also pleased to advise the Committee that the regulator will engage with the scheme to look at the options before withdrawing authorisation. For the reasons I have set out, I urge the noble Lord to withdraw his amendment.

[Lord Sharkey]

I thank the Minister for her comprehensive explanation of why it may not be necessary to add what I proposed. However, I am uncertain on one thing about triggering events. It concerns the fifth of the triggering events which we have been talking about. I could not find anywhere in the Bill what the trustees must do in the event of an Item 5 triggering event apart from notifying the Pensions Regulator that such an event had occurred. I acknowledge that I may have simply missed it but I would be grateful if the Minister could say what the trustees are supposed to do after an Item 5 triggering event. What actually gets triggered?

[Baroness Stedman-Scott]

I thank the noble Lord for his question. I am advised that we will write to him with the answer.

[Lord Hutton of Furness]

My Lords, I am grateful to the Minister for her response but something is still not clear to me. She says that there is a continuing power on the Pensions Regulator’s part to vet all appointments that fall under Clause 9. I cannot find that continuing authority; I do not know where it is in the Bill. If she could, at some future point, alert me to what provision of the Bill covers that ongoing authority on the regulator’s part to make appointments, I would be grateful.

The second interesting point is that the Minister referred to Clause 28 as if it had some relevance to the point covered by my amendment. There is no definition of “significant event” in the Bill; it will be set out in future regulations. My concern may well be addressed if the Minister were to confirm that any new appointments of trustees or other persons listed in Clause 9 falls within the definition of “significant events”.

I know that my final point goes beyond my amendments; I hope that I am allowed to make it. On the assumption that the Bill becomes law—I very much hope that it does—it is striking that we have a specific set of provisions for how trustees for these collective money purchase schemes are to be appointed; they must be fit and proper persons, for example. But if one looks at the appointment process for other pension schemes, such as defined contribution and defined benefit schemes, there is no parallel provision. Under the Pensions Act 2004, those trustees must have some knowledge of pensions law and of their own scheme, but there is no equivalent provision for the appointment of trustees to other pension schemes. I wonder whether it is justifiable to have this particular provision relating just to these new pension schemes—perhaps it is—but not to have a parallel provision for other trustee and significant appointments to DB and DC schemes.

My only request to the Minister at this point—we may come back to it—is that this may be an appropriate time for us to take a wider look at overall pension scheme governance. In my view, there is nothing more important to the health and well-being of a pension scheme than the quality of the governance in place to oversee it. If it is appropriate for trustee and other appointments to these new pension schemes, of which I am very supportive, to be subject to this process, there is a convincing case, too, for an equivalent provision for defined contribution and defined benefit schemes.

[Lord Flight]

The noble Lord is absolutely right. It is extraordinary that one group has a lot of requirements when another has none. Historically—let us say 30 years ago—trustees of pension schemes were often not remunerated. Someone applying to be a CDC trustee today would not think of taking on the responsibilities unless they were remunerated.

[Baroness Stedman-Scott]

On the first point made by the noble Lord, Lord Hutton, we will write to clarify things. We have not listed “significant events” in the Bill because if members are to be protected, it is important that such events can be adapted to emerging threats as well as lessons learned through live running. We want to ensure that these events are appropriate and reflect the specific risks that may be posed by CDC schemes. We will consult with the regulator and others before laying any regulations before Parliament. We will consider the noble Lord’s final point—it was well made—about pension scheme guidance in terms of the new CDC scheme and existing schemes and come back to him on it.

[Lord Hutton of Furness]

I beg leave to withdraw the amendment.

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[Baroness Sherlock]

My Lords, I thank the noble Baroness, Lady Bennett of Manor Castle, for raising this issue and for starting so gently with us—we look forward to seeing where she will take us in future. We do not get much excitement on pensions Bills, so we are looking forward to her giving us some.

I am glad that the noble Baroness raised diversity, because it is something that we are certainly concerned about, as most people interested in pensions should be. She is not alone in raising these concerns; the Pensions Regulator raised them, too. It published a consultation document last year on the future of trusteeship and governance, in which it made a strong case for the need to improve diversity in pension boards. It made many of the points that the noble Baroness raised about the size of the gender pensions gap, but it also flagged up the gap that those who are disabled or from a black, Asian and minority ethnic background have poorer pension outcomes than other workers.

A lack of diversity on pension scheme boards has long been acknowledged as a problem. The 2016 PLSA annual survey found that, on average, schemes had more than 83% male trustees, with one-quarter of trustee boards being all-male. We are not talking about these things not being entirely balanced. If in this day and age a quarter of trustee boards are all-male, something needs addressing.

The idea behind the noble Baroness’s Amendment 12 is that schemes should report on the action that they are taking to address diversity. It does not even mandate an outcome; it asks simply, “What are you doing about it?” In fact, TPR put that option in its consultation document. It said in response to the consultation that opinion was divided, pretty much down the middle, with half the people thinking that this was a good idea and the other half thinking that it was a bad idea. Therefore, it decided not to do it.

Obviously, I could make an alternative argument based on those same facts, but I just want to ask the Minister: if not this, then what and when? The back-up position from TPR was that it was going to have an industry working group to look at improving the diversity of scheme boards. Will that go ahead? If so, has it launched or when will it launch? Crucially, how will we know whether it works? What would success look like? If we are not going to ask people even to report on the actions they are taking, we would want to know that the alternative will make a difference. If TPR and the noble Baroness, Lady Bennett, are of one mind in saying not only that the lack of diversity is a problem but that more diverse boards make better decisions—and they are making decisions about diverse scheme membership—this is an issue on which the Government have to take some kind of action. So if not this, then what?

[Baroness Stedman-Scott]

My Lords, the two amendments tabled by the noble Baroness, Lady Bennett, to Clauses 46 and 119, both relate to issues of diversity and protected characteristics.

I will speak first to Amendment 12. I note that the aim of Clause 46, which contains requirements relating to the publication of information concerning CDC schemes, is to drive transparency about how they operate. The noble Baroness’s amendment would require CDC schemes to provide diversity information to the Pensions Regulator on what actions the scheme has taken to ensure diversity with regard to age, gender and ethnicity in its trustee recruitment. As we heard from the contributions, particularly that of the noble Baroness, Lady Sherlock, there is work to be done on this.

We recognise the importance of diversity in trustee boards, not just for CDC schemes, but across all trust-based schemes. Indeed, the Pensions Regulator has recently published its response on the future of trusteeship consultation, which considered specifically whether there should be a requirement for pension schemes to report to the regulator what actions they are taking to ensure diversity on their board of trustees.

The response to the consultation advised that there was a lack of consensus on this issue, as has been referred to, with some respondents in favour of it and others suggesting that there were initiatives already in place or that such a reporting regime would place an unnecessary additional burden on schemes. The noble Baroness, Lady Sherlock, asked, “If not this, then what?” I can tell her only that the regulator concluded that

“it would be beneficial to create an industry working group”

to further investigate raising the profile of this important issue, with a view to developing additional guidance and supporting material to help improve the diversity of trustee boards. So, I think that will happen. As I am sure noble Lords will appreciate, I would not want to pre-empt this significant work, but we will keep it under review and consider it further as it progresses.

The Government’s focus on the trustee landscape, including for CDCs, is to ensure that trustees meet standards of honesty, integrity and knowledge appropriate to their role. I think that employers and members participating in these schemes would reasonably expect that to be the case.

Together with Clause 9, Clause 11 means that the Pensions Regulator must be satisfied that the persons involved in the CDC scheme are fit and proper persons to act in relation to it. If the regulator is not satisfied, authorisation of a CDC scheme cannot be granted. We recognise that if we want to engender confidence in CDC, and ensure that the interests of members are protected, it is vital that the schemes be managed by appropriate individuals.

On Amendment 15, relating to pensions dashboards, again the Government recognise the importance of diversity on trustee boards. However, we have had to consider what information to prioritise as being required from day one. As we set out in the Government’s response to the consultation on pensions dashboards, the intention is to start with the provision of basic pensions information. This initial information is intended to help consumers plan for their retirement, in line with our primary policy objectives.

The success of dashboards is predicated on there being a good level of coverage across pension schemes. Achieving good coverage is a complex task. There are over 40,000 pension schemes, with data varying in quality and stored to different standards. The Government expect that it will take three to four years for there to be adequate coverage, with pension schemes initially providing simple levels of information. Increasing the amount and complexity of information required from pension schemes in the early stages may significantly delay delivery. The development of dashboards will be iterative, and we will continue to consider what information is placed on them following their initial delivery to the public.

TPR has not launched the working group yet, and its timescale is not confirmed, but we will monitor the situation. For the reasons that I have given, I hope that the noble Baroness will withdraw her amendment, but I am sure that she will never let up on her campaign.

[Baroness Bennett of Manor Castle]

I thank the Minister for her response. She referred to the fit and proper persons test. I am not a legal expert, but my understanding is that the test looks at people as individuals, with the Pensions Regulator being asked to judge them as such. So far as I can see, there is no requirement on the Pensions Regulator to look at the group and ask, “Is this group appropriate to represent this body?”

On the Minister’s point about an industry working group, these can be a very good thing; however, they can also be an alternative to action. This subject has been widely researched and there is a great deal of knowledge about it, so I am not sure why we need a working group rather than action.

The Minister referred to putting high-priority information on the dashboard. I strongly suggest that what I have proposed should be high-priority information when pension participants are making decisions. However, for the moment, I beg leave to withdraw the amendment.

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[Lord McKenzie of Luton]

My Lords, I agree entirely with what has been said about the need to communicate and the basis on which to do so. I simply raise that, in 2018, we had extensive discussions on the Financial Guidance and Claims Bill, as it then was. A key point was the lack of full understanding of financial matters of the general public. I have forgotten the statistics, but there was a House of Lords review of financial inclusion, and its conclusions were stark. This is not a reason not to communicate; it is a reason to communicate even more intensively. In how we communicate, we need an understanding of how people might receive these messages and we should not assume they can operate in an environment like this—as many, we know, cannot.

[Baroness Stedman-Scott]

My Lords, I agree that, for CDC schemes to be a success, a high degree of transparency and effective communications are key. If we want to foster member trust in this new provision in the UK, the full scope of risk and benefits of collective schemes must be clearly communicated to members and others, particularly highlighting the nature of benefits, their potential fluctuations and that they are targeted. I mentioned this at Second Reading.

I have already shared with noble Lords a draft illustrative statutory instrument. Paragraph 32 gives examples of the documents and information we plan to require CDC schemes to publish. This includes documents that relate to target benefits, including the actuarial valuation and a statement informing members and prospective members that benefits may be adjusted based on the actuarial valuation and are not guaranteed. We will also require CDC schemes to publish their scheme rules, which will include details of benefit design.

In addition to those regulations under Clause 46, the existing disclosure requirements under Section 113 of the Pension Schemes Act 1993 that currently apply to money purchase occupational pension schemes will apply to CDC schemes, as they are a subset of money purchase benefits. This covers targeted individual member information, and we intend to amend the existing disclosure regulations under Section 113 of that Act to ensure that, for CDC schemes, such information includes key risk messages about benefit fluctuation; for instance, providing full details regarding the possibility of benefit fluctuation at the point of joining in scheme information; emphasising that benefits can change in the member’s annual benefit statement for active and deferred members; being clear that benefits can change during retirement in retirement information packs; and notifying members in advance of any change to their rate of benefit during retirement.

I appreciate the intention behind the noble Lord’s suggestion but, if this amendment stands, all documents and information published would need to include a risk warning message, which would not be relevant in all circumstances; for example, in the scheme’s statement of investment principles. I suspect this would also not meet the noble Lord’s intention that such messages be included in other important communications also made under existing powers. I believe that the best way to approach these concerns is to set out the required information in regulations, as I have indicated, as this would allow the Government to work with the pensions industry to ensure that relevant targeted messages are developed for each relevant document or piece of information.

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Moved by

[Baroness Stedman-Scott]

15: Schedule 3, page 131, line 18, at end insert—
“22_ The Pensions Act 2014 is amended as follows. 23_ In section 54(2) (regulations subject to affirmative procedure), omit the “or” after paragraph (e) and at the end of paragraph (f) insert “, or(g) the first regulations under paragraph 1 or 3 of that Schedule that make provision in relation to collective money purchase schemes within the meaning of Part 1 of the Pension Schemes Act 2020 (see section 1 of that Act).”24_(1) Schedule 18 (power to restrict charges or impose requirements in relation to schemes) is amended as follows.(2) In paragraph 1(1) (power to restrict charges), in each of paragraphs (a) and (b), for “a member” substitute “members”.(3) In paragraph 4 (interpretation), after sub-paragraph (2) insert—“(3) Where a pension scheme is divided into sections, each section that is a collective money purchase scheme for the purposes of Part 1 of the Pension Schemes Act 2020 (see section 1(2)(b) of that Act) is to be treated for the purposes of this Schedule as a separate scheme.””Member’s explanatory statement
This amendment ensures that regulations under Schedule 18 to the Pensions Act 2014 may be made in relation to collective money purchase schemes. The first such regulations will be subject to the affirmative procedure. The power to make regulations in relation to other types of scheme is unaffected.

[Baroness Stedman-Scott]

My Lords, we are committed to protecting members of workplace pension schemes from unfair charges. This is why we introduced a 0.75% cap on charges in the default funds of money purchase schemes used for automatic enrolment. This cap, which received cross-party support, has proved successful, with average charges in schemes used for automatic enrolment reducing by a significant margin. We want to ensure that members of collective money purchase schemes in Great Britain and Northern Ireland can be similarly protected, which is why we are tabling these amendments.

Our response to the consultation on delivering CDC schemes confirmed our intention to implement an annual CDC charge cap set at 0.75% of the value of the whole CDC fund, or an equivalent combination charge. The response also confirmed our intention that the scope of the CDC cap will be the same as the existing charge cap. Unlike the existing charge cap, which applies at member level, our intention is that the CDC charge cap will apply across the whole of the fund. This reflects the collective nature of these schemes and means that the CDC charge cap will apply to all members in the collective money purchase scheme, including pensioner members. Again, this reflects the collective nature of the schemes and the fact that the same fund will provide members with a variable pension income in retirement. We want to ensure that members of CDC schemes also benefit from other existing charge control measures, such as the member-borne commission ban and the early exit charge cap.

I will speak first to Amendment 15, which will amend the Pensions Act 2014 to ensure that the powers in that Act, under which we are able to provide for a charge cap and other charge control measures, can also be used in the case of collective money purchase schemes in Great Britain. We are amending paragraph 1 of Schedule 18 to that Act, which provides a power to prohibit by regulations certain charges in relevant schemes. This is to make clear that regulations under this power can also be made in relation to collective money purchase schemes. As with the existing default fund charge cap for DC schemes, it is appropriate to use regulations to define the details of the cap and how it will apply. We will of course engage with the regulator and stakeholders in developing these details and will then consult on the draft regulations. We aim to align the application of the CDC charge cap with that of the existing charge as far as possible.

It is entirely appropriate that members of collective money purchase schemes benefit from similar charge control protections that apply to members of individual money purchase schemes. This amendment makes clear that regulations made under the powers in Schedule 18 to the Pensions Act 2014 can provide for controls on the charges borne by members in collective money purchase schemes. The amendment to paragraph 1 of Schedule 18 to the Pensions Act 2014 means that where a scheme which provides CDC benefits has more than one section, each section offering CDC benefits will be treated as a separate scheme for the purposes of the charge cap provisions. This is consistent with other provisions about how sections of schemes offering CDC benefits are to be treated and ensures that sections offering CDC benefits do not cross-subsidise other sections of the scheme.

The amendment to Section 54 of the Pensions Act 2014 means that the first regulations under paragraphs 1 or 3 of Schedule 18 made in relation to CDC schemes will be made by the affirmative resolution procedure. Section 54 already provides for the first regulations under these paragraphs to be made by the affirmative procedure, but regulations have already been made under these paragraphs. We wish to ensure that the first regulations made in relation to charge caps for CDC schemes have the same level of parliamentary scrutiny as those regulations did. Turning briefly to Amendment 16, this makes corresponding changes to Northern Ireland legislation to provide for a charge cap for CDC schemes in Northern Ireland. This will ensure parity of member protection for members of CDC schemes across the UK. I beg to move.

[Baroness Bowles of Berkhamsted]

My Lords, I have no objection to making things the same everywhere, but last time I came across this 0.75% cap I did not ask a question, so I will now. What exactly does it cover? Compared to some SIPP investor platforms and so forth, it seems rather high. Does it cover all the trading charges as well? You can get 0.15% from Vanguard, 0.25% from AJ Bell and up to 0.45% with all your trading charges covered from Hargreaves Lansdown. I could go on. If you go to some of the insurance companies —I will go on—they tend to be greedier, up to 0.3%, but that is far short of 0.75%, so what is this paying for?

[Baroness Altmann]

I shall raise similar points. Will ask my noble friend say how the 0.75% charge cap was arrived at, given that the purpose of the CDC scheme, as I understood it, is to provide members better value than if they had their own defined contribution fund and to benefit from the economies of scale of collective management and administration, which clearly should be much lower per member than an individual defined contribution scheme?

Another point my noble friend mentioned is that that there should be no exit penalty. If that were the case, the issue we were discussing earlier about potentially reducing or applying a risk margin to transfer values would become impossible. Intergenerational fairness, which we were concerned about in our earlier discussions in Committee, may be undermined if there is an express prohibition on what may be called an exit penalty, but which to others is a risk margin or buffer against future market dislocations or changed assumptions.

[Baroness Stedman-Scott]

The noble Baroness, Lady Bowles, asked what the cap covers. This is defined in the regulations, and we will send details to all Members of the Committee. We will consult on 0.75% and the final level of the cap, as part of the regulations, so there will be more opportunity for noble Lords to influence that. The noble Baroness, Lady Altmann, raised the exit penalty. I will have to write to her on that.

Amendment 15 agreed.

--- Later in debate ---

Moved by

[Baroness Stedman-Scott]

16: Schedule 6, page 139, line 22, at end insert—
“22_ The Pensions Act (Northern Ireland) 2015 (c. 5 (N.I.)) is amended as follows.23_ In section 51(4) (regulations subject to confirmatory procedure), omit the “or” after paragraph (e) and at the end of paragraph (f) insert “, or(g) the first regulations under paragraph 1 or 3 of that Schedule that make provision in relation to collective money purchase schemes within the meaning of Part 2 of the Pension Schemes Act 2020 (see section 52 of that Act).”24_(1) Schedule 18 (power to restrict charges or impose requirements in relation to schemes) is amended as follows.(2) In paragraph 1(1) (power to restrict charges), in each of paragraphs (a) and (b), for “a member” substitute “members”.(3) In paragraph 4 (interpretation), after sub-paragraph (2) insert—“(3) Where a pension scheme is divided into sections, each section that is a collective money purchase scheme for the purposes of Part 2 of the Pension Schemes Act 2020 (see section 52(2)(b) of that Act) is to be treated for the purposes of this Schedule as a separate scheme.””Member’s explanatory statement
This amendment ensures that regulations under Schedule 18 to the Pensions Act (Northern Ireland) 2015 may be made in relation to collective money purchase schemes. The first such regulations will be subject to the confirmatory procedure. The power to make regulations in relation to other types of scheme is unaffected.