Pension Schemes Bill [HL]

Baroness Stedman-Scott Excerpts

Committee stage & Committee: 2nd sitting (Hansard) & Committee: 2nd sitting (Hansard): House of Lords
Wednesday 26th February 2020 Grand Committee

I urge the Minister to think hard about this because if the next scandal, one comparable to BHS or Carillion, turns out to be a company that shipped a load of money out the door just before it went down, it will not look very good if the Minister has had the opportunity to tell us how to solve it and has been unable to do so.

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

I thank the noble Lords for tabling these amendments and all noble Lords for their contributions to this debate. It would be helpful to consider these amendments together, as they seek to address the payment of dividends when a defined benefit pension scheme is in deficit. One amendment seeks to prevent the payment of a dividend unless signed off by the trustees and the regulator; the other would require the sponsoring employers of pension schemes to submit a notice and accompanying statement to the regulator and to trustees when the employer declares a dividend in certain circumstances.

I do not think that the amendment to the Companies Act would have the effect that I believe is intended, as there are various technical problems with it. I will not go into these now, as it is more important to address the principles. The Government agree that defined benefit pension schemes in deficit should get a fair proportion of the resources available to employers.

The Government believe that they are taking a proportionate approach. The problem is not the payment of dividends; it is that some companies do not pay enough into their defined benefit pension schemes as part of the recovery plan when the scheme is in deficit. We believe we can address this problem proportionately without inhibiting reasonable dividend payments, which are a legitimate and essential part of normal business activity. We inhibit investment in UK business at our peril. A strong, profitable employer is the best possible protection for pension scheme members.

In addition, I should point out that pension schemes are also major investors. They receive significant dividends, and inhibiting or blocking these payments would impact their income and funding position.

The Pensions Regulator can, and does, take action to ensure that sponsors treat their schemes fairly. For example, in one case, a defined benefit scheme is now better funded after an upfront payment of £10 million, a reduction in the recovery plan length from 13 to seven years, annual deficit recovery payments of £3.7 million and a commitment to stop dividend payments for six years.

Information about dividends paid by these companies may be needed, but this is already available for public companies and can be obtained for private ones. The regulator takes this into consideration when it is looking at risks to a pension scheme. It would be disproportionate and unnecessary to require the sponsoring employers of pension schemes to submit a notice and accompanying statement to the regulator when the employer declares a dividend. Provided that a suitable recovery plan is in place, and the employer has the resources to pay the additional deficit repair contributions agreed, the company should be able to choose what it does with the remainder of the distributable reserves—it is rightly subject to business priorities.

But we do need to do more to ensure that the regulator can take a tough line where needed. That is why we are taking a power in this Bill to set out more clearly in secondary legislation what is required for an appropriate recovery plan. The secondary legislation will be informed by the regulator’s consultation on its revised funding code, and will work in tandem with it. The code will set clear expectations on what is an acceptable recovery plan, include guidelines on recovery plan length and structure, and support the regulator in enforcing these standards.

I turn now to some of the specific questions raised. The noble Lord, Lord Vaux, asked why the requirement under new Section 69A for a notice and accompanying statement cannot be included the Bill. New Section 69A is intended to give the Pensions Regulator information about events that pose greatest risk to pension schemes. The range of events for which a notice and accompanying statement must be given will be varied and will likely change in time. As such, the Government consider this to be a matter that is appropriate for secondary legislation. By setting out the range of events that are subject to the notification requirement in regulations, this enables new events to be added, or existing events to be removed, in order to keep pace with changing business practices.

The noble Lord, Lord Vaux, asked: why do we not propose to require a notice and accompanying statement when a dividend is paid? Dividends paid by companies with a pension scheme surplus, or those where an appropriate recovery plan is in place and deficit repair contributions are being paid, are unlikely to have adverse impact on the scheme or require any mitigations. A notice and accompanying statement about dividend payments by these companies would be unnecessary, and handling this information would be an ineffective use of the Pensions Regulator’s resources. Instead, the regulator will focus on companies where schemes are in deficit and where an appropriate recovery plan is not in place. Information about dividends paid by these companies may be needed, but this is already available for public companies and can be obtained by private ones.

The noble Lord, Lord Vaux, asked: if dividends are not limited, is there not a risk that all the money will be gone before the needs of the scheme are considered? The trustee and sponsoring employer agree an appropriate funding target and deficit repair contributions to eliminate any deficit over an appropriate period. If an appropriate recovery plan is not in place, the regulator has powers to impose a schedule of contributions. Provided that an appropriate recovery plan is in place and the agreed deficit repair contributions are being paid, it is right that how other resources are used is a matter of business priorities. It would not be helpful or proportionate for the payment of dividends to be notified to the regulator.

Of course, there is a risk that excessive dividend payments could be made, which could result in the sponsor being unable to meet its obligations to make payments as part of the recovery plan, but this is very much the exception rather than the rule. We think that intervention to prevent dividend payments in some circumstances poses a greater risk of inhibiting investment in UK business and that our approach can deter inappropriate dividend payments and put things right if that happens.

The noble Lord, Lord Sharkey, requested information about the regulator’s success in engaging with employers, and we will write to the noble Lord with that information.

[Baroness Drake]

Does the Minister accept that a regime for notifying dividends is not necessarily the same as stopping the payment of dividends?

[Baroness Stedman-Scott]

I will carry on and answer the question from the noble Lord, Lord Flight, and then I will answer the question asked by the noble Baroness, Lady Drake.

The noble Lord, Lord Flight, asked what the Government are doing to reform the UK’s dividend regime. The Department for Business, Energy and Industrial Strategy is considering the case for requiring companies to disclose information about their distributable reserves from which dividends are paid. The Institute of Chartered Accountants in England and Wales has been asked to provide technical advice and options for doing so. It is expected to report shortly. Sir Donald Brydon’s recent independent review into the quality and effectiveness of audit recommended that directors make a statement that the proposed dividends would not threaten the existence of the company and are within known distributable reserves, and, in some circumstances, that the distributable reserves should be subject to audit. Further consultation on this is expected later this year. The department has welcomed the Investment Association’s recommendation to companies that they should publish a dividend policy setting out the board’s long-term approach to making decisions on the amount and timing of return to shareholders.

In answer to the question asked by the noble Baroness, Lady Drake, yes, notifying is different from stopping. We do not want to stop them; we want to focus on ensuring that an appropriate recovery plan is in place. Things can be put right.

The noble Baroness, Lady Bowles, asked how the Pensions Regulator knows what resources the employer has and whether a recovery plan is appropriate. In assessing the appropriateness of a recovery plan, the Pensions Regulator looks at the strength of the employer covenant, which is a measure of the ability of a scheme’s employer to support the scheme now and in future. The regulator takes account of a range of employer-specific information, including underlying trading strength and trajectory, profits, cash flows, debt structure, market risks and opportunities, asset strength, and insolvency risk. This can come from a range of sources including statutory accounts, publicly available information such as credit ratings, market analysts’ views, sectoral analysis and analysis performed by the trustees, the employer or its adviser. The regulator will also focus on how a company uses the cash flow it generates to assess whether a scheme is receiving an appropriate and fair share of these amounts. Greater clarity will be provided through the provisions we are proposing in the Bill, and the regulator intends to set clearer guidelines on recovery plan length and structures for schemes in different circumstances. This will help to improve regulatory grip and make enforcement easier.

The noble Baroness, Lady Bowles, also asked how we will ensure that companies with significant available resources address defined benefit pension scheme funding shortfalls more quickly. Most employers do the right thing and treat their schemes fairly, but we know that this best practice is not universal and that some employers are not devoting a fair proportion of available resources to paying down deficits. We are determined to do something about this.

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[Baroness Stedman-Scott]

Requiring the payment of dividends to be reported is not necessarily very helpful to the regulator. It is likely to inhibit legitimate business processes without getting more resources for the scheme. We need to take a proportionate approach. We think that the priority is to ensure that a suitable recovery plan is put in place that takes account of the full range of circumstances of the employer and the scheme.

Trustees and the regulator need to look at a whole range of demands on the employer’s resources. Dividends are just one of these. Others may include maintenance of its business, and investments in its sustainable growth and debt repayments. All of these need to be considered in deciding whether a recovery plan is fair.

The Pensions Regulator scrutinises all valuations and recovery plans submitted, assesses the key risks, and assesses whether further engagement and potential enforcement action is required. Measures in the Bill will help to clarify exactly what is required for an appropriate recovery plan. Along with the regulator’s revised funding code, these measures will make it clear to trustees and employers what is expected, and will support the regulator in taking enforcement action where necessary. Provided that an appropriate recovery plan is in place, how the employer chooses to spend the remainder of its free resources is rightly a matter of business priority.

[Baroness Donaghy (Lab)]

I have listened carefully to the debate and cannot help but think that this is not sufficiently fleet of foot to prevent those such as BHS and Carillion—there is recent past history on this—which were basically giant Ponzi schemes towards the end, where they were paying dividends instead of funding the pension scheme, had deliberately obscure governance rules and left their pensioners bereft of a considerable proportion of their money. Is this system sufficiently fleet of foot? Would it take account of a company which then decided to sell itself to another person for, for the sake of argument, £1? Would it help to cover the situations covered by the amendments? It does not sound to me as though we are doing anything different from just saying, “Everybody has the right to the appropriate dividends.” How do we know that those dividends are appropriate, and how do we have power for the regulator to ensure that there are not some really bad guys out there?

[Baroness Stedman-Scott]

The noble Baroness makes some valid points. We consider that dividends are paid at a point in time. The regulator needs to form a picture of the employers’ ability to pay and, for a period in the future, needs to see the whole picture.

[Baroness Sherlock]

Can we try to narrow the point of difference? The Minister is often being given briefings which cover points with which no one disagrees. To interpret her last answer to me, the Government are saying that they do not want every company to tell them why they are paying a dividend because there will be too much information and it will take too much resource to process, rather than focusing on things that raise a particular problem. However, the amendment from the noble Lord, Lord Vaux, does not suggest that; it simply suggests that, in some very specific circumstances, there should be a notification of a declaration to pay a dividend. He suggested that those circumstances are that there will be a dividend, there is a deficit on the scheme, the amount of the dividend exceeds the DRC and a ratio between the different on the valuation. If the Government think that those are the wrong criteria, they could suggest alternative criteria. I am trying to get to the bottom of what is the problem of saying, “In certain circumstances where there could be a risk, it will be helpful to have a requirement on companies to notify the regulator as part of the notifiable events regime so that it can then do something about those risk situations”? Why is that a problem?

[Baroness Stedman-Scott]

The last word I would use to describe the noble Baroness is simple; that is not the case. She and other noble Lords have raised some interesting, valid and appropriate points on this issue. I believe that the best way that we can delve down into this and, I hope, give the comfort that they are looking for, is to meet to discuss it outside the Committee, which we are happy to do.

[Baroness Drake]

I would just say that my argument is not with the noble Baroness personally; she will be provided with the arguments to answer the points we are asking. The argument she put was that the recovery plan would be the route through which one would deal with an excessive payout of dividend, but the recovery plan is also based on an assumption about the strength of the sponsoring employer covenant. If, after that recovery plan is settled, there is a huge dividend payout—particularly to an overseas parent—which impacts the strength of that covenant, I cannot believe that the regulator would sit there and say, “We will wait until the next actuarial valuation and the new recovery plan before we act”. It would act: it has a range of powers to act straightaway. If there is a material change in the constituent elements that went into the recovery plan, the regulator has to act. A major excess of dividend payment from the sponsoring employer could materially impact the covenant strength. That is already in legislation. We just want to capture the impact of the high levels of dividend payment.

[Baroness Stedman-Scott]

I thank the noble Baroness for the points she has made. I think we should put this into the conversation that we will have to try to give answers which give noble Lords the comfort they need. My officials will call a meeting, and we will look at Hansard and try our very best to answer all the specific questions and allow further debate to resolve these issues.

[Lord Balfe]

May I also be included in this meeting?

[Baroness Stedman-Scott]

Of course.

[Baroness Bowles of Berkhamsted]

The point made by the noble Baroness, Lady Drake, is similar to the point that I was going to make. Some of the answers the Minister gave, in particular to my questions, were good and comprehensive, but they rely on having an appropriate plan in place. The point is that there are times when the appropriate plan is no longer appropriate, and at that point it all falls apart. I think what the Minister has said is that in regulations there will be things that will allay some of our fears, but it would be nice to have something about that in the Bill, because otherwise we are taking it on trust. It is not that we inherently mistrust the Minister or her officials. Of course there have been previous framework provisions that have been remarkably empty of policy, but that does not make it correct. The Government and this Parliament make policy. Regulators do not make policy; they shy away from it. There is no greater making of policy than putting it in the Bill.

[Lord Sharkey]

I also want to be invited. A critical feature of the discussion is the effectiveness of TPR. When we have the meeting—to which almost everybody seems to be invited—it would be very helpful to have a detailed discussion on what assessment the Government have made of the performance of TPR against its three key principles, certainly in the past year and perhaps slightly longer. I know the Minister gave an example of TPR being effective, but that was one example and I would like to see more data on why we should have faith in TPR’s ability to police this scheme or any scheme.

[Baroness Stedman-Scott]

We will pass a piece of paper around, and if noble Lords will write their names on it, we will make sure they are all invited.

I am sorry if I am repeating myself. I am well aware of the expertise of noble Lords in this Room who work in the industry. It is highly regarded and highly respected. The message in the points that noble Lords are making is received. We will meet to talk about them in more depth. That will give officials more time to reflect on the very detailed questions that noble Lords have asked, collect data, answer some of the exam questions and try to come to a place where we all understand and agree on what we are trying to do. We take it in that spirit. In that spirit, I ask the noble Lord to withdraw his amendment.

--- Later in debate ---

[Baroness Stedman-Scott]

I thank all noble Lords for their amendments and contributions. They have been numerous, but they have been numerous in quality, so I thank them for that. I assure the noble Baroness, Lady Sherlock, and the whole Committee that we are listening and aim to please.

I thank all noble Lords who have taken part in this important debate. In responding, I will first address the three government amendments and then the others in the group. The Government are clear that action needs to be taken to address the risks that climate change brings. The Government announced in the Green Finance Strategy, published last July, that all large asset owners, including occupational pension schemes, would be expected to report on how they address climate change risk, in line with the international, industry-led task force on climate-related financial disclosure, by 2022.

Building on that expectation, the Government are now, through new Clauses 73, 81 and 98, seeking to take powers to require occupational pension schemes to manage the effects of climate change effectively as a financial risk to their investments and to report publicly on how they have done so. New Section 41A inserted into the Pensions Act 1995 confers powers on the Secretary of State to impose requirements on occupational pension scheme trustees and managers to secure effective governance on the effect of climate change on the scheme.

Let me be clear. This does not mean that it is for the Government to direct schemes or set their investment strategies. The Government never have directed pension scheme investment, and do not intend to. Our clear view is that the amendments do not permit us to do that. Amendments 74 and 76, tabled by the noble Baronesses, Lady Hayman and Lady Jones, would amend the new clauses, expanding the remit of these powers and those under new Section 41B beyond occupational pension schemes to include personal pension schemes. Personal pension schemes are regulated by the Financial Conduct Authority, not the Pensions Regulator. To place requirements on personal pension providers through the Bill would create a patchwork of overlapping regulatory oversight, under which providers would have to respond to two separate regulators on the same activity.

The noble Baroness, Lady Hayman, raised occupational schemes. The FCA is currently considering how best to enhance climate-related disclosures by workplace personal pension schemes. The noble Baroness, Lady Janke, also referenced personal pensions.

Turning back to the government amendment, the Government believe it is absolutely necessary that trustees act within their fiduciary duty to protect members’ benefits against the growing physical risks of climate change and the risks of the transition to a lower-carbon economy. However, action taken by trustees and managers should not be limited to avoiding risk but should involve consideration of the investment opportunities that climate change presents, as new Section 41A(2) makes clear.

New Section 41A(3) sets out the kinds of activities trustees and managers of pension schemes may be required to undertake as part of their governance on the effects of climate change. Where such requirements are introduced, our intention is that trustees or managers are doing the determination, review and revision of strategies and targets. It is not a matter for the Government. We will consult on the exact requirements, the timings for introducing them and the scheme in scope.

New Clause 92 seeks to bind the Secretary of State to a specific timeline for launching this consultation and publishing the response. I am very grateful to noble Lords for their compliments about the speed of our action on climate change; I must tell your Lordships that our Secretary of State Thérèse Coffey and Minister for Pensions Guy Opperman are 110% behind this. It was their action, not mine, that put this into the Bill, so I cannot take credit for something I did not do; they deserve all the credit for that. I understand the point of the noble Baroness, Lady Jones, that we should push further. As my great friend William Booth would have said, that and better will do. I understand the point she is making.

I assure the noble Baronesses, Lady Hayman and Lady Jones, in response to their amendment, that the Government intend to launch their consultation on the task force recommendations upon the Bill completing its passage through Parliament, and to respond within a year.

Amendments 52 and 75 and new Clause 89 specifically identify alignment with the Paris Agreement as one of the risk-assessment activities which schemes should be doing. Our view is that the industry is not quite ready for this sizeable step in reporting requirements. The noble Baroness, Lady Jones, raised global warming. Amendment 75 goes further than reporting on alignment to require governance of schemes to align with the Paris Agreement’s objective of global warming of well under 2 degrees Celsius. This would be tantamount to directing schemes’ investments, which the Government have already ruled out. The Government are seeking to ensure effective governance of climate change risk, not to direct trustees’ or managers’ investments.

However, new Section 41A(4) in Amendment 73, taken with new Section 41B, would enable the Government to prescribe reporting on Paris alignment, requiring schemes to consider their alignment with Paris in relation to risk and exposure and to make this information public. At present, there is little consensus on methodologies for reporting on Paris alignment. This area is developing very quickly, which is why the Government are seeking powers to prescribe such reporting in future. We will continue to monitor the development of methodologies and data in the industry, and would put any future proposals on this issue to consultation.

The Government believe that schemes should be doing effective governance, as new Section 41A will allow us to require, and that schemes should publish this information as set out in the task force recommendations. New Section 41B would enable the Government to lay regulations to require this information to be made public, free of charge, including to members.

New Clause 89 would require some of this information on Paris Agreement alignment to feature in the scheme’s published statement of investment principles, or SIP. However, should the amendment be accepted, this would pre-empt the outcome of the consultation. In contrast, new Section 41B of the Government’s amendment takes powers which would enable the Government to introduce publication requirements relating to the degree of Paris Agreement alignment at a later date.

When disclosing information and documents, subsection (3) of new Section 41B in the Government’s amendment requires trustees and managers to have regard to statutory guidance which the department will publish. In requiring schemes to follow this guidance, consistency and comparability across reporting by different schemes will be easier to achieve. Other benefits of publication are ensuring that best practice is shared across the industry and that trustees and managers can learn from those with the most advance climate risk governance.

Amendments 28 and 36 seek to achieve a similar objective by granting the regulator the responsibility to create a repository of statements of investment principles and forcing schemes to provide their SIPs, as well as sections of annual statements, to the regulator. The Government were concerned by the UK Sustainable Investment and Finance Association’s recent research, which showed widespread non-compliance in publishing SIPs. We have urged UKSIF to pass its findings to the regulator, so that it can take swift action. We believe a central repository has a part to play in that, but Amendment 28 does not take into account the growing concentration of the vast majority of members in a small number of schemes. Of more than 5,000 defined benefit schemes, the largest 200 schemes have more than 60% of members. Of more than 3,000 defined contribution schemes, the largest 150 have more than 96% of members. For these members, their own scheme’s website or public pages are the natural places to look for investment information, not a corner of the Pensions Regulator’s website.

Similarly, in relation to Amendment 36, the regulator has already placed the largest schemes under one-to-one supervision and has regular sight of the all the documents referred to. In any event, Amendments 28 and 36 are unnecessary, as I can report that officials at the DWP and the Pensions Regulator have already begun work to identify how a central index of SIPs can be produced. Amendment 97 seeks to put a duty on trustees to consult members each time they review their SIP. However, this imposes unreasonable burdens on trustees. The Law Commission has confirmed in two reviews that trustees are not required to take account of members’ views, although in some circumstances they can. It would be unhelpful to require trustees to solicit member preferences which they had no ability or intention to take into account. Amendments 52, 67A and 67B seek to include information on Paris alignment reporting and consideration of ESG in the pensions dashboard.

We will turn to the dashboard later in Committee, but it is important to highlight here—

[Baroness Altmann]

I am so sorry to interrupt my noble friend. First, I want to draw the Committee’s attention to my interests as set out in the register in connection with pensions, and to the fact that my son works on sustainable transport and reducing transport emissions. Will the Minister write to members of the Committee about the regulator’s plans for creating a central repository? Will it be comprehensive? If DWP and the Pensions Regulator are working on setting this up anyway, would it do any harm to have this measure in the Bill to make sure that it happens?

[Baroness Stedman-Scott]

Of course we will be happy to write to answer the questions that my noble friend has raised.

[Baroness Hayman]

There is a lot of detail in what the Minister has said and I am very grateful to her for saying that she will look at it. I think she said that the Financial Conduct Authority is considering the requirements to be put on personal pension schemes; that is, those not covered by the government amendment and the regulations. The Minister was very helpful about the timetable of the consultation on the Government’s proposal on occupational schemes. Is there any timetable for personal pension scheme requirements? Is it the Government’s ambition that they should parallel the requirements in the Bill?

[Baroness Stedman-Scott]

I am advised that we need to get that information from the FCA; when we do, we will give it to all members of the Committee. I hope that that is acceptable.

[Baroness Bennett of Manor Castle]

I apologise, but this seems to be the logical point at which to do this. I echo the comments of the noble Baroness, Lady Altmann, and request to also get a copy of that. Further to that, if there are already plans to have a central index of SIPPs and that system already exists, including the implementation and chair statements would surely be a very small administrative burden. Could the Minister consider whether that is possible? She can answer now or in the future.

[Baroness Stedman-Scott]

Can I answer the noble Baroness’s question when I come to the specifics that have been asked? If I get to the end and have not answered, I have no doubt that she will let me know.

We will turn to dashboards later in Committee. However, it is important to highlight here that the Government want to ensure that information on dashboard services can be easily comprehensible to consumers. For this reason, dashboards should start with simple information. We remain interested in finding out whether dashboards can support an increase in engagement on issues, including the investment decisions made by schemes.

Moreover, new paragraph (c)(i), which would be inserted by Amendment 52, would not only duplicate the intent of the Government’s new clauses but would also duplicate existing duties that the Government have already placed on trustees. Amendment 67A would have a corresponding effect on workplace personal pension schemes, for which the FCA has also legislated to take account of such factors. Both these sets of requirements are mandatory, unlike the voluntary UK stewardship code referenced in this amendment.

Amendment 67B would enable the dashboard to include information on how schemes take into account members’ interests. Notwithstanding earlier arguments for keeping the dashboard simple at first, occupational schemes already have duties to report on the extent to which they take account of members’ views in investment decisions.

The final new section in the Government’s amendment, new Section 41C, confers powers on the Secretary of State to lay regulations ensuring that managers and trustees of occupational pension schemes comply with requirements in regulations laid under powers delegated by new Sections 41A and 41B. In particular, regulations may allow the Pensions Regulator to issue compliance notices, third party compliance notices and penalty notices. The provisions in new Section 41C are consistent with similar compliance provisions relating to pension schemes in paragraph 3 of Schedule 18 to the Pensions Act 2014.

New Section 41C and indeed 41A are subject to the affirmative procedure at first use only. The first regulations made in exercise of the powers in these sections will confer enforcement powers on the regulator and place new requirements on trustees or managers. The Government therefore consider that they should be subject to a higher level of scrutiny. However, the Government expect any subsequent use of the powers to be for the purpose of periodically amending these requirements to ensure that they reflect developments. We therefore believe that the negative procedure beyond first use is appropriate. The consultation requirements in Section 120 of the Pensions Act 1995, into which these new sections are proposed to be inserted, would also apply.

Delegated powers to set out these requirements in secondary legislation are essential to ensure that the requirements can take account of developing operational and financial best practice and are proportionate to the scheme in question. It also ensures that they reflect the rapidly developing understanding of the effects of climate change and its interaction with the financial system. Furthermore, the urgency of action required to address the climate emergency demands a swift policy response now and in the future.

All the Government’s new clauses also make provision for Northern Ireland that is equivalent to the provision that would be made by the Government’s amendments. This would ensure that, in accordance with the long-standing principle of parity, the single system of pensions across the UK is maintained. As such, the arguments made in relation to the proposed amendments to the Pensions Act 1995 apply equally to the amendments proposed to the Pensions (Northern Ireland) Order 1995, inserting a new paragraph into Schedule 11.

The government amendments and their associated powers are as urgent as they are important. Climate change is a major risk to the nation’s pension savings. It is appropriate and responsible for the Government to require those who have a duty to deliver members’ retirement income to safeguard investments against climate risk and publish information on how they have done so.

I come to some of the specific questions raised—

[Baroness Bowles of Berkhamsted]

I am sorry to interrupt but this is specifically on the government amendments. Like others, I welcome what is there and I hear the Minister referring to the matter as urgent and important. I just come up against a block when I see that it says “Regulations may impose”. Why can we not have “must” if there is an intention that these things are to be done? From the particular point of view of justice, in new Sections 41C and 41D, the reference to what would be your right of appeal to a tribunal still comes under “may”. I know that it is a standard formulation but it really does not appear to be right, because nothing is actually promised when it says “may”. Why can we not have “must”, and certainly have “must” when it comes to defences and reference to tribunals?

[Baroness Stedman-Scott]

In answer to the noble Baroness, subject to the passage of the Bill we will consult extensively this summer on the content of new regulations, which will likely include the content of these new requirements and the timing thereof. When we lay regulations and when they come into force will depend upon the outcome of the consultation, but we will respond to that within a year of its launch.

[Baroness Bowles of Berkhamsted]

That still does not mean that something will definitely happen then. I understand that the regulations’ shape depends upon the consultation but they should be regulations that do something, with a promise that we are going to have them—that there will be some, not that there “may”.

[Baroness Stedman-Scott]

As I understand it, we have to consult before we can make that decision.

[Lord Sharkey]

Could I join in on this? We are talking about Amendment 73, which would insert new Section 41A on “Climate change risk”. Its first proposed subsection says “Regulations may impose requirements”; it does not specify any requirements in that part because, as the Minister rightly says, they are all to be consulted on later. But it is odd that it should say “may” and not “must” since it talks about imposing requirements. In practice it means that the Government need not do anything at all, which is unfortunate.

Exactly the same comment applies to new Section 41C, headed “Sections 41A and 41B: compliance”. It begins “Regulations may make provision” and underneath that is a long list of things that will eventually turn out to be regulations and will be consulted on. I understand that “may” is appropriate there but, as it stands, the Government do not have to do anything at all about this as long as the word “may” remains as it is in both those initial paragraphs. I re-emphasise the point made by my noble friend Lady Bowles: leaving the provision of an appeal mechanism to “may” might not be a very good idea.

[Baroness Stedman-Scott]

I do not know whether the noble Lord has put his name on the list to meet, but it looks as though I am able to offer him a meeting on the consultation first, if that is helpful, to try to get to where he wants to be.

Going back to the point raised by my noble friend Lady Altmann about schemes not having a website, schemes are not required to set up a website to publish their statement of investment principles or other documents. The information must be published on a publicly available website in a manner which allows for the content to be indexed by internet search engines. This can include a social media site, a blogging platform or a repository offered by a search engine provider, as long as trustees have ensured that the document is public and can be indexed. The Government are not in the business of endorsing publishing tools, but Facebook, WordPress and Google Docs allow for free publication.

Coming on to my noble friend Lady Altmann’s point about what is meant by a large scheme, following the passage of the Bill, we will consult extensively in the summer on what schemes should be in scope and how the scope will increase over time. My noble friend also said that the Pensions Regulator is not doing anything about breaches of ESG legislation. The chief executive of the Pensions Regulator has written to DWP to confirm that it is taking action. The regulator has engaged with the findings of the UK Sustainable Investment and Finance Association on the poor state of compliance among some pension schemes and will follow up on breaches of compliance.

My noble friend Lady Altmann also said that pension schemes should be required to align their portfolios with the Paris Agreement to reach net zero by 2050. The Government’s amendment and subsequent regulations will focus on schemes’ governance of climate risk and disclosure of that risk. We do not wish to direct pension schemes to align their investments with the Paris Agreement targets, and the legislation does not allow us to do so. Nevertheless, Paris alignment reporting could be useful as a measure of climate-related risk to the scheme. We will consult over the longer term on whether it is a useful assessment of a scheme’s exposure and risk.

I have already come clean to the noble Baroness, Lady Hayman, on whom to credit for the speedy inclusion of the amendments. She also raised a point about taking account of members’ views. The Law Commission has found that pension schemes have a fiduciary duty to take account of all financially material risks, including environmental risks. We have legislated to require all schemes with 100 members to publish their policies on financially material environmental risks, including climate change, and defined contribution schemes will be required to report annually on how they manage those risks from October 2020.

Trustees do not have a duty to take account of members’ ethical concerns but are free to do so when they believe a majority of members who express a view share those concerns and when doing so would not result in significant member detriment. The noble Baroness, Lady Hayman, asked why we will not legislate for personal pension schemes. Personal pension schemes are regulated by the Financial Conduct Authority, not the Pensions Regulator. To place requirements on personal pension providers through this legislation would create a patchwork of overlapping regulatory oversight under which providers would have to respond to two separate regulators on the same activity. The FCA is currently considering how best to enhance climate-related disclosures by workplace personal pension schemes, building on its existing rules framework and enforcement powers. I will write on the number of members of personal pension schemes.

The noble Baroness, Lady Hayman, asked whether dashboards will include pension schemes’ environmental, social and governance policies. We are very interested in how dashboards can support and increase engagement, including whether information on areas such as ESG, which trustees are required to cover as part of their disclosure obligations, may be incorporated into the dashboards. This is to be informed by user testing and may evolve over time.

The noble Baroness, Lady Bennett, quoted the Minister for Pensions, who wrote,

“pension schemes ought to be thinking about the assets which help … drive new investment in important sectors of the economy … which deliver the sustainable employment, communities and environments which all of us wish to enjoy.”

How will we meet this if the scheme does not know members’ wishes? The Government have been very clear that the purpose of a pension scheme trust is to deliver an appropriate return to its beneficiaries. The context of the Minister’s quote makes this clear and that it is possible to deliver this while having a beneficial effect on the communities in which they invest. The noble Baroness also talked about the implementation and chair statements being published. Schemes are already required to publish their chair’s statement and implementation statement. We are working closely with the regulator to develop a central index that can also be applied to the implementation statement and the chair’s statement.

Finally on the point raised by the noble Baroness, Lady Bennett, about pension schemes being required to go beyond climate change to consider sustainability more broadly, trustees already have clarity that they should take account of financially material social and environmental risk in investment policies. This includes, for example, considering violations of human rights laws and destructive environmental practices. In practice, most trustees do not actively manage investments and cannot make stock selections, but the Government have set the requirement for a clear policy which will be published and shared with those managing the investments. As I have said before, the Government do not tell pension schemes how to invest. Seeking to do that would force trustees to chose between acting in the best interests of members and following government directions.

I hope I have answered all noble Lords’ questions and therefore urge the noble Baroness to withdraw her amendment and urge noble Lords to support the amendments standing in my name.

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[Lord Kirkhope of Harrogate (Con)]

Compared with the very interesting debate we have just had on these important amendments, what I have to say regarding the stand-part element of Clause 110 is probably rather insignificant in many minds. On Second Reading, I raised with the Minister the question of the nature of the regulator’s responsibilities, particularly in relation to the process of interview. I am concerned about Clause 110(4), where there is a situation concerning an individual summoned for interview by the regulator failing to answer a question or to provide an explanation that satisfied the regulator. That comes in new Section 72A of the Pensions Act 2004.

I am concerned because, as far as I am aware, an explanation is defined as a statement or account that makes something clear, but there is a massive amount of subjectivity and responsibility on the regulator’s shoulders in concluding whether that explanation is satisfactory. With the sanctions in place—ultimately a criminal sanction, but also civil sanctions—it seems a very serious area and one in which the basic right of individuals not to self-incriminate, for instance, or even providing some information can result in a more serious effect than anticipated.

I want to defend the regulator here because some remarks have been made during the debate on these amendments suggesting that the regulator needs thoroughly investigating. We are putting upon the regulator a whole lot of new responsibilities, partly in the area I am talking about—decision-making on subjective matters—but also in the overall workload, which I am concerned about.

I was just looking at the impact assessment of the Pension Schemes Bill 2020. In relation to the matters I am talking about, it suggests, for instance, that the impact on the government side of this—the changes that might be made to the requirements for the regulator or the regulator’s ability to pursue these matters—is “broadly cost neutral”. I suggest that this is not a fair appraisal because the extra responsibility placed on the regulator, and the way in which that becomes controversial from time to time, is bound to be costly. It will cost money, and the regulator therefore needs to be resourced adequately to be able to deal with that and other responsibilities we are placing on it.

Similarly, the extra obligations on those who are being interviewed or are required to comply with these things are not inconsiderable. There will be costs for those businesses that are already having to find considerable resources to deal with matters where the regulator has the powers to intervene. Therefore—perhaps my noble friend would consider this—I suggest that it would be very useful if, when this legislation is passed, the regulator is taken fully into account in terms of the resource. Just as importantly, it would be very useful if the regulator had thorough and better guidance compared to the present guidance about how to handle these circumstances and how these subjective requirements should be dealt with. That is enormously important. It is not part of the legislation as such but I think that the regulator is entitled not to be so liable for its judgments. Also, more guidance should be available to it so that it does not find itself in an unfair and unreasonable position in making these powers work.

That is all that I want to say to my noble friend at this point. I did so at Second Reading and have spoken to her subsequently. Although this issue is not as important as some of the amendments, it is significant in terms of the obligations on the regulator and on those who fall under these regulations.

[Baroness Stedman-Scott]

I thank my noble friend for that contribution, which is equally as important as the amendments. The regulator will update its current compliance enforcement policy in due course and that will include how it conducts interviews under this clause. We will discuss the impact assessment at a later stage, and I suggest that we address the specific issues that my noble friend has raised at that point. I hope that he is happy to proceed on that basis.

Clause 110 agreed.

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I am interested in how the Government got here. I accept that in reality most of the work is not going to be done by the fines; by the time you get to fining someone, frankly, the damage is done. Most of the work will be done by the supervision and regulatory regime, and we will spend much more time on that. However, the fines play an important symbolic role in signalling how bad we think offences are. I am with the noble Baroness, Lady Bowles, if less colourfully, in thinking that people who put pension schemes at risk are doing very bad things and the Government should discourage them from so doing, so I would be grateful to hear the Minister’s explanation of how they propose to do that.

[Baroness Stedman-Scott]

I thank noble Lords for tabling these amendments and I will do my best to answer all their questions. Clause 112 inserts new provisions for the Pensions Regulator to impose fixed and escalating civil penalties where a person has not complied with the regulator’s information-gathering powers. The level of the penalties is to be set in regulations, but the fixed penalty cannot exceed £50,000 and the rate of the escalating penalty cannot exceed £10,000 a day.

Clause 115 provides for a new financial penalty in the Pensions Act 2004 which can be issued by the Pensions Regulator, and sets the maximum amount of this financial penalty at £1 million. Amendments 29 and 30, in the name of the noble Lord, Lord Sharkey, seek to raise the penalty levels for both the fixed and escalating penalties. Fixed and escalating penalties are already available to the regulator for non-compliance with information-gathering provisions in connection with automatic enrolment and master trusts. We consider that it would be inconsistent and unfair to have a much higher maximum, as introduced by these amendments, for similar breaches connected to other types of pension schemes.

We have no evidence that these maximum levels are inadequate or not working. On the contrary, the regulator confirms that the current levels of fixed and escalating penalties provide an adequate deterrent in automatic enrolment: issuing a fixed penalty results in compliance in the majority of cases, with only a few cases resulting in escalating penalties. The noble Lord’s amendment would introduce a maximum fixed penalty of £1 million, but that is the maximum level of the financial penalty that the Bill is introducing for serious breaches of pension legislation—for example, deliberately giving the regulator false information, or conduct that puts members’ benefits at risk.

I know that some noble Lords feel that the financial penalty should be higher, but we believe it is set at the right level. It would not be right for the penalty for not complying with an information request to be as high as for serious breaches of pension legislation. I should also make it clear that not complying with information requests, or obstructing an inspector, is a criminal offence and will remain so, with the potential for an unlimited fine. The intention is that these fixed and escalating penalties will be imposed for less serious breaches, where the regulator thinks a civil penalty is more appropriate than a criminal prosecution. Imposing a civil penalty is likely to take less time than instituting criminal proceedings, therefore the regulator can receive the necessary information and conclude an investigation more quickly. In the 2018 consultation on the regulator’s powers, mirroring the approach for automatic enrolment and master trusts was supported by industry representatives.

Amendment 31, in the names of the noble Baronesses, Lady Bowles and Lady Janke, and Amendment 32 in the name of the noble Lord, Lord Sharkey, seek to raise the maximum amount of the new financial penalty. We consulted on our proposals in 2018 and they were developed from the Green Paper consultation in 2017. The £1 million maximum penalty was supported by the majority of respondents. The £1 million penalty is positioned as a mid-level sanction, between the lower £50,000 penalty for acts of non-compliance by corporates and £5,000 by individuals and the new higher-level criminal offences for serious wrongdoing that has an unlimited fine. The £1 million maximum level was also deemed to be appropriate as it is comparable with the average level of equivalent sanctions for financial crimes in the financial sector issued to individuals by the Financial Conduct Authority.

The new financial penalty can be applied to a number of offences, and changing the maximum penalty to the levels in the noble Baronesses’ amendment would be inappropriate in the case of some of these offences. Moreover, the people who are within scope of these penalties vary. In some cases, the target of the penalty may not have any direct connection to the sponsoring employer’s company or to the scheme itself. It would therefore be difficult to justify why such a person should be liable to pay a penalty of up to a maximum of double the scheme deficit or a percentage of the employer’s turnover. In such cases, a maximum level of £1 million is more proportionate and provides clarity. The introduction of the new financial penalty in this clause was also an integral part of enabling the Pensions Regulator to take action more swiftly, thereby becoming a “clearer, quicker, tougher” regulator.

The new maximum penalty levels proposed in Amendment 31 in particular go against this intention, as the precise meaning of the terms “deficit” and “turnover” is uncertain, and how these are to be calculated is unclear. This leads to uncertainty for any targets of the penalty and will place an unnecessary burden on the regulator. For example, the regulator would need to interpret what is an appropriate definition of deficit to use for the purposes of the penalty and then estimate what this deficit would be. Similarly, the regulator would need to dedicate resources to estimating what constitutes the employer’s annual global turnover and what would be relevant turnover for this calculation. Further, a question arises about the time at which the deficit or turnover should be assessed. For example, should it be calculated from the time the act took place or at the point of instituting proceedings? If the act is part of a series, at which point in the series should the deficit or turnover be calculated?

Until the regulator had carried out these assessments, the maximum penalty that could be charged would be uncertain. The assumptions that the regulator would need to use would also be open to challenge by the target. This would impede the regulator’s ability to take swift action and could tie enforcement up in lengthy challenges over the penalty amount. This would also put a drain on the resources the regulator has to undertake its functions.

The clause contains a power to increase the maximum amount of the financial penalties if required. This is to ensure that the penalty remains an effective deterrent in the future and accounts for factors such as inflation.

The noble Lord, Lord Sharkey, asked why we were consulting on the level of penalties rather than putting these figures in the Bill. The maximum level of penalties is included in the Bill. The level and daily rate of the existing fixed and escalating penalties which relate to automatic enrolment and master trusts are set in regulations. These provisions mirror that approach. Feedback during the consultation on the regulator’s powers indicated strong agreement on similar fixed and escalating civil penalties, but little consensus on the detail of the exact levels. We need to consult further to ensure that the penalties are set at an appropriate level.

The noble Baroness, Lady Bowles, asked why we do not follow the method of imposing fines used by the Information Commissioner’s Office. The ICO has a fining power as required in accordance with the 2016 general data protection regulation. Article 83 of the GDPR states that the penalties must be at particular levels.

The noble Baroness, Lady Sherlock, asked what modelling or consultation took place to set the maximum financial penalty at £1 million. The Government consulted on the proposals for strengthening the regulator’s powers in 2018, which were developed from the Green Paper consultation in 2017. As I have said, the £1 million maximum penalty was supported by the majority of respondents to the consultation.

The noble Baroness, Lady Sherlock, also asked about different fines decided by the FCA rather than by averages. I am afraid that I will have to write to her to answer her question on whether others have the power to change the maximum.

I hope that I have reassured noble Lords that the Government have thought carefully about these penalty amounts and struck the right balance between protecting members and being proportionate to the business. Therefore, I urge noble Lords not to press their amendments.

[Baroness Sherlock]

I realise that my questions were quite detailed, so could I ask the Minister to look at the record and write to me to answer each of them in turn? Could I encourage her to draw on the expertise behind her to answer the questions? Sometimes one gets letters after a debate and, while they relate to the general area of the questions, they are maybe not quite as well targeted as one would hope. I encourage her to do that and would be delighted to leave it at that at this time.

[Baroness Stedman-Scott]

I thank the noble Baroness for this homework. I will ensure it is delivered to her and that it is accurate.

[Lord Sharkey]

My Lords, in her explanation of the £1 million upper limit, the Minister relied to some extent on the consultation outcomes from 2018. I am curious about who was consulted. Was the ABI a consultee? She will have heard earlier in this debate the ABI’s rather enthusiastic approval of an increase in the £1 million limit, so it would be interesting to know whether the ABI has done a reverse ferret or whether it was not included in the first place.

Secondly, if the Minister is confident in her arguments for the £1 million penalty, as she clearly is, then I find it very strange that in the next section of the Bill it says, “If we don’t like that, we can increase it to anything we like via regulation”. That shows a startling lack of confidence in the £1 million. It is quite wrong to give unlimited discretion via regulation to raise the fine to any amount at all. It is unsatisfactory that this provision exists within the Bill. I am sure that we will want to discuss this further, preferably before Report, and if not, certainly on Report. In the meantime, I beg leave to withdraw the amendment.

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[Baroness Sherlock]

My Lords, I can add little to that careful explanation of the amendment; I know a lot more than I did five minutes ago. However, as the Minister responds, perhaps she could tell us a little more about what happens both now and when the Bill becomes law: that is, what the TPR does when someone has committed an offence, what is its understanding of to whom this should be reported, in what circumstances, and how its enforcement team works with the supervision team and with the FCA’s enforcement supervision arrangements. That is not directly the point which the noble Baroness, Lady Bowles, was making but I very much endorse her approach, which is to put the importance of pensions on a par with the importance of threats in other parts of the economy. That is interesting, and I am interested in the Government’s response to it.

[Baroness Stedman-Scott]

I thank the noble Baroness, Lady Bowles, for tabling this amendment, which would require the Pensions Regulator to provide a report to the Secretary of State for the purposes of the Company Directors Disqualification Act 1986. Director disqualification is within the remit of the Insolvency Service, which has the powers, resources and expertise to disqualify directors. As such, the Pensions Regulator does not have the power to disqualify directors, as this would be unnecessary, costly and inefficient. However, the Pensions Regulator is already able to share information with the Insolvency Service if it meets the “gateway” criteria as outlined in its restricted information regime under Section 82 of the Pensions Act 2004. The regulator can use this gateway in circumstances where the sharing of information is with a view to instigating director disqualification proceedings.

As such, the regulator is already able to share information with the Insolvency Service where it has identified persistent wrongdoing by a director or where it has already taken regulatory action. Under Section 8 of the Company Directors Disqualification Act 1986, the Insolvency Service is then able to apply to the court for a disqualification order on behalf of the Secretary of State, based on investigative material provided by other agencies or departments. Whether or not the Insolvency Service takes action to disqualify a director on the basis of information provided by others, such as the Pensions Regulator, will depend upon its assessment of the case in question. The Pensions Regulator and the Insolvency Service regularly engage with each other to discuss areas of joint interest. They continue to monitor the effectiveness of the disclosure process and are taking steps to streamline it when necessary. This will help to ensure that the organisations are able to work together to achieve successful outcomes and better protect the public.

In summary, the amendment is looking to introduce a process which is already in place. The Pensions Regulator and the Insolvency Service continue to work closely together to streamline this disclosure process and ensure that both organisations have a good working knowledge of each other’s remits. On that basis, I urge the noble Baroness to withdraw her amendment.

[Baroness Bowles of Berkhamsted]

I thank the Minister for that explanation. I think that there are two provisions within the Company Directors Disqualification Act: the ones with the Insolvency Service tend to be based around purely financial mechanisms. I will carefully read the response in Hansard to see whether it covers everything that I envisaged it should. I am a little suspicious that it does not; there would otherwise not be the provision of Section 8(1) and its very careful amendment in 2015. As the Committee might expect, I have had some communication with QCs who deal with these kinds of issues. If it is covered, I am happy; if not, I would like to see whether we can tighten it up. With that, I beg leave to withdraw my amendment.