Pensions Act 2011 (Consequential and Supplementary Provisions) Regulations 2014

Baroness Turner of Camden Excerpts

Wednesday 9th July 2014 Grand Committee

I understand the complexities, and trying to construct this speech so that it did not sound too complex was a challenge in itself. I remain concerned at how the Government accord themselves a level of confidence at which they can say that, in giving this retrospective protection, the disregard on members’ benefits is negligible.

[Baroness Turner of Camden (Lab)]

My Lords, my noble friend Lady Drake has made an exhaustive study of this complicated matter. I certainly do not have her kind of in-depth understanding. I came this afternoon because I am interested in what happens to members of DB schemes who have been concerned that the various changes would threaten the safety of their benefits.

As we have heard this afternoon, there have been quite heavy assurances from the Government that the protection of members is paramount to them; that is of course important. We have already heard that there have been assurances on retrospection. The changeover in some schemes from non-money purchase into money purchase can give rise to uncertainty and a lack of assurance among the people receiving it. I am therefore interested to hear what the Minister has to say in response to my noble friend, who has raised these points sharply and with great clarity. It is necessary when you are making adjustments in pension benefits in whatever area to make sure that people who are on the receiving end are confident that what they have been paying for and supporting all their lives will be safe. That is terribly important.

We understand that the Government have given assurance both in relation to protection under the ECHR, which is important, and to general protection as well as protection of some means of challenging if people feel concerned and are not happy about what is happening. I await with interest what the Minister has to say in response to the issues which have been raised, which are very pertinent in the circumstances.

[Baroness Sherlock (Lab)]

My Lords, I thank the Minister for his introduction to these regulations and for explaining how we got to this place, the noble Lord, Lord Kirkwood, for some very good questions, and my noble friends Lady Drake and Lady Turner for raising some significant concerns.

There has rightly been a long consultation on this issue, and it is right that the Government have taken the time to listen to a wide range of voices, particularly regarding the retrospective nature of the changes, the significance of which has been highlighted by the noble Lord, Lord Kirkwood, and others. While on one level these are very technical changes—I say to my noble friend Lady Drake that, being a relatively normal person as far as pensions are concerned, if in no other respect, I found that “complex” did not begin to describe my emotions—sadly, I felt the same way as Brazil when I was reading these. None the less I confess that the questions I am asking the Minister are quite genuine and I will find the answers fascinating, because I certainly do not pretend to understand the exact implications of what is happening here.

As my noble friend Lady Drake explained, the original draft SI was withdrawn after being challenged by the Joint Committee on Statutory Instruments. It has been replaced by two orders: this affirmative draft instrument and a negative instrument, the Pensions Act 2011 (Transitional, Consequential and Supplementary Provisions) Regulations 2014, to which I shall refer from now on as the negative instrument, if noble Lords will bear with me. Those two orders are completely intertwined. Indeed, the Government issued a single impact assessment covering both. Therefore I hope that the Minister will forgive me if some of my questions end up straying into that territory. I simply want to understand the settlement that the Government reached, and inevitably the ground is split in practice between the two instruments.

On commencement, my noble friend Lady Drake explained that these regulations will apply primarily with prospective effect, with the exception of two limited circumstances relating to winding up and to employer debt where there is a risk to member benefits. However, there will be retrospective protection for the affected pension schemes, with earlier decisions effectively being validated. The key effects of that of course—as has been mentioned—are on schemes that switch from being money purchase to defined benefit, with all the significant regulatory, governance and funding implications that that switch carries. There is also the effect on wind-ups and administration and the impact on employer debt. The Government originally intended that the provisions should all be retrospectively applied, but changed their position on consultation. The Government response to the consultation on the definition of money purchase schemes says at paragraph 50:

“However the Department has been persuaded that, where there is negligible risk to member benefits, it would be unduly burdensome to require schemes to revisit past decisions. This would give rise to expensive administrative costs that could deplete scheme assets and therefore, the ability to fund members’ benefits”.

Paragraph 51 continues:

“Nevertheless, where there is a real risk to member benefits, it is right that the legislation provides that employers fund a scheme deficit if a scheme is underfunded on wind-up, or if the scheme is unable to put in place a recovery plan”.

The response goes on to explain that in practice the transitional regulations validate the actions of trustees or managers in respect of those non-money purchase benefits, except in limited circumstances.

If that is the basis of the transitional protection that is being offered by the Government, can the Minister tell the Grand Committee a bit more about the basis of their assessment? The impact assessment says that,

“there is insufficient information available to accurately estimate the number of schemes affected by these regulations”.

It goes on to say that there are approximately 40,000 private occupational pension schemes in the UK that include money purchase benefits, of which about 2% are hybrid schemes.

The impact assessment says that during the consultation the department held four stakeholder forum events, with more than 100 stakeholders in attendance. It had 95 responses to the consultation document. The department also made direct approaches to relevant organisations, including employer representative bodies. As my noble friend Lady Drake mentioned, it also went out and made direct attempts to get data, in order to better understand this. However, paragraph 25 of the impact assessment says:

“Despite these efforts the Department is unable to quantify the impact of the regulations on the schemes that are likely to be affected. There is no data available at an industry-wide level and the consultation did not elicit sufficient data at scheme level to allow us to produce reliable estimates of the impacts on schemes, employers or members”.

However, the Government were obviously given a pretty clear steer by the industry that the consequences of retrospection would be significant, because the impact assessment says at paragraph 30:

“The Department have taken into account the strongly expressed views of those in the industry. Having carefully considered these responses, the Department is persuaded that this change to the policy”—

as was quoted—

“will not appreciably increase risk to members’ entitlement or make any material difference to members’ pension outcomes, given the protections put in place through these regulations”.

My noble friend Lady Turner said that she was pleased the Government were able to give assurances that members would not find their benefits being affected. However, I have to ask—along with my noble friend Lady Drake—how the Government can be confident that the risk to members’ entitlements is negligible and will not increase appreciably, when they are unable to quantify even the number of schemes affected, never mind the number of members, and when they do not seem to have been able to gather any data about what the quantum of that effect might be. I understand that they are in a difficult position, but I wonder what degree of confidence the Government have, and therefore what degree of assurance the Minister can offer the House through this Grand Committee, that these regulations will have the effects that the Government believe they will.