Pension Schemes Bill [Lords]

Damian Green Excerpts

2nd reading: House of Commons
Monday 30th January 2017 Commons Chamber

[The Secretary of State for Work and Pensions (Damian Green)]

I beg to move, That the Bill be now read a Second time.

Let me start by placing the Bill in the context of the Government’s overall record on pensions. This Government have delivered radical and much-needed changes to our pensions system to make savings easier, fairer and safer for all. Since 2010 the pensions landscape has seen a revolution not only in state support, but in the ways in which people can save and access their pension savings.

We have removed the default retirement age, helping people to live fuller working lives. That is good for people’s wellbeing and their retirement income, and it benefits individuals, employers and the economy. We have made it easier for them to understand their state pension, and by setting the full amount at £155.65 a week we will lift more pensioners out of means-testing in the future. Together with the reviews of the state pension age, those changes are creating a sustainable system as a foundation for people’s private retirement saving.

We have increased private long-term savings by introducing automatic enrolment. More than 7 million people have already been automatically enrolled into a workplace pension, and more than 370,000 employers have declared that they have met their automatic enrolment duties. This is the cornerstone of our private pension reforms and it reverses the decade-long decline in pension savings prior to its introduction. It is a programme that works and it helps people achieve a more financially secure later life.

I am grateful to the many independent observers who have commented on the success of the policy. The Work and Pensions Committee has recognised that automatic enrolment has been a “tremendous success”. The National Audit Office, reporting on automatic enrolment in November 2016, found that the

“programme is also on track to deliver value for money in improving retirement incomes in the longer term”.

Findings of a report by the Institute for Fiscal Studies, which was also published in November 2016, suggest that automatic enrolment is having a huge relative impact on those with the lowest participation rates in workplace pensions before its introduction, in particular those aged between 22 and 29—a group that has seen a 52.1 percentage point increase in pensions saving—and those in the lowest incomes quartile, who have seen a 53.9 percentage points increase. Moreover, the institute found that automatic enrolment is having an effect well beyond our target eligible group, in particular those earning under the £10,000 threshold, and that some employers are paying above minimum contribution rates.

Women are benefiting, too. In 2011, only 39% of eligible women employed in the private sector were in a workplace pension; by 2015, the figure had increased to 70%. By 2018, we estimate that 10 million workers will be newly saving or saving more into a workplace pension as a result of this change, generating about £17 billion in additional pension saving each year by 2019-20.

The Government’s introduction of pension freedoms in April 2015 allows those aged 55 and over to access their pension savings with more flexibility. People with defined contribution pension schemes can now choose to use those funds in the way that is most suited to their circumstances, whether by drawing down the income, taking out an annuity, taking a lump sum or using some combination of those options. Since the introduction of pension freedoms, more than 1.5 million payments have been made, with £9.2 billion withdrawn flexibly in the first 21 months.

That is the landscape; let me turn to the Bill. Our focus now is to make sure that the regulatory landscape continues to be effective in protecting members so that everyone can have confidence in their pension scheme. Automatic enrolment requires employers, small and large, to provide pensions for their workers, in many cases for the first time. Automatic enrolment is helping to ensure that tomorrow’s pensioners have greater security and an asset base in later life. Many employers have selected master trust pension schemes because they can offer scale, good governance and value for members.

[Frank Field (Birkenhead) (Lab)]

I am grateful to the Secretary of State for giving way and for his earlier comments. Although we may have differences on the adequacy of the Department’s responses to some of the Select Committee’s reports, its response to our report on this issue is immensely encouraging. I think that some Members of the Committee will want to endorse the Secretary of State’s proposals, which implement some of our recommendations to defend the hard-earned savings that many people are making, sometimes for the first time, by auto-enrolment. We do not want the cowboys to get hold of those funds.

[Damian Green]

I am extremely grateful to the right hon. Gentleman for his words. Throughout his intervention, I was expecting “but” to appear at any moment, and it did not. We can be as one on the matter, and I will seek to improve our responses to future reports of the Committee that he chairs.

[Hywel Williams (Arfon) (PC)]

I am grateful to the Secretary of State, but—if I may use that word—would he accept that the Bill is a missed opportunity to put right the severe problems in the plumbing and mechanical services industry pension scheme? For example, my constituent Chris Stuhlfelder wants to pass on his business to his employees after a lifetime of work in the industry, but he risks losing the lifetime rewards of that work just in order to secure the pension scheme for liabilities that are not directly his. Will the Minister table amendments to deal with that?

[Damian Green]

I acknowledge the problem faced by the hon. Gentleman’s constituent and others in the same scheme. The Parliamentary Under-Secretary of State for Pensions, my hon. Friend the Member for Watford (Richard Harrington), has met the hon. Gentleman’s constituent. We are looking, with representatives of the employers and the scheme, to see what we can do about the issues that they have raised, and we are exploring alternative methods to help employers in such schemes to manage their employer debt. The hon. Gentleman will be aware that this is a complex area of legislation, so it is important that we get it right. As I hope he knows, we are on the case.

[Julian Knight (Solihull) (Con)]

I really welcome this legislation, but I am not the only one. I do not know whether the Secretary of State is aware of the comments of Morten Nilsson, the CEO of NOW: Pensions, a huge master trust. He has said:

“When we entered the market we were shocked at how easy it was to set up a master trust. It was simply a case of sending a form off to HMRC and The Pensions Regulator, nothing more.”

I am very glad that the Government are looking to address that serious issue.

[Damian Green]

My hon. Friend raises an important point, which is at the heart of the legislation. The strong and quick growth of master trusts in response to the success of automatic enrolment has been in danger of running ahead of the regulatory system. In the Bill, we are catching up and making sure that the regulatory system is adequate to deal with these trusts, which will be hugely important in 20 years’ time. We hope and expect that auto-enrolment will carry on, so the funds under management will increase hugely in the decades to come. It is really important to have the regulation right from the early days of the new system.

Automatic enrolment requires employers to provide a pension for their workers. It is, as I have said, helping to ensure that tomorrow’s pensioners have greater security and an asset base. Many employers have selected master trust pension schemes because they offer scale, good governance and value for members.

[James Duddridge (Rochford and Southend East) (Con)]

As well as being equitable for employees, will the schemes be equitable for employers? In the past, one of the problems of pooled defined benefit funds was that employers had ongoing liabilities beyond their initial contributions. Will the master trusts include only defined contributions and limit employers’ liability in the longer term, so that it is just an amount that will be put in, rather than an ongoing liability?

[Damian Green]

The purpose of the regulatory system we are introducing in the Bill is precisely to ensure that there are checks and balances to avoid some of the problems we have seen in traditional schemes. My hon. Friend may be aware that we are about to produce a wider consultation on defined benefit schemes, so some of the problems he rightly identifies will be addressed in that consultation.

There has been very fast growth in the use of master trust schemes. In 2010, there were about 200,000 members in master trust schemes in the UK. By December 2016, there were over 7 million members, and £10 billion of assets in 87 master trusts. The schemes are regulated by the Pensions Regulator in accordance with occupational pensions legislation, but that legislation was developed mainly with single employer pension schemes in mind. The master trust schemes have different structures and dynamics, which give rise to different risks. We have worked closely with the Pensions Regulator and engaged with other stakeholders to see what essential protections are needed. We believe that the measures in the Bill, while proportionate to the risks, will provide those protections.

The Bill introduces a new authorisation regime for master trusts. Under the new regime, the trusts will have to satisfy the regulator that they meet certain criteria before operating, or achieve those criteria if they are already operating. The criteria have been developed in discussion with the industry, and they include the same kind of risks that the Financial Conduct Authority regulation addresses in relation to group personal pensions, with which master trust schemes have some similarities.

Master trusts will now be required to demonstrate five things: that the persons involved in the scheme are fit and proper; that the scheme has financial sustainability; that the scheme funder meets certain requirements; that the systems and processes relating to the governance and administration of the scheme are sufficient to ensure that it is run effectively; and that the scheme has an adequate continuity strategy. The Bill sets out these criteria so that it is clear to master trusts and other stakeholders what the new regime will entail. Schemes will have to continue to meet the criteria to remain authorised. The regulator will also be given new powers to supervise master trusts, enabling it to intervene where schemes are at risk of falling below the required standards.

The Bill also places certain key requirements on master trusts and provides additional powers for the regulator where a master trust experiences key risk events, such as the scheme funder deciding to withdraw from its relationship with the scheme. The Bill requires a scheme that has experienced such an event to resolve the issue or to close. This requirement, along with the regulator’s new powers, supports continuity of savings for members, protects members where a scheme is to wind up or close, and supports employers in continuing to fulfil their automatic enrolment duties.

On the introduction of the Bill in the other place, the Pensions Regulator said:

“We are very pleased that the Pension Schemes Bill will drive up standards and give us tough new supervisory powers…ensuring members are better protected and ultimately receive the benefits they expect.”

In welcoming the Bill, the Pensions and Lifetime Savings Association commented that

“tighter regulation of master trusts is essential to protect savers and ensure that only good master trusts operate in the market”.

It went on:

“This is an important Bill that will provide the appropriate safeguards for the millions of people now saving for their retirement through master trusts.”

As I have said, we continue to engage with stakeholders on aspects of the detail to be made in regulations. We anticipate the initial consultation to inform the regulations will take place in the autumn, and it will be followed by a formal consultation on the draft regulations. Our intention is to lay the regulations during the summer of 2018, and the authorisation and supervision regime is likely to be commenced in full that year.

However, the Bill also contains provisions that, on enactment, will have effect back to 20 October 2016, the day on which the Bill was published. These provisions relate to requirements to notify key events to the Pensions Regulator, and constraints on charges levied on or in respect of members in circumstances relating to key risk events or scheme failure. That is vital for protecting members in the short term and will ensure that a backstop is in place until the full regime commences.

The Bill makes a necessary change in relation to the existing legislation on charges. We are keen to remove some of the barriers that might prevent people from accessing pension freedoms.

[Tom Tugendhat (Tonbridge and Malling) (Con)]

I am pleased that my right hon. Friend has come to the section about charges. He will know of the transparency campaign I have been pushing. I am extremely grateful for the efforts that he and the Under-Secretary of State for Pensions, who is sitting to the left of the Secretary of State, have made in introducing more openness into pensions schemes. I should be grateful to hear more on how he will approach that.

[Damian Green]

I congratulate my hon. Friend on his campaign. Transparency is a key area. Hidden costs and charges often erode savers’ pensions. We are committed to giving members sight of all the costs that affect their pension savings. He asks for more detail. We plan to consult later in the year on the publication and onward disclosure of information about costs and charges to members. In addition to the Bill, other things are clearly required to give greater confidence in the pensions system. Greater transparency is clearly one of the steps forward. I completely agree with him on that.

As I was saying, we are keen to remove some of the barriers that might prevent people from accessing pension freedoms. The Financial Conduct Authority and the Pensions Regulator indicate that significant numbers of people have pensions to which an early exit charge is applicable. The Bill amends the Pensions Act 2014 to allow us to make regulations to restrict charges or impose governance requirements on pension schemes. We intend to use that power alongside existing powers to make regulations to introduce a cap that will prevent early exit charges from creating a barrier for members of occupational pension schemes who are eligible to access their pension savings. The FCA will introduce a corresponding cap on early exit charges in personal and stakeholder pension schemes in April this year.

The Government intend to use that power together with existing ones to make regulations preventing commission charges from being imposed on members of certain occupational pension schemes when they arise under existing contracts entered into before 6 April 2016. We have already made regulations that prohibit such charges under new or amended contracts agreed on or after that date. That will fulfil our commitment to ensure that certain pension schemes used for automatic enrolment do not contain member-borne commission payments to advisers.

In conclusion, we believe that the Bill is an important and necessary legislative step to ensure that essential protections are in place for those saving in master trust pension schemes. With many millions of members enrolled in such schemes, it is important that we act now to ensure that members are protected equally whatever type of scheme they are in. The measures proposed in the Bill have been developed in constructive consultation with the industry and other stakeholders, so we have confidence that they are proportionate to the specific risks in master trusts and will provide that necessary protection. In turn, that helps to maintain confidence in pension savings, and particularly in automatic enrolment. By making it easier for people to save through a workplace pension, the Government are building a culture of financial independence and long-term saving.

The Bill will also ensure that people are not unnecessarily dissuaded from taking advantage of the pension freedoms by high early exit charges. The Government have given people greater flexibility to take their pension savings, rewarding those who have worked hard and saved for their future. This is a focused Bill that specifically concentrates on the action we must take to cement the reforms we have already made, and I commend it to the House.