Pension Schemes Bill [HL]

Lord Flight Excerpts

Committee: 1st sitting (Hansard): House of Lords
Monday 21st November 2016 Lords Chamber

Moved by

[Lord Flight]

1: Clause 1, page 1, line 8, at end insert “and is not an AVC only scheme,”

[Lord Flight (Con)]

My Lords, the intent of my Amendments 1, 3, 5 and 6—and, I believe, similarly the intent of the Opposition’s Amendment 2—is to remove from the definition of master trust certain non-associated multi-employer schemes, known as NAMESs, that are supported by employers and are not run for profit. Such schemes are often industry-wide schemes set up to provide benefits for employees within a particular industry sector.

I have identified at least 12 of these schemes, with member numbers ranging from 900 to 340,000 and the value of assets ranging from £80 million to £48 billion. They include the Railways Pension Scheme, the Merchant Navy Officers Pension Fund, the Merchant Navy Ratings Pension Fund, the Plumbing & Mechanical Services (UK) Industry Pension Scheme, the Cheviot Trust, the ITB Pension Funds, the Industry-Wide Coal Staff Superannuation Scheme, the Industry Wide Mineworkers’ Pension Scheme, the Motor Industry Pension Plan, the Pilots’ National Pension Fund, the YMCA Pension and Assurance Plan, and the Registered Dock Workers’ Pension Scheme.

The concern is that, without my amendments or other ways in which the Government may choose to address the issue, these schemes will need to comply with the new regulations on master trusts, despite being subject already to a very comprehensive regulatory regime. I had always understood that the intent of the new Government was not to double up regulation but to streamline it. I believe the USS—the Universities Superannuation Scheme—has raised this point already with the Department for Work and Pensions. I sympathise with its argument that such not-for-profit hybrid schemes should be excluded. By inserting,

“is not a relevant centralised scheme”,

my Amendment 3 would create such an exclusion.

Mostly, the schemes are occupational pension schemes regulated by the Pensions Regulator. They do not have a commercial agenda and have not been established with a view to making a profit, unlike the commercial master trusts, which are surely the intended target of the Bill. The NAME schemes provide defined benefit—DB—pensions and so are subject to the scheme-specific funding requirements of the Pensions Act 2004. It is usual in schemes such as these for the participating employers to be liable for the expenses of running the scheme. When relying on employers to fund the scheme and to pay expenses, there is the risk of employer insolvency but this risk is faced by trustees of all occupational pension schemes, except where there is a government guarantee.

The reason many of these schemes will be caught by the definition of master trusts for the purposes of the Bill is that they give members the option to accrue money purchase benefits on top of their DB pensions by choosing to pay additional voluntary contributions. Having to comply with the requirements for master trusts would cause difficulties for many NAME schemes and result in additional expense for those employees and, ultimately, employees participating in such schemes. In particular, there will not usually be a person involved with a scheme who fits the requirements of being a “scheme funder”. The Bill requires that a scheme funder,

“must be constituted as a separate legal entity”,

and that the only activities it carries out relate directly to the master trust.

It is not entirely clear whether or not the drafting of my amendments in this technical area succeeds in excluding all NAME schemes that the Government might want to carve out of being a master trust, and it is impossible to know what different pension arrangements may be developed in the future. The amendments therefore include a regulation-making power to enable the Secretary of State to remove further schemes from the definition of master trust.

I have referred to the Universities Superannuation Scheme, which is a classic example. Its starting position is that it believes it is “unintended, unnecessary and burdensome” that,

“hybrid schemes such as USS, which provide pension benefits for multiple non-connected employers … will be caught by the new regulation”.

It would like to see the definition of master trusts clarified in secondary legislation to ensure that it targets only those schemes which are currently subject to inadequate regulation.

I feel sure that it is not the Government’s intent that these NAME schemes should be covered by the definition of master trusts. If the particular changes that my amendment proposes are not to the Government’s liking, or if they think that it does not work, I hope to hear that they have alternative proposals to deal with these issues.

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[Lord Freud]

Yes, I think that we will come back to that issue—and, if we do not, I shall make sure to write to the noble Lord before the end of the Committee stage.

[Lord Flight]

My Lords, I am pleased to hear the Minister advise that Clause 39 will be used for further consultation, and that he is certainly minded to introduce a carve-out for AVCs. I would like to push the case for NAME as well, particularly as regards the arguments made by the university schemes. However, I understand the Government’s reservations here. Considerable further discussions with the industry are needed. On the basis of such constructive use of Clause 39, I beg leave to withdraw the amendment.

Amendment 1 withdrawn.

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[Lord McKenzie of Luton]

My Lords, in moving Amendment 7 I shall also speak to Amendments 8 and 78. Amendment 7 would require that, for a master trust scheme to be operated, it must be authorised under all the provisions of Part 1. Part 1 covers provisions relating to authorisation, supervision, triggering events, continuity options, pause orders and withdrawal of authorisation—in others words, the totality of the Bill’s requirements apart from Part 2, which deals with administration charges.

We have already touched on the reason for the amendment with our reference to the Constitution Committee. In its letter of 11 November to the Minister, the noble Lord, Lord Freud, it drew specific attention to Clause 39, which we just debated, pointing out that it could be used not only to extend the master trust regime to schemes to which it might otherwise not apply, but to prevent a regime applying in whole or in part to schemes to which, according to the terms of the Bill, it would otherwise apply. We would counter this by deleting the authority of Clause 39(1)(b) with Amendment 78. As I said, we would require all the Bill’s provisions to apply if someone is to be authorised to operate a master trust.

Clause 39, as we have debated, is an extraordinarily wide power to allot to the Secretary of State, notwithstanding the proposed use of the affirmative resolution procedure. I suggest it is incumbent on the Minister to do much more to justify these powers. In what circumstances will it be envisaged that the provisions would be disapplied? We identified some areas, but which provisions do the Government have in mind? This gives the opportunity to disapply some or all of the provisions. Some might be taken out of the scheme entirely—AVCs, for example—but how would they be partially disapplied? Further, if the provisions are to be ignored, what authority might there be to make alternative arrangements? What other regulatory procedures would kick in? This legislation is important to protect the savings of millions of people. However, much still needs to be developed.

Amendment 8 would require that a scheme’s policies relating to systems and processes be added to the list of matters to be included as part of the application. While we acknowledge that the Secretary of State can, by regulation, add to the list of matters that have to be addressed as part of the application, it seems odd not to include in the Bill information regarding matters about which the Pensions Regulator should be satisfied pre-authorisation.

Amendment 8 would also require the application to set out the extent to which it proposes to adopt the master trust assurance framework. This is a probing amendment. As an at least interim response to the acknowledged poor standards of governance administration, in 2014 the Pensions Regulator and the ICAEW developed a master trust assurance framework to help improve governance for DC schemes. This is a voluntary framework that has been adopted by only a minority of master trust schemes to date—some 11 out of a current total of 84. It involves commissioning an independent reporting accountant to assess the design and operational effectiveness of the control procedures in place. As we know, there are two types of report: type 1 checks the design of a scheme’s control procedures; type 2 checks the operational effectiveness over a reporting year.

The point has been made to us that, other things being equal, accreditation will increasingly become a commercial imperative for providers so they can demonstrate that their scheme is well run. We agree with the Government that simply making the assurance framework compulsory is not a full response to the risk that such master trust schemes engender. In contrast to the Bill, it does not cover, for example, the financial stability of the provider and capital adequacy. Although it is not an alternative to the legislation, a question arises as to the future of the framework. This is particularly pertinent, as it appears that the regulations which will enable most of the Bill to come into force are some way off—possibly two years. Can the Minister give us the Government’s view on what should happen in the interim? We urge them to set out some analysis of the key areas of consistency between what the Bill requires, in so far as it can be determined, and the assurance framework, and to encourage schemes which have not obtained assurance to do so.

The FCA states that master trusts are expected to obtain independent master trust assurance to demonstrate the meeting of standards of governance and administration that meet the DC code and DC regulatory guidance. Clear indications from the Government are vital now so that schemes under the Pensions Regulator and the ICAEW can know where they stand. I am aware that the noble Lord, Lord Flight, has an amendment still to come. I will withhold my comments on that until we have heard from him. I beg to move.

[Lord Flight]

My Lords, I support Amendment 8. It is disappointing that reference to the master trust assurance framework was not already in the Bill, particularly given that the accreditation procedure confirms the rigour in the administrative procedures within the master trust. It is right that that should be added.

My Amendment 9 is a probing amendment to ask whether a continuity strategy not be the ongoing responsibility of the trustees rather than something which the regulator determines.

[Lord Young of Cookham (Con)]

My Lords, this group of amendments relates to the nature of the authorisation regime, the requirement to meet the criteria, the information provided in the application and the regulation-making powers to vary the scope of the regime in respect of specified characteristics.

Amendment 7, tabled by the noble Lord, Lord McKenzie, and the noble Baroness, Lady Drake, would modify the central tenet of the authorisation regime: the prohibition on a person operating a master trust scheme unless the scheme is authorised. It would amend Clause 3(1) so that it read:

“A person may not operate a Master Trust scheme unless the scheme is authorised under all of the provisions of Part 1”.

The prohibition on operating a master trust scheme has been drafted so that a person may not operate a master trust unless it is authorised and that, to become authorised, the master trust must satisfy the Pensions Regulator that it meets the authorisation criteria. As is set out in the Bill, these are that the persons involved are fit and proper, that the scheme is financially sustainable, that the scheme funder meets certain requirements, that the scheme has sufficient systems and processes to run the scheme and that the scheme has an adequate continuity strategy.

All the criteria must be met in order for the master trust to be authorised. They must continue to be met on an ongoing basis, with the Pensions Regulator having the power to withdraw authorisation if it ceases to be satisfied that all the criteria are met. It is these criteria that are relevant for determining whether a master trust should be authorised. For that reason, I am happy to be able to reassure the noble Lord that all the authorisation criteria must be met for the scheme to be authorised and for the master trust to be allowed to operate. I hope that he will agree that the amendment is not necessary.

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[Lord Flight]

My Lords, I wish to express some concern about Amendment 36. Surely trustees need discretion over the timing of communicating with members in a triggered event period so as not potentially to cause unnecessary scares and worries.

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Moved by

[Lord Flight]

11: Clause 4, page 3, line 25, leave out first “the” and insert “any”

[Lord Flight]

My Lords, this is a very simple amendment. The use of the word “the” assumes that a fee will apply and that, effectively, this legislation is laying that down. Should not it be best left to the Secretary of State or the regulator to determine whether or not a fee will apply? Hence, I suggest that “any” is substituted for “the”.

[Lord McKenzie of Luton]

My Lords, we have Amendments 12 and 82 in this group. We are happy to support the amendment of the noble Lord, Lord Flight, on this occasion.

Amendment 12 requires a new clause to be inserted in the Bill requiring the Secretary of State to report to Parliament on the sufficiency of resources available to the Pensions Regulator for the purposes of the Bill. I think we can anticipate the specifics of the reply to that formulation but I stress that this is about trying to get something on the record today about resources, rather than it necessarily being dealt with on the basis of a clause in the Bill. We know from the impact assessment that there will be additional costs to business from funding the Pensions Regulator and an ongoing levy charge. However, like so much of this Bill, we have no further detail.

The Pensions Regulator has a very significant role in the new era of master trusts and it is vital that the regulator is resourced to play its part in full. When fully commenced, the Pensions Regulator will be responsible for applications for authorisation; judgments about fit and proper persons; decisions as to whether a scheme is financially sustainable, with all the calculations that that entails; a sound business strategy with sufficient financial resources; taking a view on whether the systems and processes used in running the scheme are sufficient to ensure that it is run effectively; and determining whether a master trust has an adequate continuity strategy. On an ongoing basis, the Pensions Regulator is the recipient of supervisory returns and scheme accounts, and must deal with significant events—whatever that may be, and we are going to come on to that—issue penalty notices where appropriate and withdraw authorisation where criteria are no longer met. Further, the Pensions Regulator has an important role as a consequence of a triggering event and winding-up. Not all these responsibilities will bite immediately. It looks as though it could be two years before the commencement of all the Bill takes effect. However, there are responsibilities before that under the transitional provisions of Schedule 2.

Currently, of course, the Pensions Regulator has a role in relation to master trusts, but it is more limited than that provided for in this legislation. The extent of resources required depends upon the volume of master trusts, now and in the future. Although aggregate amounts are expected to increase—that is both members and investments, largely through auto-enrolment—there is the prospect at least of some providers exiting the market. Clearly the workload of the Pensions Regulator is likely to be front-end loaded as the authorisation of existing master trusts is completed and the role becomes more one of supervision. Notwithstanding that, there is much detail still to be settled and we are entitled to seek comfort on the capability of the Pensions Regulator to play what is a central role in the new regime.

On funding, is it proposed that fees and levies will provide the totality of additional resources needed to meet the requirements of the Bill? What assessment has been made of any recruitment needs given the expanded role? In particular, what, if any, changes are considered necessary to the skills set of the Pensions Regulator employees and what planning is under way to meet this? This is inevitably a probing amendment, but one to focus on the operational position of the Pensions Regulator given the important additional tasks of the organisation, which we support, based on the Bill.

Amendment 82 reinforces the Government’s commitment in the impact assessment dated October 2016. This recites that the level of uncertainty currently is too great to provide a meaningful estimate of the net cost to business of the introduction of the authorisation and supervision regime. However, it promises a full assessment at the secondary legislation stage. Our amendment causes this to be before triggering the bringing into force of the main provisions of the Bill. We seek some further clarification on timing, as presumably all the secondary legislation will not arrive at the same time. Are we going to get the impact assessment piecemeal? The purpose of these amendments is to make sure that we get the information about the overall impact of these provisions.

[Lord Flight]

My Lords, should Amendment 12 be in the Act? Generally the Government and the Secretary of State have responsibility to see that something like TPR is funded and it is not solely a master trust issue. I question whether this should be in the Bill.

[Lord Freud]

My Lords, these amendments all concern the resources, financial or otherwise, which will be required to ensure that the Pensions Regulator can implement and operate the master trust authorisation regime.

Amendment 11, tabled by my noble friend Lord Flight, would change the wording of Clause 4 so that subsection (5)(b) reads:

“The Secretary of State may make regulations setting out … any application fee payable to the Pensions Regulator”,

instead of “the” application fee.

The current provision in the Bill does not require the Secretary of State to set an application fee but it is important for the Government to be clear to the industry about their intentions now—and the Government intend to make regulations that specify an application fee. It is also important for the Secretary of State to have the ability to change the application fee in the future. That is one reason for specifying this fee in regulations. The master trust industry is developing, and will continue to do so, as it adapts to the new requirements of this regime. As the industry changes, it is entirely feasible that the cost to the regulator of assessing applications for authorisation may change too.

The fee serves two key purposes. First, it ensures that the Pensions Regulator can recover the costs of processing applications from master trust authorisation without indirectly placing those costs on the wider pensions community it regulates. Without an authorisation fee it would have to recover these costs through the funding provided by the general levy, and this would not be fair given that a large number of the schemes which pay into this levy are not master trust schemes. Secondly, the fee ensures that schemes seeking to become authorised submit carefully considered applications by acting as a deterrent to submitting multiple applications.

As I hope I have explained, it is important to make provisions for regulations to specify an application fee and that the industry is clear that the Government intend to use this power. The Bill as it stands achieves this intent.

Both Amendments 12 and 82 require that a report on the subject of the Pensions Regulator’s resources is laid before the Houses of Parliament before the provisions within Part 1 of the Bill are commenced. Amendment 82 would additionally require that Parliament is presented with a report about the impacts of the master trust authorisation regime. The additional report required by Amendment 82 is described as,

“a comprehensive assessment of the impact of Part 1”.

The other report is,

“a report demonstrating that sufficient resources are available to the Pensions Regulator to carry out the requirements on the Regulator pursuant to”,

this Act. The focus of Amendment 12 is very similar, but it requires that the resources report should address the resources required to conduct the regulator’s functions under Clause 5.

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[Lord McKenzie of Luton]

I am grateful to the noble Lord.

[Lord Flight]

My Lords, I am interested to note that my amendment has resulted in a clear statement by the Government that a fee will be charged and that it will be provided for in the Bill. I beg leave to withdraw the amendment.

Amendment 11 withdrawn.