Pension Schemes Bill [HL]

Lord Flight Excerpts

Monday 21st November 2016 Lords Chamber

[Baroness Drake (Lab)]

My Lords, Amendment 18 proposes a new clause that, put at its simplest, seeks a compensation fund or provider of last resort when a master trust fails and there are not enough resources to meet the costs of wind-up and transfer. It is the in extremis protection, ensuring a last line of defence for members’ funds if the capital buffer required under Clause 8 or the proposed continuity option provisions in Clause 24 fail.

Setting regulatory operational capital requirements for master trusts is important but does not guarantee the security of members’ benefits or rights. I am sure the Minister will reassure us that the Government intend to be robust. The trouble is that we are not sighted on the robustness of the capital adequacy or transfer-out regimes—indeed, neither is he at this point—because so much of it is still left to further policy decisions and regulations. Concepts such as “sustainable”, “sound” and “sufficient financial resources” are undefined in the financial sustainability requirement in Clause 8. There are no draft regulations for us to consider. There is no provision in the Bill for what happens if the regulatory regime fails to ensure that sufficient financial resources are available in the event of a master trust failure.

The Constitution Committee points out in its letter to the Government of 11 November that Clause 24, dealing with wind-ups and transfers-out, is an example of the Bill delegating the power to make regulations that will determine substantial policy issues when a draft of the regulations is not available and the Government have yet to determine their policy. This regulatory regime will be applied to an existing market that has developed in a variety of ways. The Government cannot guarantee that they will have time before its introduction to create and hold the benign behaviours needed to protect scheme members. The impact assessment acknowledged uncertainty about the Bill’s impact because substantive policy decisions will not be taken until the secondary legislation stage. Indeed, such is the amount of further work to be done that the authorisation regime will not come into effect until 2018. The Bill does not make clear what happens if no potential receiving scheme is able or willing to accept the benefits of the members on transfer. The scheme records may be in disarray. The actual costs of wind-up and transfer will not be known or knowable in advance.

Under Clause 33, there are prohibitions on the charges the master trust and the receiving scheme can impose on the members transferring, or on imposing any new charges to meet costs for which a receiving scheme is liable but which were originally incurred by the transferring scheme or as a result of the transfer. If the actual costs of wind-up are very high, the terms of the clause may deter other suitable master trusts from accepting a transfer in whole or in part.

The impact assessment explains that the prohibition on increasing member charges during wind-up and transfer will work because the money to pay for these costs will be met by the access to funding or capital reserves held in accordance with the new financial stability reserve requirements in Clause 8. Yet no regulator can guarantee that those will always be sufficient. Indeed, the impact assessment reasoning is restated by the noble Lord, Lord Freud, in his letter of 14 November. However, neither the Bill, the impact assessment nor the Minister’s letter inform us what would happen if, in a particular failing master trust, the capital reserve requirements proved insufficient for whatever reason. The Bill proposes no contingency plan for the failure of a master trust the records of which are in disarray, which has insufficient financial resources to comply with its duty when a triggering event occurs, and for which no master trust is willing to accept transfer of members’ benefits. What will happen in those circumstances? How will all the members’ funds be protected against increased charges? What liability for or immunity from the past provider’s mistakes will a receiving scheme have? What plans do the Government have for ensuring that bulk transfers between master trusts can legally proceed in an efficient and timely manner to ensure continuity of coverage for members of failed master trusts?

The suggested timetable in the Bill indicates that the new regime will come into full effect in 2018, after most remaining employees have auto-enrolled, so it will be some time before it is in place. However, the retrospective casting of the Bill—which I support—means that for existing unauthorised schemes, the scheme funder is liable for wind-up and transfer costs when a triggering event occurs on or after 20 October 2016. What if that funder has insufficient resources, is a limited liability company or is insolvent? Where would wind-up and transfer costs be recovered from?

In his letter of 14 November, the noble Lord, Lord Freud, comments that in such a situation,

“we would expect the normal considerations in terms of insolvency and court proceedings to apply to this financial debt as to any other”.

That prompts a series of questions for the Minister. What does that mean? Who would bring the proceedings and how would they be financed? If the members of such a master trust were transferred, would the receiving master trust be covered by the prohibition in Clause 33 on increasing charges? The noble Lord, Lord Freud, further comments in that letter:

“We do not expect the number of trusts who will find themselves in this position … without solutions for their members to be high. We anticipate that the market will wish to consolidate”.

That leads to a more general question: how exactly is it to be determined which is the appropriate master trust to be the receiving scheme in a wind-up under Clause 24? How will a potential receiving scheme be identified? Presumably, the regulator will not leave it to other schemes to do some self-organised divvying up. It could be problematic under competition law for a panel of providers to self-organise the divvying up of schemes. Will there be a formal regulatory allocation process, and if so, what will it be?

People need to be reassured that the Bill will provide them with protection in practice. At the moment, that ultimate reassurance is not there. The amendment does not prescribe the model but it fixes the principle of a last resort provision. I recognise that work needs to be done. There are matters to be considered—how to protect against moral hazard; how to ensure that market players do not game the process to cream off the best members; the need to look behind a triggering event to identify evidence of cherry-picking; and the funding underpin for a last resort provision—but there is a compelling need for a compensation or last resort provision, as proposed in the amendment. Without it, the Government cannot credibly assert that the Bill will do what is claimed in the opening line of the Explanatory Notes: protect all savers. I beg to move.

[Lord Flight (Con)]

My Lords, it is actually extremely unlikely—in fact, virtually impossible—that members will suffer if the manager of a master trust gets into difficulties. The assets attributable to the pension fund members are segregated from the assets of the manager. How valuable or otherwise they are will depend upon how well they have been managed and, if there is more than one fund choice, which fund people have chosen.

Secondly, it is clear that the Pensions Regulator will and is intended to play the brokerage role. If it perceives that a master trust manager is in trouble, it will quickly sort out who is going to take over that business. It has value because fees are attached to managing the money, which other master trusts will happily pay. There is even some source of revenue coming back to the master trust in trouble as it is bailed out.

I am afraid that this sort of plaintive request for a compensation fund does not have my support. I thought we had collectively agreed that we did not want another compensation fund. Adding it at the end, almost out of principle, when the chances of it ever being used are virtually zero, is not particularly constructive.

[Baroness Bakewell of Hardington Mandeville (LD)]

My Lords, I support this amendment, to which my noble friend Lord Stoneham has put his name. The noble Baroness, Lady Drake, has set out the arguments in depth and there is very little left to say. Some means to guarantee the solvency of master trusts is needed, and will be fair. It is essential that it be fair.

If regulation is working well, it is to be hoped that the costs will be minimised and insured against. The regulator should have an incentive to merge schemes where resources look likely to be insufficient, and means to tide them over should be provided for. In other with benefit schemes, guarantees of last resort are provided and the liability risk is much greater. Confidence in pension schemes is essential. It would be very serious indeed if trusts became insolvent. As has already been said, protection as a last resort should be a rare occurrence. I support the amendment.

--- Later in debate ---

[Lord Freud]

The money cannot come out of their pots, but the Pensions Regulator will be looking to transfer those pots to another master trust. The protection that this amendment and my noble friend are suggesting is almost conditioned by what we watch in the defined benefit market. This is a different situation, where there are protected pots. There may be costs in a catastrophic situation, but they will not fall on members, and it is not the job of government to protect non-members from getting into a mess.

[Lord Flight]

Is it not very simple? The manager of the master trust would go bust just like any other business can go bust. It would go into liquidation and, to the extent that it owed debts to the suppliers of electricity or other such things, they would suffer.

--- Later in debate ---

[Baroness Drake]

I accept the clarification from the noble Lord. The amendment—which at this stage is partly probing, although underlying it is a principle that is a matter of substance—was not intended to prescribe the model. It does not say it has to be a compensation fund—it could be a provider of last resort—but there needs to be an explicit provision in the Bill that makes it clear what happens to protect the members’ pots when the supervisory and capital adequacy regime fail in a failing master trust. I do not believe that the Bill addresses that at the moment. I am not arguing for a particular model; I am arguing for a principle of absolute clarity as to how members’ protection against exposure to meeting the cost that I described—the risk that the Bill seeks to mitigate—will be addressed in an in extremis position.

It is not a plaintive request—I say to the noble Lord, Lord Flight, that I am not a plaintive request person. I am standing here quite firmly because potentially 7 million people are going to be affected and, over time, there will be trillions of pounds under management. This matter is worthy of interrogation, rather than us simply hoping.

[Lord Flight]

The issue is an administrative one, in that you have people’s pension fund money, and the manager has got into trouble and, let us say, gone into liquidation. What administration would make sure that a new manager takes over and continues to investment-manage those pots of money? There have been suggestions that the Pensions Regulator himself should be empowered, or maybe required, to act as a broker with regard to such arrangements, but that problem has not yet been solved. That, surely, is the practical issue, not people losing money out of their pension pots.

[Baroness Altmann]

The issue that we are dealing with is indeed an administrative issue, but saying members’ pots are protected does not protect members’ pots. In a scheme which has failed and is winding up, and whose administration is in disarray, it will take some time and money to decide and assess how much each member’s pot is actually worth, for example in the cases of a big master trust whose systems fail or of a smaller master trust whose systems simply were never up to scratch. We have 80 or so master trusts out there at the moment and have had no protection regime at all, no capital adequacy rules and no proper assessment of the quality of the trusts. We have so many members’ pension funds growing for them, and there is the possibility that more than one of these schemes will fail and need to wind up. There will be costs associated with assessing what the value of those members’ pots actually is. I do not hear anything at the moment that explains how the costs of administering and sorting out the records of that scheme, so that we know what each member’s pot is worth, are going to be funded. If the Pensions Regulator finds a way to pick up the cost, if NEST has to pick up the cost or if there is some insurance regime for industry-wide assessment of those costs, that is fine, but I just feel that we are assuming that this will be a wind-up of a scheme whose records are fine and it will be shipped off to another scheme, which will want to earn money for those members. That is not the case that is necessarily going to arise.

--- Later in debate ---

[Lord Flight]

My Lords, I believe this clause has aroused most concern in the industry, particularly the insurance industry. A number of organisations, particularly life offices, undertake a range of business activities in addition to simply sponsoring a master trust. The clause suggests that the scheme funder or sponsor must set itself up as a separate legal entity and undertake no other activity beyond sponsoring the master trust. Given that the whole purpose of the Bill is to ensure that funds are available to see through the orderly exit of the scheme’s sponsor, the provisions of Clause 10 as it stands are surely counterintuitive. One wants the sponsor to be as strong financially as possible, but the clause as it stands could well invoke the very thing that the Government are trying to avoid.

More specifically, as the noble Lord has pointed out, the insurance industry typically will have master trusts side by side with group personal pension schemes. As matters now stand, they are regulated by the FCA and PRA, and there would be a considerable duplication of regulation under the arrangements as proposed. I am sure the Government have focused on this, but I certainly feel that Amendments 19 and 20 are appropriate to address the problem that stands.

[Baroness Altmann]

My Lords, I echo the comments made by my noble friend Lord Flight. Why do the draftsmen of the Bill think that having a separate legal entity is definitely a good thing? What are the risks that this approach tries to close down? Perhaps if we could understand those risks better, we might be able to address the issue in a slightly different way. Is the aim somehow to ring-fence the DC covenant of the scheme funder and prevent them from having other financial obligations that might take away from the support for this master trust, or to minimise the burden on checking accounts? Obviously, it is easier to review the accounts of a stand-alone entity than of a much broader group. Hopefully, if we could better understand what the rationale is, it might be possible to address some of the very important concerns that have been expressed by some of our major insurance companies.