Pension Schemes Bill [HL]

Lord McKenzie of Luton Excerpts

2nd reading (Hansard): House of Lords
Tuesday 1st November 2016 Lords Chamber

[Lord McKenzie of Luton (Lab)]

My Lords, I thank the Minister for introducing this Bill. It is a necessary measure, if too long in the coming. As we have heard, Part 1 introduces an authorisation framework and supervision regime for master trusts; that is, multi-employer DC pension schemes which operate on a trust basis. As trust-based schemes they have hitherto been subject to laws that have traditionally been designed and applied to a single employer model, as the Minister explained, although in some respects they share characteristics with group personal pension plans. As the impact assessment reminds us, some of the fundamental dynamics of occupational pensions are not present in the case of master trusts, which would typically involve the employer having an ongoing interest in the scheme and its alignment to the future of the employer.

We know that some master trusts operate on a scale that is unprecedented in occupational pensions and most are run on a profit basis. However, they are not subject to the same regulation that is placed on contract-based workplace pensions. There is no requirement for a licence to operate and limited barriers to entry. There is also no requirement for specialised trustees and no infrastructure in place to support the wind-up of a failed trust. Given that the savings and pensions of millions of employees and their employer contributions are at risk, this position cannot be allowed to continue. So we are strongly supportive of the thrust of this Bill and concur with its rationale and the need to protect members from suffering financial detriment, the imperative of promoting good governance and a level playing-field for those in the sector and, crucially, the promotion of sustainability and confidence in pensions more generally.

We welcome the new powers for the Pensions Regulator to intervene where a master trust is at risk of failing. Unfortunately, despite what the Minister has said, too much has been happening in the pensions arena in recent times that has served to damage confidence in savings and pensions. Just two weeks ago we heard of the mis-selling of what should have been enhanced annuities. We have had the U-turn on the secondary annuities market after savers were encouraged to contemplate the sale of their annuities and then to have it denied—a crass piece of policy-making. There are the lingering problems of the BHS pension scheme and the adequacy of the powers of the regulator and the willingness to use them. There is a continuing sense of grievance among women in the Women Against State Pension Inequality campaign, despite what the Minister has said, who believe that they were given inadequate notice of their state pension entitlement changes. There was the acknowledged poor communication surrounding the introduction of the single state pension, the unforeseen barriers to exercising the new “freedoms”, which in part will be fixed by this Bill, and suggestions that not enough people are reaching the guidance service which as we know is now to be recast.

However, we are encouraged to be optimistic by the new Minister, Richard Harrington, who is apparently fostering a more collaborative approach between the DWP and the Treasury. In a recent speech he mused that he would do better than his two predecessors because key Ministers in the Treasury happen to be his good friends. I do not know whether the noble Lord, Lord Freud, is a chum as well, and perhaps he might let us know. So we look forward to the forthcoming Green Paper and ask the Minister how forthcoming he expects it to be. I think the answer will be “the winter”, whenever that is.

All of this emphasises the need to make progress on the regulation of master trusts, especially given the growth in their membership. We are told that by January of this year there were expected to be more than 4 million members of master trusts with auto-enrolment assets under management of some £8.5 billion in 84 schemes. Some of these have achieved accreditation under the master trust assurance regime developed with the Institute of Chartered Accountants in England and Wales but these are in the minority. Zurich has told us that accreditation is rapidly becoming a commercial reality to demonstrate a well-run scheme and it points out that there is an overlap with some of the provisions in the Bill. How do the Government plan to resolve this? Of course, the growth of such schemes is directly linked to the success of auto-enrolment, with some 6.5 million—I think the Minister said that the figure is now 6.7 million—employees currently enrolled

I am bound to say that an example of good pension policy-making started under a Labour Government, being evidenced based, with independent analysis and political consensus—an approach that would have stood more recent policy pronouncements in good stead. However, although the numbers to be auto-enrolled look set to grow, in July this year some 5.9 million employees were considered ineligible for auto-enrolment—an exclusion attributable in part to the coalition’s raising of the income threshold. The review in 2017 is an opportunity to address these matters, particularly issues with mini-jobs, income thresholds and the self-employed.

The Bill outlines a strong framework for the regime, but there is still much left to secondary legislation. Most of these regulations are to proceed by way of the negative parliamentary procedure. We will use the Committee stage to probe the detailed intent of some of these regulation-making powers and we ask the Minister, acknowledging that some depend on further consultation, to provide us with a note of when we might see the drafts, or at least policy statements, to outline their intention. I fear from what the Minister said earlier that we could wait some time for that.

Responsibility for the regulation of master trusts will be placed with the Pensions Regulator, not the FCA. As the ABI pointed out, this involves a significant change in the role of the regulator, with extensive powers and obligations being made available, including dealing with authorisation, determining fit and proper persons, judging financial sustainability and capital adequacy, deciding on adequacy of systems, having the power to initiate triggering events, and more. We will examine these powers and responsibilities in terms of what is provided, as well as where there may be gaps, to see whether they need be strengthened.

Will the Minister say what assessment has been made of the capacity and resources of the Pension Regulator to cope with all of this, particularly at the point of introduction, where all existing schemes need to seek authorisation? What fee structure is envisaged?

The Bill provides that scheme funders must be constituted as a separate legal entity—seemingly not necessarily resident in the UK; Panama, perhaps—if fit and proper persons and only carrying on activities related to the master trust scheme. The Minister may be aware of the point raised by Zurich about scheme funders having established other workplace pensions and the benefits of using shared systems. How does he respond to this? Will such shared arrangements have to be unpicked to gain authorisation? What would the position be if the scheme funder were to become insolvent? Can a restriction be placed on the level of dividends or profits of the scheme funder?

Under Schedule 1 to the Bill, the regulator can make a pause order such that during a triggering event period no new members can be admitted to the scheme and no further contributions or payments made. Will the Minister say what the consequences of this pause are for employers and workers who have current obligations under auto-enrolment? Is there a pause in their respective obligations?

A master trust scheme is defined in the Bill to apply where “two or more employers” are involved in a scheme, but it effectively counts employers that are connected as one. Perhaps the Minister would expand on the rationale for this and confirm which regulatory regime applies in these circumstances. Will such connected arrangements be run on a profit basis?

While the Bill contains a lot about the role of the Pensions Regulator, it says little about the position of members. ShareAction points out that there is a significant gap around member communication—for example, relating to the notification of triggering events—silence on the trustees providing transparency on where savers’ money is invested, no right to be given standard information on charges, where money is being invested and how ownership rights are being exercised. Will the Minister say what has happened to their consultation—closed, I believe, nearly a year ago—looking at transparency from a member’s perspective where investment has been undertaken? Will the Government encourage employer and member panels along the lines of the NEST arrangements?

We should expect some consolidation in the marketplace both before and after the Bill comes into effect. This is no bad thing. It is expected that some will seek to pre-empt the requirements in the Bill, and we need to be assured that this is not achieved to the detriment of members. On the face of it, as the Minister has explained, giving the Bill retrospective effect to 20 October appears to provide the necessary protection to ensure that member pots cannot be accessed to fund the wind-up. Can the Minister confirm that?

It is suggested that smaller master trusts in particular, faced with extra capital requirements and/or increased governance, will likely depart. Does, or should, the regulator have the power to intervene to direct a consolidation of schemes to assist such smaller schemes?

As we have heard, this Bill is not just about master trust regulation. Clause 40 purports to enable a cap on early exit charges in occupational pension schemes and to ban member-borne commission charges. The cap on early exit charges has already been implemented for contract-based schemes given the clear evidence that exit charges were preventing consumers accessing their pension savings flexibly. A fair and consistent approach is now proposed across all defined contribution pensions, and I understand that the noble Baroness, Lady Altmann, launched a consultation to that effect in May. We support the intent. Perhaps the Minister will update us on how the Government propose to proceed. We similarly support the banning of member-borne commissions and ask for an update on transaction costs. Both these issues serve to highlight the need to be vigilant in ensuring that members’ funds are protected in an environment where for the most part there is an imbalance of economic power and advantage.

The authorisation and supervision regime for master trusts will help protect the savings and pensions of millions of individuals. It will contribute to building confidence for people to save, to deny the scammers and to help sustain our pension system. Although we have to look at the detail, the regime should provide the basis of a consensus and we look forward to working with the Minister and his predecessor to see it delivered.

Pension Schemes Bill [HL]

Lord McKenzie of Luton Excerpts

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

[Lord McKenzie of Luton (Lab)]

My Lords, I shall speak to Amendment 2, which we have in this group. I say to the noble Lord, Lord Flight, that the intent of our amendment is not to take schemes out of the definition of master trusts but to probe where those boundaries currently are, because there is a lack of clarity in some respects.

Before I touch upon the detail of the amendment, it might be helpful if I set out the context in which we plan to approach Committee. We have already made clear our support for the thrust of the Bill and what it seeks to do, but much of the detail is missing and will depend on regulations, at least some to be informed by further consultation. There are policy gaps, as well as gaps in the operational detail. The impact assessment recites that there is still,

“significant uncertainty over the full impacts of the proposal, as costs will be determined by the details to be set out in subsequent secondary legislation”.

Additional costs for master trusts and for the Pensions Regulator cannot currently be determined, as the charging structure has yet to be finalised.

The Constitution Committee has also commented on the degree of delegation in the Bill. It instances Clause 24(4), which lists 15 matters that regulations must address relating to continuity option 1. It also draws attention to the wide provisions of Clause 39, which would allow the Secretary of State to adjust the range of pension schemes to which Part 1 of the Bill applies, either to extend the regime or to disapply it in whole or in part. We will come back to this extraordinarily wide provision later. This almost turns on its head the normal approach, which is to determine policy first and then to legislate. We accept the importance of having flexibility to deal with the changing models which an agile sector might bring forward, but in scrutinising this legislation we need to have the opportunity to test the boundaries of that flexibility. I think it has already been indicated that we will not get a full set of draft regulations before the Bill leaves your Lordships’ House, but perhaps the Minister will set out when we might see the drafts of key regulations, as we have requested, or at least policy notes to expand on their intended coverage. In the meantime, we will proceed with a range of probing amendments to flesh out as much detail as possible.

The purpose of Amendment 2, in my name and that of my noble friend Lady Drake, is to probe why the Bill excludes single-employer occupational schemes from the scope of its provisions and why connected employers are therefore effectively treated as one. As it stands, the Bill would leave single/connected employer arrangements regulated as at present. These arrangements sit alongside the regulation of group personal pension plans, which is within the remit of the FCA, so we will be going from two approaches to three.

We understand the reasons why the existing regulation for trust-based schemes is inadequate, notwithstanding some prospects for improvement under the assurance framework and the 2015 code. It is inadequate to deal with master trusts, which have developed new types of business structures. This can alter the relationship between members, employers, trustees and providers, with some being run on a profit basis but not all, as the noble Lord, Lord Flight, indicated. The scale of some of them is also unprecedented in occupational pensions.

Our probing amendment is designed to give the Government the opportunity to put on record the overall scope of the new regulatory environment to justify how it all fits together and that the boundaries of the system are clear and do not overlap. We accept that the master trust regime is focused on schemes with particular risks, but does there not have to be some consistency across the piece? As it stands, the definition of master trust is potentially very broad. We do not particularly have a problem with that, but it can cover those set up by unregulated businesses as well as those set up by regulated businesses, such as insurance companies or investment managers. It can also cover what are described as “white label” master trusts, which are set up by a pension provider with commercial or non-commercial partners being allowed to brand their sections of the trust. Others may have partnering arrangements with large employers where each employer gets its own section of the master trust but does not make any profit from it. Schemes can include industry-wide schemes and schemes that happen to include two or more unassociated companies and schemes in the university, charitable and religious sectors. So within the master trust definition there are a range of differing situations, and a question arises about whether the line to exclude single unconnected employer arrangements is the appropriate line to draw.

The amendment also seeks, as a probe, to delete the exclusion from the definition of a master trust those schemes which are to be used only by connected employers. I have some questions on that. What is the position where a scheme starts life as a scheme for connected group employers only, but where one of the employers enters into a time-limited joint venture which causes it to cease to be connected? Does it then have to seek approval to operate? What is the position when the joint venture has run its course and the scheme reverts to being used only by employers which are connected? How do the Government justify the juxtaposition of a connected group of employers being outside the scope of the Bill and another connected group of similar size but with just one small associated employer presumably being inside it? This is a very thin distinguishing line. Are there any circumstances currently envisaged where Clause 39 would be used to bring within the scope of the Bill a single-employer occupational pension scheme?

So far as the amendment moved by the noble Lord, Lord Flight, is concerned, it is understood that AVC-only schemes are a type of arrangement that has been developed of late, prompted by the introduction of the Pensions Regulator DC code of practice, which introduced a degree of comprehensive governance and management tests for DB schemes where the only DC benefits are AVCs. It is suggested that the new code can lead to disproportionate costs—hence the plan to remove AVCs from individual DB schemes and corral them in a master trust. As we have heard, the proposition now is to remove them from this Bill’s provisions. Presumably, this implies that the current regulatory regime, as enhanced by the April 2015 changes, would continue to operate. However, in so far as comfort is being taken from the voluntary master trust assurance framework, its future is uncertain. We wonder whether that should be relied upon. In any event, do not such arrangements—that is, AVC-only schemes—exhibit at least some of the risks which this legislation is seeking to address, such as the existence of providers, funders, the profit motive and the promotion of the scheme? In the circumstances, it is difficult to see why they should be outside the Bill, acknowledging that some may have been created specifically to take advantage of the current regime.

We have a similar position in relation to the other group of schemes to which the noble Lord referred. So far as the noble Lord’s amendment about having the power to modify the Bill is concerned, the Bill already provides that power. In fact, we think the power is too broad and do not like it. We look forward to the Minister’s comments.

[Lord Naseby (Con)]

My Lords, I support my noble friend Lord Flight in his amendments, in broad terms. The Minister will recall that at Second Reading, at col. 570, I raised the question of mutuals and the mutual movement. His noble friend on the Front Bench confirmed that since a great many of them were defined benefit pension schemes, they would be outside the scope of the Bill. However, that does not take everybody out. Since that time I have had discussions with the Universities Superannuation Scheme. It is perhaps a bit of an oddball, but it is deeply concerned about the Bill and its effect on it and its members. Its representatives emphasised to me in our meeting that they were very much behind the intention of the Bill—so it is not a question of some organisation trying to undermine the situation.

They made three particular points on why the Universities Superannuation Scheme should not be subject to the Bill. First, there is,

“the comprehensive regulatory regime already in operation for hybrid schemes, which already provides a well-established, ample level of protection for pension savers”.

Secondly,

“the protection already afforded to USS members with Defined Contribution … benefits both under statute and the scheme rules, whereby the DC benefits are underwritten by the whole fund (DB and DC) which means that the only circumstances where DC benefits could not be fully satisfied would be where the whole scheme fund (assets currently circa £49 billion) was depleted in full”.

Lastly, there are,

“the anticipated costs of compliance”—

a common thread that has been raised by noble friends across the House. The cost of compliance is estimated at,

“in the region of £10.5 million in order to satisfy the financial sustainability requirements over 2 years, plus a further £250,000 per annum for compliance with the requirements of the Bill, which would be funded from the scheme assets”.

I hope very much that the Minister will take these points on board. I do not expect a full and complete answer this afternoon, but I would have thought that schemes such as this—there probably are others that have not been brought to noble Lords’ attention—could be dealt with in secondary legislation. It certainly seems to me that they need to be addressed at some point. All I am seeking this afternoon is a reassurance that my noble friend recognises that there are some schemes out there that should not be covered by the Bill but may need to be covered in some form in the regulations. I look forward to his response.

--- Later in debate ---

[The Minister of State, Department for Work and Pensions (Lord Freud) (Con)]

Clause 1 is critical to the Bill. It sets out the scope for the regime, so I welcome these considered amendments, which give us the opportunity to explore this important clause in detail.

We have taken considerable care in defining master trusts and setting the scope for the new authorisation regime. The guiding principles throughout have been twofold: the first is to ensure that members are protected against the risks that arise in these new structures; the second is to ensure that the extent of any regulation is proportionate.

For example, the definition applies to schemes which are open to more than one employer because the level of engagement and involvement of the employers and scale of such a scheme is likely to be very different from that of a single employer scheme or a scheme in which all the employers are part of the same corporate group. It applies only to schemes which offer money purchase benefits because of the risks that the member bears in relation to such benefits, but we have been careful not to create a loophole for schemes which offer mixed benefits—as we will come on to later.

However, we also need to be mindful of the fact that master trusts are a recent development in a rapidly changing pensions landscape, and the master trust market is evolving all the time. A one-size-fits-all regime may not be proportionate, and we therefore need flexibility to be able to respond to the needs and changes. It is for this reason that Clause 39—which we will come to later in Committee—makes provision allowing for the disapplication of some or all provisions of the Bill for certain schemes.

Turning to the specific amendments, my noble friend Lord Flight seeks to exclude from the definition “AVC only” and “relevant centralised” schemes. I have sympathy with his intentions. Many defined benefit schemes offer AVCs for historic reasons and could be considered to be DB schemes to all intents and purposes, but schemes such as this could be excluded from regulation under our powers under Clause 39, and we prefer to use this power rather than to create a list of exemptions in the Bill, allowing time for more detailed consultation with industry about the diverse types of scheme that currently exist.

I put it on record that our intent is to propose such a carve-out. That is: we intend to consult on regulations under Clause 39(1)(b) to disapply some or all of the provisions of the regime for a mixed benefit master trust scheme, where the only money purchase benefits are those related to additional voluntary contributions of non-money purchase members, but we will also be considering carefully the need to avoid creating any avoidance loopholes as we go through that process.

In relation to the relevant centralised schemes, I am concerned that my noble friend’s amendment may go too far. The definition to which he refers is not confined to industry-wide or not-for-profit schemes, and although there may be a case for excluding some such schemes, I am wary of creating a loophole.

Our aim is to protect members from the risks that are particular to master trusts, and these may equally arise in industry-wide schemes. Similarly, although it is true that most master trusts are run for profit, and that this gives rise to certain risks which the regime seeks to protect, it is not this feature alone which determines the nature of master trusts.

I am grateful for the amendment tabled by the noble Lord, Lord McKenzie, and the noble Baroness, Lady Drake. As the noble Lord said, it is a probing amendment to investigate the boundaries of the definition. The amendment would change the definition of master trusts in the Bill and extend it to all schemes which offer money purchase benefits, including those which are used by only a single employer or employers connected to each other.

On the noble Lord’s question of how and when we plan to consult on draft regulations, and indeed on the question asked by the noble Lord, Lord Kirkwood, we have worked with the industry and the regulator to establish the key criteria for master trust authorisation. We intend to continue these discussions to develop more detailed policy and secondary legislation. We will follow the published government principles to ensure that consultation is an ongoing process, using the most appropriate forms of communication. The timing of that formal consultation on draft regulations will depend on a number of factors. We anticipate that the initial consultation to inform the regulations may take place in autumn 2017. I hope that that gives the noble Lord, Lord Kirkwood, some reassurance about the process.

The amendment would extend the scope of the definition and the authorisation regime considerably and would do so in a way that would be disproportionate. To take the example of the scheme starting as a single group employer picking up a non-associated one and moving back and forth, if the scheme is intended to be used for more than one unconnected employer, it is within the scope of the regime. If it starts with only connected employers but takes on an unconnected employer, it will fall within the regime at the point that it takes on the unconnected employer.

[Lord McKenzie of Luton]

Will the noble Lord help me on that point while it is on my mind? If you take on an associated entity and therefore have to join the scheme, what happens if you have a joint venture and that joint venture comes to an end? Are you perpetually in and out of the scheme? How does that work?

[Lord Freud]

In practice, one has to be fairly formal about the definition. The noble Lord has drawn up an example of a potential revolving door which I suspect may be in the black swan category. I will take that point away. I need not write to him on it because we will have a chance to come back to it, or I will make sure that we do. He describes a very volatile situation, but I suspect the very existence of a precise regime will tend to stop people doing that kind of thing unnecessarily, or without a very good reason.

On the question of bringing into the regulations schemes that have only one employer, we are currently considering whether some schemes offering decumulation-only benefits have the same rules as some master trusts. Any use of the powers to deal with this issue will clearly be subject to the affirmative procedure. My noble friend Lady Altmann asked whether PPF could be extended; an amendment has been tabled—I think it is Amendment 18—to explore this issue, and we will deal with it when we reach that point.

Much of our debate at Second Reading indicated that there is general acknowledgement that further regulation of master trusts is both desirable and necessary. Master trusts have developed in part in response to the success of the automatic enrolment programme emerging as a different kind of beast to the traditional structures that have existed in the occupational pensions sphere.

There is much to recommend master trusts as the schemes of choice for employers and members. They can drive value for money due to competition in the market and the economies of scale and offer a neat solution for smaller employers, for whom setting up an individual pension scheme for employees would be impractical and burdensome. But these very qualities also give rise to new risks that are not present in single employer defined contribution schemes in the same way. In a single employer scheme, the employer is typically far more closely involved in the running of the scheme and tends to have a more active relationship with the trustees. With master trusts used for automatic enrolment, employer involvement is generally limited to paying over the employer contribution. The different dynamics that exist in master trusts give rise to the need for a different approach to ensure that members are properly protected. These issues do not arise in the same way in single employer or connected employer schemes, and it is for this reason that we have been careful to confine the definition to multi-employer schemes in which the employers are not all connected.

--- Later in debate ---

[Lord Freud]

At the moment, these schemes would not be within the master trusts legislation. I cannot give a full answer now because I am not sure what other protections there may be for people in this situation, but we will have a chance to come back to this issue again and again and I shall make sure that we have a dialogue on this point later, as we consider the Bill in Committee.

This Bill addresses the risks that arise in master trusts. It is important to remember that these risks are specific to this particular type of structure, and it is therefore important that the definition reflects those structures and does not go wider. This ensures that the regulation in the Bill is a proportionate response to the issues arising. I hope that with these explanations and assurances particularly on the process of consultation, noble Lords are reassured, and I ask them not to press their amendments.

[Lord McKenzie of Luton]

In relation to the use of Clause 39 for carve-outs, is it envisaged that that will be done on a broad scheme basis or on an individual scheme basis? How will it work in practice? Will it be a carve-out for a defined type of scheme, as in the AVC scheme referred to, or could it be more specific?

[Lord Freud]

We will come on to discussing Clause 39 later, but I think that it will be fairly specific—sorry, no, I think that it will not be specific. It will be general types.

--- Later in debate ---

Moved by

[Lord McKenzie of Luton]

7: Clause 3, page 2, line 33, at end insert “under all of the provisions of Part 1”

[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.

[Lord McKenzie of Luton]

I would be delighted to agree that the amendment was unnecessary, but Clause 39 is about the Secretary of State making regulations,

“applying some or all of the provisions of this Part”,

and in particular,

“disapplying some or all of those provisions to Master Trust schemes that have the characteristics set out in the regulations”.

This is the point that we are getting at: if you are in, you should be in in respect of all the provisions. What alternative situations are envisaged in which just some of them might apply?

--- Later in debate ---

[Lord Young of Cookham]

If I may respond briefly to the first point made by the noble Lord, Lord Kirkwood, we are rolling out auto-enrolment, where employers have to enrol employees into a policy. Very substantial sums of money are in the process of being invested and it is crucial that there should be public confidence in the regime. I accept entirely what he said about the responsibility of trustees but we want to go beyond that and have a statutory framework in which people can have confidence that their master trust, which is getting their money and the employer’s money, is robust, has been approved and ticks all the boxes that we have outlined in earlier clauses. This is not to take away from the responsibilities of trustees but to give an added bonus of public endorsement and confidence in an area of public policy.

[Lord McKenzie of Luton]

I thank the Minister for his detailed reply to the amendments. In relation to the amendment tabled by the noble Lord, Lord Flight, we, too, would not be able to support it. The continuity strategy is very important. It sets out how members’ interests are to be protected if a triggering event occurs. Crucially, it sets out levels of administration charges which apply, and it must be approved by each of the scheme funders. It is a fundamental part. As for ignoring the trustees, the trustees themselves have to start the process to apply for authority, so they are covered in that respect.

I note what the Minister and the noble Lord, Lord Kirkwood, said about the institute’s framework. I am not sure I need to declare an interest as a retired member of the institute. It is a long time since I did any meaningful work in that regard.

My noble friend Lady Drake properly probed the Minister’s response to misapplying parts of these provisions. I think we want to go away and think long and hard about getting some more information on that. Basically, the Minister is saying that they would not apply this unless they were certain there was a satisfactory alternative in place. That is fine as a matter of principle but we would like to understand a bit better what likely alternative arrangements would be in place for the sorts of disapplications we would seek to engender by this. I beg leave to withdraw the amendment.

Amendment 7 withdrawn.

--- Later in debate ---

Moved by

[Lord McKenzie of Luton]

10: Clause 4, page 3, line 15, at end insert—
“( ) the scheme’s member engagement strategy.”

[Lord McKenzie of Luton]

My Lords, I shall speak also to the other amendments in this group, Amendments 25, 31, 36, 41, 43 and 44. Amendment 10 adds to the matters which must be part of the application for authorisation of a scheme’s member engagement strategy. Understanding members’ views and needs is essential to designing investment strategies and to the assessment of value for members. It is, or ought to be, an essential component of designing a pension scheme and something which is integral to its creation and continuance. Amendment 25 is a parallel amendment. It requires that the Pensions Regulator should also be satisfied that the scheme has set up a communication strategy defining how it will communicate with members. Indeed, as the DC guide sets out:

“Good member communications, provided at the right time and in the right format, are vital if members are to engage and make decisions that lead to good outcomes in retirement”.

The strategy should cover not only style and approach but key content, and the code expects all communications sent to members to be clear, relevant and in plain English. Preferred methods of communication should be checked with members. Some will be more technologically savvy than others. A strategy should also cover the need for ongoing communications throughout membership to help members prepare for choices at retirement.

We know that pensions can seem complex and confusing to some and that the recent growth in schemes has largely been due to auto-enrolment, which has harnessed the power of inertia, the need not to make a choice. But at retirement, or earlier, new flexibilities now offer an increased range of choices which encourage the reverse of inertia, making effective communications more important. The risks of not communicating effectively on pensions are all around us: the growth of scams—albeit there is, belatedly perhaps, some good news due from the Government this week; confusion over the new state pension; and a failure to communicate properly changes to the state pension age, hence the WASPI campaign.

The Pensions Regulator should have the opportunity to review the systems and processes related to communications just as much as the features and functionality of the proposed IT system.

--- Later in debate ---

I apologise for the length of that contribution. I hope that I have explained why the Government are of the view that, while it is important for all pension schemes to communicate effectively with their members, these specific amendments would not be appropriate for inclusion in the Bill, and I hope that the noble Lord will consider withdrawing his amendment.

[Lord McKenzie of Luton]

My Lords, I start by thanking all noble Lords who have spoken in this debate, most of whom have supported the amendments. My noble friend Lord Monks made reference to good practice for master trusts. He also asked about the pensions dashboard, but I do not know whether we have any further information on that. The noble Lord, Lord Stoneham, set down the three key reasons why he supported member engagement: the risk lies with the employee; there should not be sole reliance on the regulator; and some schemes, such as L&G, are already doing it. The noble Baroness, Lady Altmann, raised an interesting point, probably relating to an earlier debate, about the big injustice for low earners because of how the tax system works. That is something that we ought to return to before the Bill leaves this House, and we should be grateful for that intervention.

I thank the Minister for a very full reply. I would certainly like to go away and read the record on what he referred to as the balance that is struck in these provisions. That is an important point. I was slightly concerned about what he said in relation to Amendment 36. The implication seemed to be that you had to protect scheme members from this knowledge because they might go and do something adverse. There was a smack of paternalism there, but let me read the provisions in the round because we may well wish to return to that. I am certainly grateful for the offer to reflect on Amendment 44 and the nature of the process that will apply to the resolution. Having said all that, I beg leave to withdraw the amendment.

Amendment 10 withdrawn.

--- Later in debate ---

[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.

--- Later in debate ---

I would like to conclude by saying that I absolutely agree with the points that noble Lords are making through these proposed amendments. The regulator must have the resources it requires to ensure that the authorisation regime is successful and the Government must ensure that the impacts of the regime are considered with appropriate scrutiny. With that assurance, I hope that my noble friend will see fit to withdraw his amendment.

[Lord McKenzie of Luton]

My Lords, I thank the Minister for his response. I should say to the noble Lord, Lord Flight, that I accept that having this in the Bill in those terms would not be appropriate. The purpose of the amendment is to try to have a debate around the issue and thus have something on the record. I accept entirely the proposition around annual business planning and the assurance given that there is a need and recognition that the Pensions Regulator must be properly resourced to carry out these important functions.

Although there is an impact assessment, it is quite thin. It takes up lots of paper but it is thin in terms of the numbers that were on some of the schedules. The Minister has reiterated what was in that report about how there will be a further impact assessment at the secondary legislation stage. What precisely does that mean? Is it that when the regulations are in place and have been agreed there will be a comprehensive review, or that it is going be done piecemeal as each of the components of these regulations is put in place? If we tot up the number of regulations in the Bill—I have not done it—I am sure that they will run into the several tens. How is that actually going to work and when would the secondary legislation be laid for these purposes? Will there be an aggregate impact assessment at that stage?

[Lord Freud]

One of the things I have committed to do is to go back and think about how we make these regulations in the context of the noble Lord’s own suggestion of perhaps looking at the balance between the affirmative and negative procedures. In that context, the exact way in which the Government decide to present the regulations would clearly change. Regulations made under the negative procedure tend to be less of a set piece, while affirmative regulations do tend to be more of a set piece for obvious reasons. The answer to the noble Lord’s question will depend on our reflections on what we do with his proposition.

--- Later in debate ---

[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.

Pension Schemes Bill [HL]

Lord McKenzie of Luton Excerpts

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

Moved by

[Lord McKenzie of Luton]

32: Clause 14, page 8, line 29, at end insert “annual statement and”

[Lord McKenzie of Luton]

My Lords, I beg to move Amendment 32 and shall speak also to Amendments 33 and 34. I shall be brief. We have dealt earlier with amendments relating to communicating and engaging with members. These amendments deal specifically with the requirements to ensure that an annual statement must be submitted to the Pensions Regulator, together with the scheme accounts. The annual statement for these purposes is that required by the 2015 DC regulations, with particular reference to relevant multi-employer schemes.

The requirement to produce an annual statement—the chair’s annual statement—although supported by the trustee board, is part of the Pensions Regulator’s DC code. The clause is designed to ensure that the Pensions Regulator has sufficient information about the master trust scheme to know when a scheme should be required to submit a supervisory return. I beg to move.

[Lord Young of Cookham (Con)]

My Lords, after some five hours of debate there is now a glimmer of hope for one of the amendments moved by the noble Lord, Lord McKenzie. Its intention appears to require the trustees of an authorised master trust scheme to submit the scheme’s annual governance statement to the Pensions Regulator each year.

The annual governance statement, sometimes known as the chairman’s statement, which trustees of most money-purchase occupational pension schemes are required to produce, provides information on the scheme’s compliance with governance measures such as the charge cap. It sets out, among other things, the level of charges in the scheme and the trustees’ assessment of the extent to which these represent good value for members.

I understand why this amendment may have been tabled, and I agree that it is important for schemes to operate transparently and demonstrate that they represent good value for money for members. This information would indeed be valuable to the regulator in its assessment of the master trust against the authorisation criteria. However, I have reservations about whether the approach, as drafted, represents the best way of achieving this. From a drafting perspective, there is a risk in making a provision of this kind in primary legislation which relies on a reference to a provision in regulations—in this case the Occupational Pension Schemes (Charges and Governance) Regulations 2015. Should those particular regulations be amended in the future—for example, so that the statement is no longer required under the same specific provision—there is a risk that this provision of the Bill would no longer have the desired effect.

A safer approach is to make use of the existing provision in the Bill, which enables regulations to specify that the regulator may require that further information is submitted to it. That provision is in Clause 15(2). I can confirm that it is intended that the provision of the annual governance statement to the regulator will be dealt with in these regulations by enabling the regulator to require the statement to be included in master trusts’ supervisory returns. We will of course consult on these regulations and we cannot confirm the final content until the consultation is concluded. I hope that I have explained to noble Lords that I resist the amendment not because I disagree with it but because there is a better way of getting there. The Bill already allows equivalent provision to be made in a manner more likely to secure the desired outcome in the long run. Against that background, I hope that the noble Lord will withdraw his amendment.

[Lord McKenzie of Luton]

My Lords, I am grateful to the Minister for that response. I thought for a moment that the glimmer of hope was going to be completely snuffed out, but I am pleased to know that it has not been. I accept the point about drafting and will look forward in due course to seeing this in the regulations. Having said that, I beg leave to withdraw the amendment.

Amendment 32 withdrawn.

--- Later in debate ---

Moved by

[Lord McKenzie of Luton]

35: Clause 16, page 10, line 9, leave out “negative” and insert “affirmative”

[Lord McKenzie of Luton]

My Lords, I shall speak also against Clause 16 standing part of the Bill. The amendment is an alternative formulation that requires the affirmative procedure to operate for the regulations. We touched on this issue earlier this evening. The clause imposes a duty on a range of persons involved in running a master trust to give notice of the fact that a “significant event” has occurred. Civil penalties can be applied to anybody failing to comply. The only hint of what might constitute a significant event is what the Secretary of State sets out in regulations. No hint is given in the Explanatory Notes to the Bill. The information provided to the Delegated Powers Committee simply refers to a significant event being one that might affect the ability of the scheme to meet the authorisation criteria, such as a change of trustee or scheme administrator.

As the Delegated Powers and Regulatory Reform Committee pointed out, the delegated power confirmed by Clause 16(3) is a very wide one. It emphasised that the definition of what constitutes a significant event is fundamental to determining the duty imposed by Clause 16. It says that the width of the power appears to be needed because the Government have not yet decided on the policy or purposes for which the power is to be used. Its conclusion is that the power is inappropriate in the absence of any convincing reasons to justify its scope. We agree that as things stand the Government have more work to do to justify the change in the clause. I beg to move.

[Lord Freud]

I will begin by explaining why it is important that the clause stands part of the Bill, and then I shall set out my thoughts on the proposed change in the parliamentary scrutiny procedure.

Clause 16 addresses one of the requirements that will be placed on a master trust scheme once it has been authorised. One of the great strengths of the authorisation regime is that it is an ongoing system. This means that, in order to continue operating in the market, the Pensions Regulator must remain satisfied that the master trust continues to meet the authorisation criteria. This makes it particularly important for the Pensions Regulator to remain informed about the scheme. Indeed, I hark back to our discussion a little earlier about whether there should be someone to compensate as a last resort. It is really important that we make sure that the Pensions Regulator knows what is happening in schemes. That is one of the key ways in which to make that happen.

The regulator will collect information from authorised master trust schemes on a regular basis through a combination of existing requirements on occupational pension schemes and new requirements on authorised master trust schemes, introduced as part of the Bill. For example, all occupational pension schemes are already required to submit an annual scheme return to the Pensions Regulator and, under Clause 15, master trusts will be required to submit a supervisory return as well. In addition, Clause 14 introduces a requirement on the trustees of master trust schemes to submit the scheme’s annual accounts, and on the scheme funder to submit its accounts to the Pensions Regulator. These returns allow the Pensions Regulator to collect information from schemes on a regular basis in order to determine whether they still meet the authorisation criteria.

This clause provides that the Pensions Regulator must be notified in writing if significant events occur in relation to an authorised master trust scheme. The Secretary of State, following consultation with the industry, will set out in regulations what constitutes “significant events” for the purposes of this clause. These might include, for example, change of scheme trustee, change of scheme administrator, changes to the continuity strategy or changes to the business plan. The Government intend that the events which will be prescribed as significant events will be events of the type which the regulator would need to be made aware of promptly due to the potential impact on the scheme’s authorised status or because they are indicators that support or intervention may be required.

To be clear, the occurrence of a significant event in a master trust scheme will not necessarily affect the ability of the scheme to meet the authorisation criteria. It just may have such an effect or it may be a warning sign. For example, a scheme may have a change of trustee. As the fitness and propriety of a trustee is linked to the authorisation criteria, the Pensions Regulator must be informed of this change so that the new trustee may be assessed against the relevant standards. The new trustee may well meet the required standards, in which case the scheme’s authorisation status will not be affected—but there could be an impact. A civil penalty will apply to a person who fails to comply with this reporting requirement. For that reason, it is important to be as clear as possible about who will be subject to this requirement in the Bill. This clause therefore lists the persons subject to this requirement in subsection (2). Further persons may be listed in regulations.

There is a precedent for this requirement. Section 69 of the Pensions Act 2004 provides that key persons involved in the running of defined benefit occupational pension schemes must report the occurrence of certain events to the Pensions Regulator. That provision was made to warn the Pensions Regulator that such a scheme may require the support of the Pension Protection Fund. The provision in this Bill is made to warn the Pensions Regulator that an authorised master trust scheme may need support or intervention or be at risk of not meeting the authorisation criteria. This provision will protect scheme members and it will assist the Pensions Regulator to carry out its functions. That is why it is important that this clause stands part of the Bill.

Amendment 35 concerns the affirmative as opposed to the negative procedure. We have discussed that and we will also consider it in this context. On that basis, I hope that the noble Lord will see fit to withdraw both his opposition to the clause and his amendment. I hope that I have provided clarity on the wider purpose of Clause 16 and I commend it to the Committee.

[Lord McKenzie of Luton]

I thank the Minister for that response. I think we understand what the intent of this provision is. Obviously, the persons to whom this obligation applies are listed in detail in the Bill. Why, therefore, is it not possible to list at least some examples in the Bill—for example, a change of scheme trustees—as one of the significant events which might require action? There is silence on that side of the equation. However, there is a list of persons who are subject to this provision.

[Lord Freud]

I think the reason is that it is pretty odd to have a hybrid approach to a list of requirements some of which are in the Bill and some in regulations. We are looking to put them all together in a coherent way in regulations, which we will consider how best to introduce to the House.

[Lord Freud]

The noble Lord has opened himself up to a letter from me.

[Lord McKenzie of Luton]

My Lords, I think we need to read the record. In the meantime, I beg leave to withdraw the amendment.

Amendment 35 withdrawn.

--- Later in debate ---

Moved by

[Lord McKenzie of Luton]

37: Clause 24, page 17, line 3, at end insert—
“except where the Pensions Regulator is satisfied that continuity is best achieved by the substitution of a new funder.”

[Lord McKenzie of Luton]

I shall speak also to Amendment 38. Amendment 37 seeks to probe an additional route to continuity. As the Bill stands, where trustees have chosen, or are required, to pursue continuity option 1, they must identify one or more master trust schemes to which members’ accrued rights and benefits are proposed to be transferred. Continuity option 2—an attempt to resolve the triggering event—is a route to be determined by the trustees, and not, seemingly, the Pensions Regulator. It is understood that in some circumstances a route to achieving continuity would be to change the scheme funder at the initiation of the Pensions Regulator as an alternative to transferring out or winding up a scheme. On the face of it, the regulation-making powers of Clauses 24(3)(a) and (b) do not seem to cover the position, but perhaps the Minister will tell us how, or indeed whether, this outcome can be accomplished.

Transferring the responsibility for a master trust to a new scheme funder could provide a quick answer to a collapsing master trust and would fit in with what happens with standard occupational schemes where it is wished to avoid having to wind up the whole scheme if a scheme sponsor becomes insolvent. Changing the scheme funder could be an easier solution that costs less and helps members because it keeps the scheme intact and avoids unnecessary investment transition costs and expenses for the members. Does the Minister agree that this opportunity should be available and, if so, can he put on the record how it might be accomplished?

The purpose of Amendment 38 is to highlight circumstances under continuity option 1 which require a transfer out and winding up and for members’ accrued rights and benefits to be transferred. Notwithstanding regulations which might require transfers to alternative schemes or the right of employers or members to opt out of a proposed transfer, what is the position if the trustees simply cannot identify a transferee scheme? How is continuity option 1 to proceed? It is accepted that the focus of the Bill is just the money purchase component of a master trust but, if other benefits are provided, what is the position regarding these and how are they to be covered by other legislation and regulations? I beg to move.

[Baroness Altmann (Con)]

My Lords, I want to raise an issue which is very relevant to this point. As the Bill will, rightly, require continuity strategies for the event of failing master trusts, I ask the Minister to consider introducing measures that will facilitate bulk defined contribution pension transfers. At the moment, the bulk transfers are governed in a way that would be suitable for defined benefit schemes rather than defined contribution schemes. It seems that we have an opportunity to disapply Regulation 12 of the 1991 preservation regulations and to introduce measures in this Bill to directly facilitate defined contribution pension transfers, which could also cut the costs of transferring across.

--- Later in debate ---

Perhaps I may have another shot at responding to my noble friend Lady Altmann. There will be specific bulk transfer provision for master trusts that are following continuity option 1. That will be made by regulations under Clause 24. It will not have the normal requirements on defined benefit schemes, such as an employer link between the two schemes. I hope that is of some help to my noble friend, and that the noble Lord will consider withdrawing his amendment.

[Lord McKenzie of Luton]

I thank the Minister for his response. Working backwards through our amendments, I think that in referring to the second paragraph of Amendment 38,

“dealing with benefits other than money purchase benefits”,

he said that there is legislation in place which in a sense covers those situations. Can we be clear—perhaps he would care to write to me and to my noble friend Lady Drake—that there is a perfect fit of that regulation in those circumstances where there is a master trust with money purchase benefits and other benefits, just to make sure that it fits those precise circumstances? I think that we remain to be convinced on that point.

On the point about continuity under option 1 or option 2 and who should initiate that, the amendment talks about the Pensions Regulator being,

“satisfied that continuity is best achieved by the substitution of a new funder”.

It does not itself say that the Pensions Regulator effectively has to initiate it. I am not sure if we are on the same page on that one, although perhaps there is more than a glimmer of light. But I think that there is an issue here. We understand what the Minister has said about the role of the trustees as opposed to the Pensions Regulator, but what we were seeking was that the Pensions Regulator could perhaps have some influence, or focus on nudging, to get people to accept a situation where there is a new funder rather than go through one of the other courses—we accept that, obviously, that would involve the trustees having to sign up at some stage, and this would not necessarily be something done over their heads. Again, we will read the record, but it is something to which we will return on Report, among some other things. In the meantime, I beg leave to withdraw the amendment.

Amendment 37 withdrawn.

Pension Schemes Bill [HL]

Lord McKenzie of Luton Excerpts

Committee: 2nd sitting (Hansard): House of Lords
Monday 28th November 2016 Lords Chamber

[Lord Freud]

I think that the situation is the same—the fact that you have primary legislation will allow that to happen. I will clarify that, but I think that is the point of primary legislation.

I make the point to the noble Baroness, Lady Drake, that the Pensions Regulator will make a pause order only under carefully considered circumstances. The pause order may last for the duration of a triggering event period but is not likely to continue for a significant length of time, and the regulator must weigh up the potential impacts on members when considering whether to issue such an order.

I shall now turn to the government amendments on the pause power.

[Lord McKenzie of Luton (Lab)]

My Lords, perhaps I might speak to my amendment in this group, which he has answered in part. That might make it a tidier process.

The purpose of Amendment 47A is to look at the issue of tax relief, as the Minister has identified. Under the pause provisions, an order can direct that no new members are to be admitted to the scheme and no further contributions and payments are to be paid towards the scheme by, or on behalf of, any employer or members. This does not apply, under Clause 31(6), to,

“contributions due to be paid before the order takes effect … and … references to payments … include payments in respect of pension credits”.

Our amendment seeks to make it clear that amounts recoverable by the provider from HMRC in respect of tax relief attributable to the permitted contributions—that is, those paid before the order—will still be available to the master trust. For the purposes of Clause 31(6)(a), it is presumed that the tax component is a contribution or payment. If so, do the mechanics of how relief at source operates mean that the HMRC payment is due to be paid before the order if the related contribution is—there is a timing issue here—or is it proposed that there will be some form of carve-out for the tax relief under Clause 31(5)(b)?

The intention behind the amendment was to probe that narrow issue rather than to achieve a wider objective, but of course it raises the wider issue of the amounts of the two forms of tax relief, touched upon in particular at Second Reading by the noble Lord, Lord Flight, and the noble Baroness, Lady Altmann. They set down very clearly the problem for schemes operating net pay arrangements for individuals who do not pay income tax, in contrast to those who use the relief at source method and can get tax relief at 20% on the first £2,880 paid into a pension—equivalent to a gross of £3,600. Those who are not subject to income tax and are within the net pay method are clearly missing out. The extent to which they miss out in aggregate may not be dramatic at present and will be influenced by auto-enrolment thresholds or current required contribution levels and the income tax threshold—the personal allowance. However, this will increase as more and more auto-enrolment takes place, the required contribution increases to 3% and there is still a gap—possibly a widening gap—between the threshold and the income tax personal allowance.

Can the Minister tell us how many non-taxpayers are currently contributing to a pension under net pay arrangements and could benefit from relief at source, and what is the aggregate tax benefit forgone? Going back to my earlier point, the amendment is intended specifically to focus on the technical issue of how that tax is garnered and paid before the cut-off point of the pause order.

[Lord Freud]

My Lords, on that narrow point, I hope that I can again reassure the noble Lord that, when those rebates are due, before the pause order is in place, we have a way of making sure that they are paid—through Clause 31(6)(a). It may be easier for me to write to the noble Lord and describe that process, but I think that it achieves what he is looking for. I will have to provide the figures on the net pay separately but will write to him on those, too.

[Lord McKenzie of Luton]

I would be grateful if the noble Lord could write on that specific point because I am struggling to see how a contribution—particularly one which comes in fairly late in relation to the date of the pause order—could immediately be converted into a receipt from HMRC, which is what I think the Bill requires.

[Lord Freud]

This is really a specific point, but I will write to the noble Lord both on the numbers and on how the process will work. I hope that that will be satisfactory and that we can then dispose of the matter for the purposes of later stages of the Bill.

I turn to government Amendments 47, 48, 49 and 52. These are intended to provide further clarity and some tidying up of the provision. They are based on further consideration of the comparisons with the Pension Regulator’s freezing-order power in the Pensions Act 2004, and are intended to ensure that they work sufficiently in a triggering event period. Amendment 47 makes clear that the pause power can be used to prevent benefits being paid out. Following the introduction of the Bill to the House, we have received some inquiries as to whether this is achieved through the provisions in the Bill. That was our intent, and as the freezing-order power makes separate provision to cover this aspect, we have, through Amendment 47, made an equivalent and explicit provision in respect of the pause order. Amendment 48 inserts a missing definition of “pension credit”, which was an oversight, and mirrors the freezing-order power. Amendment 49 is consequential to Amendment 47, and ensures that members retain their entitlement to any benefit payments affected by the pause order.

--- Later in debate ---

[Lord Freud]

I thank noble Lords for allowing me to speak to these amendments. Once again, please accept my sincere apologies for proposing these amendments now rather than including them in the draft Bill as introduced. Most of my proposed amendments modify the procedures the Pensions Regulator must follow when exercising some of the new functions introduced by the Bill.

Amendments 58 to 65 and Amendments 73 and 76 change the procedure that the regulator must follow when making a decision on an application for authorisation from an existing master trust scheme. The majority of the Pensions Regulator’s statutory functions are exercised through internal procedure known as “standard procedure”, with “special procedure” applying to certain functions where there is an immediate risk to members or assets. These procedures are set out in the Pensions Act 2004. The Bill as introduced provides for standard and special procedure to apply to the power to grant or refuse authorisation to an existing master trust scheme. However, on further consideration, we do not believe that some of the steps involved in these procedures would be appropriate.

The standard procedure provides for the issuing of a “warning notice” to such persons who, in the view of the regulator, would be directly affected by the regulatory action under consideration. They would then have the opportunity to make representations before a decision could be made about whether to exercise the regulatory function. This means that the Pensions Regulator would be obliged to send the trustees of an existing scheme such a notice after the trustees submit an application for authorisation.

In this instance, the regulatory action the notice would refer to would be the power to grant or refuse authorisation. It would not be necessary to warn the trustees that the regulator intends to take this regulatory action and make this decision, nor would it be appropriate to invite further representations at this point as the trustees would have submitted all necessary representations in their application. Special procedure, which dispenses with the warning notice and representations steps in the first instance, could be used only when the regulator considers there is an immediate risk to the interests of the members or assets of the scheme.

Amendments 58 to 65 and Amendments 73 and 76 would align the process of deciding whether to grant authorisation to an existing master trust with the process the Bill specifies for making this decision for new schemes. However, the amendments retain the requirement that the decision to grant or refuse authorisations must be made by the determinations panel of the Pensions Regulator. This is appropriate because in both situations a scheme operating in the market will be required to transfer members out to an authorised master trust scheme and to wind up. The impact of this is significant, and under these circumstances it is appropriate for the determinations panel to make the decision. The amendments I propose would maintain rights of appeal to the First-tier or Upper Tribunal should the decision be to refuse authorisation. The amendments would simply remove unnecessary steps and delay.

Amendment 55 has a slightly different purpose. It would ensure that if an existing master trust scheme—that is, a master trust in operation before the commencement date—submits an application for authorisation and the Pensions Regulator decides to refuse authorisation, it would not have to commence the process of transferring members out and winding up until any appeals are disposed of.

The final amendments I seek to move within this group are Amendments 72 and 77, which also deal with changes in procedure, but in relation to different regulatory powers within the Bill. The regulator has a power to direct the trustees of an authorised master trust to comply with the requirements of Clause 26 in relation to the implementation strategy. Where there is no strong reason to specify a different procedure, it is right that the regulator’s functions should be subject to the standard procedure, and for this reason Amendment 72 makes this power to direct subject to that procedure. In addition, where the trustees of a master trust should be following an approved implementation strategy but are failing to do so, under Clause 28(4) the regulator has the power to direct the trustees to pursue the continuity option identified in the strategy and to take such steps as are identified in the strategy to carry it out.

Amendment 77 makes this a power which can only be exercised by the determinations panel under standard procedure. The Government consider this appropriate, as it is a power which may have a significant impact on the scheme and its members. I hope I have given a thorough explanation of my proposed amendments. I thank noble Lords again for bearing with me in bringing these amendments at this stage of the Bill process, and I beg to move.

[Lord McKenzie of Luton]

My Lords, I thank the Minister for his full explanation of these provisions. I am bound to say that we would like to study them a bit further and bring something forward on Report, if necessary, but I thank the Minister and the Bill team for supplying us with a Keeling schedule, which made these provisions somewhat less impenetrable than they might otherwise have been. As far as the panel is concerned, we discussed the issue of resources available to the regulator before. Will the determinations panel have the necessary resources available to it, and how speedily can it act and pick up these matters?

I have two brief questions on Amendments 73 and 76, which delete particular provisions in the Bill. Amendment 76, for example, deletes:

“The power to grant or refuse authorisation of a Master Trust scheme in operation on the commencement date under section 5”.

I presume that power is being deleted because it flows to the determinations panel, but will the Minister just clarify that for us?

[Lord Freud]

I am pleased to do that. My understanding is that the second assumption is correct: Amendment 76 moves it over to the determinations panel and I spelled out last Monday the process by which we will get the financial resources required by the Pensions Regulator. Clearly, one of the issues in that process will be the funds required to operate the determinations panel.

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Moved by

[Lord McKenzie of Luton]

56: Schedule 2, page 37, line 39, leave out “six” and insert “three”

[Lord McKenzie of Luton]

My Lords, this small, probing amendment would reduce the application period from six months to three. It was conceived by seeking to deal with the question: for how long can an authorised master trust remain in operation unauthorised under these provisions? That is what sparked the thoughts. I acknowledge that the consequential amendment to paragraph 8(7), which should have followed, has not been made, so in effect we have just part of the amendment here.

The purpose of this probe is to test the rationale for the length of the period during which an existing master trust can continue to operate without authorisation. As it stands, a master trust must apply for authorisation by the end of the application period. The application period in the Bill is six months—three in our amendment—beginning with the commencement date. The commencement date is the date on which Clause 3—“Prohibition on operating a scheme unless authorised”—comes into force, which is to be fixed by the Secretary of State but is expected to be some two years away. The Pensions Regulator must make a decision on the application within six months and, if it is refused, can be referred by the trustees or others to the tribunal.

From today, absent an appeal, an existing master trust could remain in operation for two years before the commencement date; then there are six months before it applies, with a six-week extension, and six months during which the Pensions Regulator must give it consideration, assuming that there is no appeal. This is potentially a long time. It is accepted that the transitional provisions will be in place from the date the Act is passed, or 20 October, concerning triggering events, the prohibition on increasing charges and the scheme funder’s liability for the costs of winding up the scheme. Of course, all this is happening nearly two years after the commencement of auto-enrolment, which has been the spur to the growth of master trusts.

My plea is: should we not be making faster progress? Given the commitment to consult on regulations, the shape of the detail required for an application will surely be evolving long before the commencement date. Is there not a way we can make faster progress in this very important area, where billions of pounds of people’s investments are at risk? I beg to move.

[Lord Young of Cookham (Con)]

My Lords, as we have just heard, the amendment tabled by the noble Lord, Lord McKenzie, and the noble Baroness, Lady Drake, would reduce the time period an existing master trust scheme will have in which to apply for authorisation from the commencement of the relevant provisions of the Bill from six to three months. While I have some sympathy with the amendment, for the reasons set out by the noble Lord, the Government’s view, which is informed in part by the Pensions Regulator, is that there is a compelling case for allowing a maximum of six months.

My expectation is that some schemes will have relatively little to do in order to align their businesses with the new requirements and, as a result, will be in a position to apply for authorisation early in the six-month application window. Others may face more of a challenge and may need time to consider the final legislation in full—including, of course, the regulations, which will come out next year—before they determine whether to apply for authorisation or withdraw from the market. We do not want to risk losing good schemes from the market because they have not had sufficient time to make the necessary changes to meet these new requirements. Having consulted the regulator, our view is that six months will give schemes the time they are likely to need.

I appreciate the noble Lord’s concern that members should be protected as quickly as possible but we must get the balance right between achieving that and placing demands on existing businesses. As I think the noble Lord recognised in his remarks, an additional key protection for members is set out in the Bill, which will apply from the beginning of the application window. This is in addition to the retrospective provisions in the Bill, which mean that a scheme that experiences a triggering event from 20 October this year will be unable to increase charges on members to pay for scheme wind-up. The additional protection is that if a scheme experiences a triggering event during this period, and the regulator has reason to believe that there is an immediate risk to the interests of scheme members, the regulator will have the ability to issue a pause order under Clause 31, which we have just been discussing, regardless of whether or not the scheme has submitted an application for authorisation.

Finally, on the overall length of time it will take, as the Bill stands, from the date on which regulations fully commence master trust schemes will have six months to submit an application for authorisation. The Pensions Regulator will then have six months from the point of receiving an application to decide whether to grant or refuse authorisation. This means that the vast majority of existing schemes will be either authorised or not authorised within one year of full commencement. Where trustees are unsuccessful, they can appeal to the First-tier Tribunal or the Upper Tribunal. The master trust will be able to continue operating pending the outcome of that appeal.

Although I understand the noble Lord’s desire to ensure that the schemes become authorised quickly—after all, the whole purpose of the Bill is to move to a position where all master trust schemes operating in the market have satisfied the Pensions Regulator that they meet the requirements for authorisation—we must strike a balance between increasing protection for scheme members and placing requirements on the master trust industry. Having consulted the Pensions Regulator, the Government’s view, as I said, is that allowing six months for applications from the commencement of regulations strikes the right balance. For those reasons, I invite the noble Lord, Lord McKenzie, to consider withdrawing his amendment.

[Lord McKenzie of Luton]

My Lords, I thank the Minister for his reply—which was not unanticipated. I beg leave to withdraw the amendment.

Amendment 56 withdrawn.

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[Baroness Bakewell of Hardington Mandeville (LD)]

My Lords, on the face of it, Clause 40 on the power to override contract terms appears sensible to most people. While there may be very good reasons why the Secretary of State may wish to override provisions contained in some pension schemes, I believe that the House would want to be reassured that it was absolutely necessary.

People I have talked to about my concerns over this power all say the same thing: the Government are always overriding contracts. In other words, get used to it. However, I find this quite difficult to come to terms with. As noble Lords know, I come from a local government background, where every contract has to go out to tender, even if it is too small to hit the OJEU rules. It is expected that at least three quotes will be obtained. Once initial quotes are obtained, haggling often begins on the bigger contracts, and a lot of lawyers are involved before the contract is finalised, signed and executed. The contract start date is agreed and eventually the service contracted for is begun.

Quite small parish councils also adhere to the rule that quotes must be obtained before a service contract or purchase can properly be made. It is, after all, council tax payers’ money that is being spent by parish, district, county and other local authorities. Due process has to be followed. If a contract that has been correctly drawn up, tendered for, signed and legally agreed were overridden by the local authority in question, there would be very serious consequences—and even, perhaps, central government intervention.

But here we see that the Government are proposing that contracts that have been legally executed, agreed and signed can be overridden summarily by the Secretary of State. Of course we want to be reassured that the interests of pensioners and their pension pots are protected, and we all want to ensure that all steps are taken to make that happen—but do we really need such a draconian step to facilitate this?

I originally felt that this clause set a very dangerous precedent. But I now understand that Secretaries of State do this all the time, so it quite clearly does not set a precedent as the practice already exists. I will therefore confine my comments to the Minister to asking: does he not feel that this is setting double standards for those who hold elected office and are in positions of authority? One rule exists for governance at local authority level and a completely different set of rules exists for central government. Does the Minister feel that this is likely to generate trust and confidence in central government—or, as I feel, that it will do quite the reverse?

[Lord McKenzie of Luton]

My Lords, I will comment briefly. I find it difficult to support this proposition. The noble Baroness drew attention to contracting in local authorities, and we understand that—a number of us have been there. But is not the key issue here that the market does not produce the right result? There is weakness on the buyer side, and given the complexity of the product, you need some specific provision to deal with that. We are dealing here of course with a ban on member-borne commission and a cap on early exit charges. The latter in particular is seen to be an inhibitor to people accessing their pensions—indeed, the evidence is clear that it is an inhibitor. If those issues have to be addressed, then we have to use the mechanisms which are at hand. I agree that causing an override of these contract provisions is not the most comfortable mechanism, but it already exists in relation to scheme details, I understand, between the FCA and contract-based schemes, and this extends it to deal with other contractual arrangements relating to schemes.

I am afraid that this proposition does not have our support. We think it is important that we go ahead and get the ban on member-borne commission and the cap on early exit charges in place as soon as possible. On that latter point, I am bound to say we are somewhat disappointed. We are pleased to see the press release from the Minister announcing a cap of, I think, 1%, or 0% for new provisions. But it is will be October next year before that is in place, which again seems a little bit tardy, because the FCA is moving to get the restrictions in place by the end of March.

[Lord Kirkwood of Kirkhope (LD)]

My Lords, I will add my voice to commend the merits of my noble friend’s position. I understand what the noble Lord, Lord McKenzie, says, and I understand too the grave situation and the need for protection, but as I have said before—the Minister was sensitive enough to pick it up the last time we discussed this—the provision of an override completely freezes the responsibilities and duties of the trustees. There is a master trust here, which presumably—I cannot see any way round this—has a trust deed which sets out the rules and responsibilities. The provisions in this clause do not just override the contracts but run a coach and horses through the trust deed and the responsibilities of the trustees. It is effectively a vote of no confidence in the trustees, as far as I can interpret how this is to be used, and that is an extremely serious situation.

In the past, trust law has served pension provision well in this country. In addition, there are extremely onerous fit-and-proper-person tests in the earlier clauses of this Bill. The assumption should be that people of good faith and knowledge and experience will not get into these positions at all. We have always been able to rely, in the main, on trustees doing their duty well, but this clause gives them no chance to do that. It sets them aside and is a vote of no confidence in what they do. If I was in that position, I would resign as a trustee—and if the trustees of the master trust resign, then the pause period might be not just three months or six months but a lot longer. My position in supporting careful consideration of this clause before we vote it into law is not just about the important points my noble friend made but about how this will impact on the assumption and service of trustees. If I was invited to become a master trustee in these circumstances, I would look twice at the provisions in this clause before agreeing to do any such thing.

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[Baroness Altmann]

My Lords, I will comment briefly on my noble friend’s absolutely valid observations. The concerns expressed across the House on this issue are particularly acute as there has been an interdepartmental, cross-government approach to try to clamp down on these issues. Police initiatives such as Action Fraud and Operation Scorpion have all supposedly joined together to fight this issue. The FCA is involved as well. However, in response to Written Questions that I have tabled, my noble friend has said that so far this year, for example, nobody has even been charged and, over the last few years, nobody has been convicted. So this initiative, while very worthy, is not necessarily catching the public’s attention. If you ask those who have been scammed where people should go if they are not quite sure about something or have had a problem, they simply do not know. So we either spend a lot more money advertising the existing initiatives or, preferably, ban cold calling and introduce further measures—as the Chancellor has already indicated is the intention—to prevent or make more difficult the transfer of pension money to one of these unregulated vehicles. If we do that, the public will be better protected.

[Lord McKenzie of Luton]

I will be brief as I do not want to echo the fantastic contributions made by the noble Baroness, Lady Bakewell, my noble friend Lady Drake, the noble Baroness, Lady Altmann, and the noble Lord, Lord Flight. I can see that if an intelligence unit were part of a wider cross-government approach, it could well pay dividends. However, I fear that we would simply replicate arrangements whereby HMRC constantly chases tax avoiders, alights on some and then there is a change, and then somebody draws a line somewhere else and it is a never-ending process. Nevertheless, it may be worth while pursuing that.

The noble Baroness, Lady Bakewell, should be congratulated on bringing forward this amendment, the thrust of which we clearly support—although I disagreed with her on her last amendment. As others have said, events have to a certain extent overtaken it because we heard from the Chancellor last Wednesday the welcome news that the Government will shortly publish a consultation on options to tackle pension scams, including cold calling. It proposes giving firms greater powers to block suspicious transfers and making it harder for scammers to abuse “small self-administered schemes”. So this approach appears to take us a little further than the strict terms of the amendment, but if we are to forgo the opportunity to legislate now, at least on cold calling, we need some reassurance from the Minister on how short is “shortly” and what legislative vehicles will give effect to these conclusions.

I do not seek to repeat a number of the awful situations that noble Lords have identified, of people being deprived of their life savings. We have argued before that insufficient groundwork was undertaken by the coalition Government when they introduced these reforms; my noble friend Lady Drake made that point. One omission was clearly to anticipate the opportunities for fraud which these changes attracted. So if the Government are not able to convince us how quickly they can introduce measures to tackle these problems, we will be minded to support the amendment in the name of the noble Baroness, Lady Bakewell, at least as an interim measure.

[Lord Freud]

This amendment seeks to make it a criminal offence to make a cold call or send other unsolicited electronic mail or communications for the purpose of scamming a pension scheme member of their pension savings or to make changes to their existing arrangements; for example, inducing them to participate in high-risk investments. The noble Baroness, Lady Bakewell, focuses on a substantial issue. The figures are enormous. According to the ONS—the Office for National Statistics—eight scam calls happen every second in the UK, or over 250 million a year. Almost 11 million pensioners are targeted annually by cold callers, and savers have reported losses of nearly £19 million to pensions scams between April 2015 and March 2016. The amendment also stipulates that a person convicted of such an offence is liable to a term of imprisonment not exceeding six months, or a fine, or both, so it aims to deter scammers from such activity.

I state firmly that this is a priority for the Government, and we are determined to tackle the scourge of fraudulent nuisance calls. We want to send a strong message to consumers that they should not respond to such approaches. However, as my noble friends Lady Altmann and Lord Flight and the noble Baroness, Lady Drake, pointed out, that is not enough—banning cold calling alone will not stem the flow of transfers in scam vehicles or the establishment of those vehicles in the first place. Scammers who make cold calls are criminals and will continue to cold call and incite people to part with their savings. It probably does not make a huge amount of difference to the savers whether the criminals are based in this country or elsewhere in the world where we find it difficult to get hold of them.

The Government have explored this issue in detail, which is why in the Autumn Statement last week we announced that we will consult on how best to ban pensions cold calling. That needs to be supported by a wider package of proposed measures intended to tackle pension scams themselves. With regard to timing, on which I have been pushed by the noble Lord, Lord McKenzie, the plan is to publish a consultation on these measures before Christmas and to have the next steps ready for the 2017 Budget—I think it is still called a Budget—which will be in the spring. Comments can then be made on proposals to: ban cold calling in relation to pensions investments, and tackling inducements to do that; placing restrictions on certain types of transfer, which seeks to limit the flow of funds into scams; and making it harder for scammers to set up and run fraudulent small self-administered schemes, which tackles the potential vehicles for scams. We intend to provide more detail on these proposals in the consultation document.

To tackle the scams effectively, it is clearly vital to get this right and to do so in a way that does not impact on legitimate businesses. The consultation will seek to understand what impact these proposals would have on legitimate firms and member transfer activity, and what, if any, legislative solutions might be available and proportionate to disrupt the scams. In answer to the noble Baroness’s question, we will also be consulting on appropriate custodial sentences, although imposing them on people in different parts of the world is harder to achieve.

As I said, we need to ensure that we get this right, and the consultation, alongside existing engagement with experts from the pensions industry and consumer groups, will help inform our thinking. With that in mind, I ask the noble Baroness to withdraw the amendment, with which we are entirely in sympathy.

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As I say, this issue is of growing economic importance. It seems quite extraordinary that huge pension fund deficits continue to be reported and we are aware that the amounts are probably hugely overstated, but we are stuck with being legally obliged to show these deficits when directors are producing companies’ accounts. If we are constrained by EU agreement, we should require at the very least that deficits calculated at an appropriate rate of interest are also shown. I beg to move.

[Lord McKenzie of Luton]

My Lords, the amendment of the noble Lord, Lord Flight, seeks a way of tackling the concern about the calculation of DB pension liabilities and deficits, particularly their volatility and the impact a large deficit can have on a company’s balance sheet.

By way of illustration, the LCP annual survey of FTSE 100 company schemes estimated deficits at 31 July 2016 of £46 billion, compared with £25 billion a year earlier and an estimated surplus in February 2016—big swings, clearly. Of course, a significant factor in these calculations is bond yields, which reduced sharply following the EU referendum, pushing up liabilities, although it is suggested that some of this reduction has been negated by interest-rate hedging and that foreign currency-denominated assets have benefited from some decline in sterling.

The reality is that a number of factors feature in how DB schemes should be accounted for: life expectancy, inflation and discount rates, as well as contribution levels and benefits. In seeking to understand the sensitivity of this, for FTSE 100 companies, as reflected on the basis of International Accounting Standard 19, the aggregate pension deficit of £46 billion in July 2016 comprised liabilities of £628 billion and assets of some £582 billion. These are very large aggregates.

The noble Lord’s amendment concentrates on the calculation of defined benefit pension liabilities and would enable directors to use an alternative method if,

“they are satisfied that accounts give a true and fair view”.

It provides that the Secretary of State must,

“set out one or more alternative methods”,

for these purposes—I understand that this is based on actuarial advice—and that an alternative method of valuing DB liabilities must not be,

“contrary to international accounting requirements”.

I am grateful to the Institute of Chartered Accountants in England and Wales for the information it provided in helping me to frame this contribution. At present, listed companies have to adopt international accounting standards. In other cases, companies can choose to use IFRS or FRS 102, which replaced FRS 17. However, it is understood that so far as pension scheme liabilities are concerned, the two standards are broadly consistent. The amendment of the noble Lord, Lord Flight, would not appear to apply to listed companies which are bound by international accounting standards—but for how long? He raised that interesting question. FRS 102 sets out how defined benefit plan liabilities are to be measured and recognised. It requires a defined benefit obligation to be calculated on a discounted present-value basis, using a rate of discount by reference to market yields at the reporting date on high-quality corporate bonds. This has to be recognised in full on the balance sheets.

We have sympathy with the amendment to the extent that it seeks to dampen the volatility of the measurement of liabilities for accounting purposes, but not if it is seen as a route to lessen employer contributions to DB schemes. We recognise that the current accounting treatment which generates this volatility is not ideal, although it is not helped by government policies such as quantitative easing. However, we have concerns about this approach. The Financial Reporting Council is responsible for setting UK accounting standards, not the Secretary of State.

A process in which generally applied standards are overridden on particular issues would set a precedent that could lead to a confusing regime and not help transparency and confidence in financial reporting. It begs the question of what alternative method of valuing DB liabilities would enable directors to be satisfied that the accounts give a true and fair view. What would this mean for trustee scheme valuations? The era of very low interest rates has brought the matter into sharp focus. In winding up our Second Reading, I think the Minister said that the Government had this issue in their sights and would explore it in the upcoming winter Green Paper. We look forward to that but, in the interim, we seek an update on where the thinking is going.

[Lord Freud]

I thank my noble friend Lord Flight for this amendment, which opens up a fascinating area. Amendment 81 would require the Secretary of State to make regulations which would have the effect of allowing companies to disregard any method of valuing defined benefit pension liabilities required by accounting standards. I recognise and understand the concerns that have been expressed in this debate and during Second Reading about the measurement of the liabilities under accounting standards, particularly when we are in what one would hope is an unusual period of interest rates being low not for reasons of the economy but because of quantitative easing.

Following its recent public consultation on its future agenda, the International Accounting Standards Board concluded that,

“there was no evidence of problems that were sufficiently widespread and significant to require a comprehensive review of IAS 19”.

However, I assure my noble friend that this is not the end of the matter. The UK’s Financial Reporting Council is in the early stages of considering the impacts of the current approach and will be examining the case for an alternative approach. I believe that this is the most appropriate way forward compared with the approach proposed by this amendment. The independence of the standard-setting approach is widely regarded as one of its strengths. I do not think it would be right for government to intervene directly—here I echo the wise words of the noble Lord, Lord McKenzie. It should not effectively set aside the accounting standards framework that has been developed to deal with these complex matters. If the Financial Reporting Council finds objective evidence or broad stakeholder demand for change, any proposals would need to take fully into account the risks they may pose to members’ benefits and would need to be tested through public consultation.

My noble friend talked about the experience in the US. When he did so at Second Reading, he got me to do some work—I always resent that—to look at that. In the US, schemes may move to calculate their funding based on yields from high-quality bonds averaged over the past 25 years. That approach would effectively discount rates by 1% and lead to employers paying significantly less into their pension schemes. What we must not allow to happen—again I echo the noble Lord, Lord McKenzie, and it is not often that that happens—is a change that releases pressure on employers, only to find that that leads to their pension scheme being less well funded and members losing out.

I do not think there is a quick and easy solution here. Nobody who looks into this issue can be in any doubt that this is an extremely complex and technical area. To come up with an alternative accounting methodology would require a number of substantial steps. Those would include: undertaking a detailed analysis of the current commercial, financial and broader economic impacts of the current methodology to determine whether there is a need for that change; developing alternative approaches, which would also have to model transition impacts between the two regimes; seeking views from the market through public consultation on identifying the costs and benefits and any adverse impacts; and, finally, developing the detailed standard itself, which again would require a further round of public consultation.

We are planning to publish a Green Paper over the winter, and I can reassure noble Lords that it will explore the issue of how liabilities are measured and reported in the round. We want to ensure that measures of liabilities and deficits are properly understood and are being used and interpreted appropriately. We will explore and seek views on whether the measures used could, in some cases, be driving investment behaviour that is not in the best interests of members or employers, and we will look at what the alternatives might be. I hope I have reassured my noble friend that his concerns are being addressed and that he will withdraw his amendment.

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[Baroness Altmann]

My Lords, I commend the noble Baroness, Lady Bakewell, on her amendment. I was proud that the Government finally recognised the need to allow people to undo unwanted or unsuitable annuities when that decision was announced and indeed put in the manifesto, which the noble Baroness quoted.

Government rules effectively forced people to buy these products even though they did not want or need them. They had no protection when they were buying but the plans were in place to ensure that they would have protection if they considered reselling them. There was to be mandatory Pension Wise guidance and advice depending on the value of the annuity, and indeed legislation had already been passed to make that happen. As the noble Baroness mentioned, companies have already spent quite significant sums in preparation for this market, which consumers want and in some cases need, as the case studies showed.

In the annuity market it is normal for there to be only a small number of providers, which has never stopped that market operating in the past. For defined benefit pension schemes and bulk annuities, for example, for many years there were only ever two companies that would offer quotes. That should not be a reason to stop people being able to sell their annuity. Indeed, many people with secure defined benefit pensions, and the additional voluntary contributions that they were saving on top of that, were often forced to buy an annuity that they clearly did not need. Very often, because the regulatory system drove people to shop around for the best rate, they did not know that that would not actually necessarily be the right product. If you shopped around for the best rate and bought the single-life annuity, there was no protection for your spouse. In some cases, individuals have bought a product that they do not need and is not suitable for their family circumstances. This measure would have given them an opportunity to undo that. The law currently allows people who have less than £10,000 a year in an annuity to undo it, but if we do not proceed with the plans that were previously in place, they will potentially be doing so without any consumer protection. The plans had been to ensure that there was consumer protection before this happened.

It is not up to the Government or the pensions industry to decide what is best for somebody’s money; they are the ones who know that. If they have bought something that is not suitable, it is right that the Government give them an opportunity to undo that deal. If you buy a brand-new car and it is the wrong car for you, you have the opportunity to sell it in the second-hand market—yes, you have to take a discount; yes, it may be a significant discount; but that is your choice. When the Government have enshrined freedom and choice in the pension system, it is appropriate for us to continue to enable people to access their savings, which they need and to which they were promised access. If it requires a delay to get the consumer protection in place, so be it. That is a shame, but it is at least a rationale for asking people to wait longer. To take away the opportunity altogether seems unfair, as the noble Baroness, Lady Bakewell, said. She is receiving representations; I am hearing from large numbers of ordinary people across the country how much it would mean to them to have the opportunity to undo an annuity that they no longer want, or perhaps never even wanted or needed.

[Lord McKenzie of Luton]

My Lords, we were a little surprised—perhaps we should not have been—to see this amendment seeking the establishment of a secondary annuity market, given the Statement made by the noble Lord, Lord Young of Cookham, just a month ago. I say first to the noble Baronesses, Lady Altmann and Lady Bakewell, that the fact that people may have ended up with an annuity which is not the greatest in the world does not mean that they should compound that problem by doing a bad deal in the secondary annuity market. That is the nub of this issue. You simply cannot equate a transaction on a second-hand car with the sale of an annuity. It is fairly clear what is the market price for a second-hand car; there is a vibrant market out there, as I understand. It is quite different with annuities. That is at the heart of this issue.

An amendment seeking to establish a secondary annuity market was rejected by the noble Lord, Lord Young of Cookham, and we supported him in that. In that Statement, he explained that the Government had consulted extensively with the industry and consumer groups to explore whether conditions for a secondary market in annuities could be established. The conclusion was that, without compromising consumer protection, there were likely to be insufficient purchasers to create a competitive market and that pensioners were likely to incur high costs in seeking to sell. They concluded that the policy would not be taken forward, despite the loss of front-end-loaded tax revenue to the Exchequer. As I said, we supported the Government in that, and we oppose this amendment.

We were sceptical from the outset that this was a sensible policy, and my noble friend Lady Drake and I raised a number of concerns when it first surfaced as part of the Bank of England and Financial Services Act. Indeed, we went on a delegation to see the noble Baroness, Lady Altmann, in her former role. There is of course no pre-existing secondary annuities market to help form a judgment on these matters, but what was proposed was potentially very complicated, with the players including individual annuity holders, potential beneficiaries and dependants, purchasers of rights of an annuity under a specific regulated activity, a further regulated activity for providers buying back annuities, regulated intermediaries, IFAs providing mandatory regulated advice, and authorised entities to check that holders of relevant annuities had received appropriate advice.

No wonder that even the then Pensions Minister, Steve Webb, opined that, for the vast majority of consumers, selling an annuity would not be the best decision. There would be significant costs arising from the necessary regulatory systems. There were further unresolved issues of means-tested benefits and social care and how the income deprivation and capital disregard rules would work in this context. There have been many problems—and, at the end of the day, concerns that there would be insufficient purchasers to make the market work for pensioners. I have not heard any new points raised by the noble Baroness, Lady Altmann, that dislodge this conclusion. Surely there is more for the pensions sector to concentrate on at this time than complicated arrangements that will likely serve only a very few.

Pension Schemes Bill [HL]

Lord McKenzie of Luton Excerpts

Report stage (Hansard): House of Lords
Monday 19th December 2016 Lords Chamber

Moved by

[Lord McKenzie of Luton]

1: Clause 4, page 3, line 17, at end insert—
“( ) the scheme’s member engagement strategy.”

[Lord McKenzie of Luton (Lab)]

My Lords, this revisits an amendment debated in Committee and requires the scheme’s member-engagement strategy to be one of the pieces of information that must be submitted to the Pensions Regulator as part of the application for authorisation. As such, it would then sit alongside the scheme and the scheme funder’s latest accounts—incidentally, that assumes there are some. In a start-up situation there may not be. Perhaps the Minister will comment on that—the business plan and the continuity strategy. The latter, of course, addresses how the interests of members are to be protected if a triggering event occurs.

As was argued in Committee, understanding members’ views and needs is essential to designing investment strategies and to the assessment of value for members. Such engagement ought to be an essential component of designing a pension scheme and an integral part of its creation and continuance.

The DC guide sets out that good member communications provided at the right time and in the right format are vital if members are to engage and make decisions that lead to good outcomes for them in retirement. As the code reminds us, there are a number of ways in which the views and needs of members can be determined. It recommends choosing methods that are appropriate and proportionate depending on the size of the scheme and available resources. Included in the techniques which might be employed are member surveys, running workshops, holding member AGMs—although we left that degree of flexibility out of this amendment—focus groups and forums, and regular member panels.

In Committee, my noble friend Lord Monks referred to the challenges of encouraging the member voice to be at the top of the agenda. He was speaking of his experience of a master trust with some 1 million members and 20,000 employers—a different proposition from engaging with perhaps just a few thousand members and a handful of employers. As the noble Lord, Lord Stoneham, has reminded us, we are dealing with schemes where the risk is with the members—the employees—which therefore necessitates their effective engagement.

On Second Reading, and repeated in Committee, the noble Lord, Lord Young—the Minister—expressed his support for the principle of member engagement. At col. 1758 of Hansard of 21 November, he expressed “a lot of sympathy” with the rationale behind the amendment then tabled. We hope that, on reflection, he might be moved a little further and is now able to accept it. The thrust of the noble Lord’s reason for rejecting the proposition appeared to be that there are comprehensive statutory requirements covering communications with members as well as guidance from the regulator and the Bill is not about stipulating how trustees should run an excellent scheme, and that they should have discretion about how they go about member engagement, provided, that is, that communications requirements which already apply are met.

This amendment does not seek to impose any particular approach to engagement on trustees, but it would mean that they would have the opportunity to lay out for the regulator how it is proposed to go about the task, and to demonstrate an understanding of the requirements and how in fact they are to be met in the particular circumstances of each master trust. It would be wrong to see engagement and communication as just a routine matter, especially given the scale of some of the existing master trust operations and given developing technologies. It seems a little odd that the regulator is required under the Bill to assess whether a range of persons are fit and proper; to take a view on whether any particular master trust scheme is financially sustainable and receive a business plan for this purpose; to decide on whether the systems and processes to be used are sufficient to be run effectively; and to determine whether a scheme has an adequate continuity strategy to address the interests of members in the event of a triggering event. However, it can look aside from whether a scheme has an effective member engagement strategy, as it can assume that statutory requirements and regulator guidance will be followed. Frankly, this seems a bit thin.

To accept this amendment would be a very clear demonstration to the sector of the importance placed upon member engagement. At the end of the day, the members are the very people the schemes are supposed to support. What is the downside in accepting this amendment? I beg to move.

--- Later in debate ---

Having said that, and given the assurances about the scope of the automatic enrolment review and the intention to use regulations under Clause 11 to assess the adequacy of the scheme’s systems and processes related to member communications and engagement, I hope noble Lords will feel reassured that the Government understand the importance of this matter. Against that background, I hope the noble Lord will withdraw his amendment.

[Lord McKenzie of Luton]

My Lords, I am extremely grateful to the Minister for that response. It ended up a lot more positive than when it started and where it looked as though it was heading originally.

The noble Lord reiterated what he said at an earlier point in our deliberations about statutory guidance being met. My question was going to be: “How does the regulator know that that guidance is being met”? I think the answer is, from the processes under Clause 11 and what he said about systems and processes requirements. I am grateful for that.

I am grateful to the noble Lord, Lord Kirkwood, for his support. I look forward to further deliberations on the auto-enrolment consultation, which we will come to, presumably, in the new year. Having said that and noting what is just ahead, at this stage I beg leave to withdraw the amendment.

Amendment 1 withdrawn.

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[Lord Kirkwood of Kirkhope]

My Lords, obviously I welcome the Minister’s amendments, which are a very appropriate response to our discussions in Committee. The compromise that he has struck is useful—and not just in these circumstances. It is actually not a bad idea for legislation to start adopting some of these things because it might avoid some of the tensions we have seen in the past in social security legislation in terms of trying to get access to the secondary legislation. Taking the first regulations under the affirmative procedure is an excellent way out of the problem we saw in Committee.

The timetable that the Minister has laid out is very reassuring and gives people an idea of what to expect in terms of the consultation and the timeframe available. I understand Amendment 24. I know that such provision has been used previously in pensions legislation, but Ministers at the Dispatch Box will be well advised to note that this clause will be particularly carefully looked at not just by the House committees that scrutinise these matters but by the usual suspects on the Back Benches who crawl over the fine print of these things. If the use of such procedure is deemed to be inappropriate, the negative procedure is always available to us to make sure that there is no abuse of the powers taken under Amendment 24. Otherwise, the noble Lord, Lord McKenzie, and the rest of us are doing quite well so far. I hope that we can keep up this strike rate for the rest of Report.

[Lord McKenzie of Luton]

My Lords, I thank the Minister for the introduction of these amendments, which are very welcome. He has been true to his word and we thank him for taking us through the process of dealing with the regulations. One of our criticisms of the Bill was the plethora of regulation-making powers therein contained without the prospect of sight of even drafts of such regulations by the time we had to conclude our deliberations.

It was for this reason that we sought to strengthen the parliamentary process for this secondary legislation by subjecting it to the affirmative regulation procedure. The Government are meeting us part way on this matter by requiring in some key areas that the affirmative procedure apply to the first regulations made under various provisions. As we have heard, the changes apply to fit and proper person requirements, financial sustainability, the business plan, systems and process, continuity strategies and significant events.

We have also had the benefit of briefings with the Minister and the Bill team, which have aided our understanding of the regime and how it is meant to operate in respect of a range of issues including non-money purchase benefits, significant events, tax and pause orders and connected employers. As our continuing amendments should signal, we are not in total accord with the Bill as it stands and consider further change desirable.

As to the Henry VIII clause introduced by Amendment 24, the Minister is right that we discussed it before it was laid and I was grateful for that opportunity to engage. We are not enamoured generally of such provisions, particularly when they emerge at the tail end of our deliberations. As originally explained to us, they will be constrained by being used only to make the implementation of the regulations effective. In the event, they seem to go further than that. I wonder whether the Minister might comment. We recognise also that these types of provision have been used by Governments of all persuasions.

We recognise the complexity of the provisions in the Bill as well as the agility of the sector in adapting to change and sometimes circumventing it. Our own scrutiny of the Bill has caused us to conclude that the primary legislation is not in perfect shape even after being improved by our amendments, but until the detail of the regulations has been consulted on, it is difficult to foresee in every respect ideally what changes might have been appropriate. This is notwithstanding the flexibility that the Government have already taken for themselves; for example, in Clause 39.

For us, the imperative is to see a fit-for-purpose Bill on the statute book as quickly as possible. We will therefore not oppose this amendment.

[Lord Freud]

My Lords, I thank your Lordships for your understanding. I thank again the whole House and its committees, which made the point forcefully about making all these substantial regulations subject to the negative procedure. This was an occasion where we went back. There was a good suggestion—I am sure it was from the noble Lord, Lord McKenzie—that we should do it the first time via the affirmative procedure. I am with the noble Lord on this in thinking that that is a pretty smart way of doing this kind of legislation, because one can really clog up Parliament with affirmatives. I have to do quite a few of them and really, when one looks at them, it is overkill. This compromise may be something that we can look at becoming more of an institution in future. Let us just see on that.

On the power in Clause 37 and the pointed question put by the noble Lord, Lord McKenzie, about its use, I assure noble Lords that that power is narrow in scope. It will be limited to consequential amendments to allow for necessary technical fixes. It will apply only to existing legislation and legislation passed in this Session. Just to make it absolutely clear, it can be used to amend primary legislation but only in this consequential context to allow necessary amendments to make the Bill work.

I am grateful for the understanding of the House on all these amendments—the last of them in particular. I beg to move.

[Lord McKenzie of Luton]

I do not want to prolong this but may I just check one point? The noble Lord said that the Henry VIII provisions would be used only in respect of Acts passed in this same Session of Parliament. The wording sent to me says,

“an Act passed before or in the same session as this Act”.

Could the Minister clarify that?

[Lord Freud]

To make it clear, it incorporates legislation that now exists and the legislation that we will prospectively pass with this Bill.

Pension Schemes Bill [HL]

Lord McKenzie of Luton Excerpts

Report stage (Hansard - continued): House of Lords
Monday 19th December 2016 Lords Chamber

Moved by

[Lord McKenzie of Luton]

9: Clause 10, page 6, line 39, leave out “as a separate legal entity” and insert “and carry out activities in a manner which enables its financial position and the financial arrangements between it and a Master Trust to be transparent to the Regulator”

[Lord McKenzie of Luton]

My Lords, I will also speak to Amendment 10 in this group. Amendment 9 takes us back to scheme funder requirements, which we debated in Committee.

Our concerns expressed at that time were about the rigid nature of the provisions requiring a scheme funder to be constituted as a separate legal entity and for the activities of such entities to be restricted to the particular master trust. Our concerns remain, and in particular include representations made to us that preventing a single provider supporting more than one master trust could inhibit consolidation and the ability to rescue failing schemes. Further, where the scheme funder is currently part of a wider, well-capitalised legal entity—perhaps an FCA and PRA-authorised insurer—to force a restructuring could weaken and not improve the position of the funder.

Our original amendment was to delete the requirement for the scheme funder to be a separate legal entity and to carry out activities only for the master trust, replacing this with a requirement that the scheme funder should be approved by the Pensions Regulator. The Minister—the noble Lord, Lord Young—rejected this approach, arguing that it would make it more difficult for the regulator to obtain transparency on the financial position of the funder and its financial arrangements with the master trust. Our revised amendment therefore requires that the scheme funder be constituted and carry out its activities in a manner that enables its financial position and the financial arrangements between it and the master trust to be transparent to the regulator. It sits alongside the regulations that will set out the requirements of the scheme funder accounts. It may well be that some will choose the existing formulation of the Bill to do this. Others may have a different approach, especially if they are existing trusts. However, they must satisfy the regulator as to the transparency of the arrangements. Moreover, they must continue to satisfy the regulator on this point.

On 21 November, the Minister in the House of Lords, at Hansard col. 1789, rejected the idea that the Bill’s existing requirements placed restrictions on shared services or would lead to the disruption of existing business. The requirements are apparently not designed to require the unpicking of any shared service agreements. We suggest that this analysis is suspect. From what the Minister said, it would seem perfectly possible for a scheme funder to receive a charge from a group or associated company for services it has received, presumably with an arm’s-length profit uplift, but not for the scheme funder to make a charge for services it has rendered, with or without uplift, because this would be outwith Clause 10(3)(b). If the issue is transparency, what assurances are received by an incoming group charge which cannot be obtained in respect of an outflow?

Shared service agreements do not necessarily arise by all costs originating in one entity that are then allocated across a group. Individual companies might bear costs, all or part of which are contributed to a pool and then reallocated across all or some of the group entities, and there may be a changing pattern from year to year. Incidentally, whereas in the Government’s formulation a scheme funder may not charge for services to another company, associated or otherwise, it seems there is nothing to inhibit the flow of dividends upstream. Is this right? What is the position of a scheme funder which provides a guarantee to another entity? Is the provision of a guarantee an “activity” for the purposes of Clause 10(3)(b) or not?

It is important that these group flows are transparent—we accept that. But the assertion that the regulator’s task is easy when dealing with inward group flows but more difficult for outward flows from the very entity that is being regulated seems difficult to sustain. The Minister said that he expected costs allocated to master trusts to be transparent to the regulator through the business plan accounts and other related documents. If transparency can be achieved in this manner for inflows, why not outflows from the scheme funder, or indeed for it having more than one business line?

Of course, we accept and support the significance of the scheme funder in these arrangements and the importance of being clear as to its financial strength. However, as outlined already, are not the Government in danger of throwing out the baby with the bath water in circumstances where a scheme is funded by an FCA-regulated entity with the robust capital requirements that this entails? Further, the Government have yet to answer how the clause currently works in circumstances where the master trust provides benefits other than money purchase benefits. If there were any activities carried out for non-money purchase benefits, which seems inevitable, the scheme funder would appear to fall outside the definition of a “separate legal entity”. Is this correct?

The Minister is also on record as suggesting that groups of companies are used to restructuring their statutory accounting arrangements to reflect changes in focus. That may be true, but it does not mean that it can inevitably be achieved without costs, especially taxation, if non-group entities are involved.

We look forward to hearing from the noble Lord, Lord Flight, on Amendments 11 and 12, the thrust of which appears to enable a scheme funder to carry on other activities, as well as those for the master trust, although these must be disclosed to the regulator for the purposes of assessing financial sustainability. If they have the effect of allowing the scheme funder to carry on the scheme and other activities, but with the obligation to disclose, we will indeed be making good progress on the issue.

Finally, can the Minister say whether Clause 39 could be used to carve out certain schemes from the requirements of Clause 10? Do the Government have any plans to do this, and what types of schemes might be involved if they do? Although we are on Report, the scheme funder provisions remain troublesome, with many unanswered issues. We urge the Government to take this away for another go at Third Reading. In the meantime, I beg to move.

--- Later in debate ---

[Lord Young of Cookham (Con)]

My Lords, I am grateful to the noble Lord, Lord McKenzie, and to my noble friend Lord Flight for tabling amendments which are, in their objectives, all broadly supportive of the Government’s position: that there should be transparency about a master trust’s financial position, including the financial arrangements between it and the scheme funders and the strength of those funders, in order to support the Pensions Regulator’s financial supervision.

Amendments 9, 10 and 11 would all have a similar effect: to remove the requirement that the scheme funder,

“be constituted as a separate legal entity”,

that does not carry out any activities other than master trusts. Although they are well-intentioned, these amendments raise problems of their own. Amendments 9 and 10 would have the opposite effect to transparency, because scheme funders would be unclear as to whether the manner in which they carry out their activities and are constituted is sufficiently transparent to the regulator for the purpose of its financial supervision. This is partly because the arrangements between scheme funders and master trusts will vary enormously across schemes. Amendments 9 and 10 would, by removing much of the substance of the scheme funder requirement in Clause 10, make it more difficult for the regulator to assess compliance and make its financial supervision of the scheme more challenging.

Following the exchange in Committee, we have explored this issue further, but the Government and, more importantly, the Pensions Regulator believe that ensuring transparency about the status of the financial arrangements between the master trust funder and the master trust is essential to this new regime and to the regulator’s assessment of the financial sustainability of the scheme. The requirement to be a separate legal entity achieves this objective. I do not pretend that this is not without cost to some insurance companies—a point that was raised earlier—but the alternative provided by this amendment is not equipping the regulator to make a key decision that could impact on the security of thousands of scheme members.

Amendment 12 may be technically flawed because Clause 8 relates to the financial sustainability of the scheme, not of the scheme funder. It is worth noting that the regulator can assess the financial strength of the scheme funder through its accounts, required under Clause 14, in any event. The Government believe that the most clear and straightforward way to achieve the desired level of financial transparency is through the requirement in Clause 10 for the scheme funder to be set up as a separate legal entity whose only activities relate to the master trust. This will also protect the interests of master trust scheme members. However, this does not prevent scheme funders, such as insurance companies, operating other lines of business through another vehicle.

I was asked whether a scheme funder can support more than one master trust. A scheme funder can support more than one master trust by setting up separate legal entities for each scheme. On the question of whether there is anything in the Bill to inhibit the flow of dividends from the scheme funder outwards, the Bill does not impose any direct restrictions on the flow of dividends from or to a scheme funder, so long as the scheme is financially sustainable. The noble Lord also asked whether the provision of a guarantee by a scheme funder is an activity which the clause prohibits. A scheme funder can provide a guarantee in respect of the master trust to which it is the scheme funder.

It may be that the amendments are intended to address certain underlying concerns: first, about the cost of corporate restructuring to meet the requirement to be a separate legal entity; and secondly, about double regulation, an issue that was raised in Committee. The practical and legal requirements for setting up a business entity should not of themselves be burdensome. It is quick and easy to incorporate a company in the UK, and the Government make a company’s ongoing filing requirements as simple as possible to comply with. However, we recognise that, to meet this requirement, some companies offering master trusts among other lines of business would have to undergo corporate restructuring. To address this, we are working with key stakeholders to develop a proportionate approach to regulation that minimises the burden on business without undermining the Pensions Regulator’s ability financially to supervise schemes through transparent financial structures and reporting.

Noble Lords may recall from earlier debates that the financial sustainability requirements that master trusts have to meet in order to operate have been developed to address the specific risks faced by the members of master trusts. However, if we identify an overlap between our requirements and those of other regulatory regimes, the Secretary of State has a regulation-making power in Clause 8 that can require the regulator to take those regulatory requirements into account when assessing whether a scheme is financially sustainable. We believe that power to be sufficiently flexible to prescribe, for instance, that if the scheme funder has an enforceable guarantee from a financially sound parent company, such as one that meets the PRA’s capital requirements, the regulator must take that into account when assessing whether the scheme has sufficient resources to meet the specified costs. Let me re-emphasise our commitment to proportionate regulation, striking an appropriate balance between member protection and minimising the burdens on business. We are working with key stakeholders to ensure that we understand their concerns.

Noble Lords also expressed related concerns about how the requirement for a separate scheme funder in Clause 10 applies to master trust schemes that offer both money purchase and non-money purchase benefits, a point raised by the noble Lord, Lord McKenzie, a few moments ago. Noble Lords have highlighted the interaction of that requirement with the provision in Clause 1 that the provisions are to be taken to refer to the master trust,

“only to the extent that it provides money purchase benefits”.

My noble friend and I have had productive conversations with noble Lords opposite in the past week, although not as productive as they would have liked. I expect those to continue. The team at the DWP is looking at all options that are open to us, but at this stage I regret I cannot commit to a timetable, nor can I commit to returning to the issue before Third Reading. However, noble Lords should be reassured of our very firm intention to take further action during the passage of the Bill.

I hope that the points I have made are sufficient to explain why the Government are of the view that these amendments would not be appropriate, and that the noble Lord will feel sufficiently reassured not to press them.

[Lord McKenzie of Luton]

My Lords, I am grateful to the noble Lord, Lord Young, for his response to the amendments. I would say to the noble Lord, Lord Flight, that we end up with the same objectives and the same analysis about what we want to achieve, if with a slightly different way of going about it. However, I am disappointed with the response from the noble Lord, Lord Young. I am not sure whether he specifically dealt with the point about whether Clause 39 could be used to carve out some of the schemes in some of the circumstances we have particular concerns about, and, if so, which of those schemes could be the subject of that carve-out. That might be one route to partially addressing some of the problems. I do not know whether the noble Lord wants to come in.

[Lord Young of Cookham]

I am happy to give the noble Lord the assurance he has just asked for.

[Lord McKenzie of Luton]

I was not asking for an assurance but for an answer.

[Lord Young of Cookham]

The regulations in Clause 39 give the flexibility the noble Lord has just asked for.

--- Later in debate ---

[Lord McKenzie of Luton]

I am grateful to the noble Lord, but would be interested in knowing how they might be used and in the Government’s intent, because potentially that gives a route to addressing some of the issues we are concerned with. I regret also that the Government are not yet in a position to answer the question about non-money purchase benefits. This has been on the table for a little while and seems to me to be a straightforward tactical issue which has one of two answers: either it can be made to work or it does not work, in which case I suggest there is quite a serious flaw in the structure of these provisions.

We understand that to help the regulator get maximum clarity on transparency, there needs to be a separate vehicle which only provides activities to the master trust, but it seems to me that the Government are not putting into the balance the consequences of going down that route. As the noble Lord himself I think acknowledged, the consequences could include a restructuring of a group, which might have costs. It certainly could include disruption of all the shared services arrangements, and again I do not think we have the answers to why the Government believe it is okay to have shared services charged into a company which is providing activities to the master trust but not in the other direction. It seems to me the same level of transparency could effectively be made available to both.

If there is any comfort in this, it is that there appears to be some ongoing dialogue with the industry. I think we can be comforted by that, but it is a great pity that the Bill leaves us with this provision, which has been seen as a bone of contention for a long time and was flagged up some time ago. Frankly, the issues is completely unresolved. I am tempted to test the opinion of the House, but it is Christmas. We are a long way from achieving clarity on this issue, but in the circumstances I do not think dividing would achieve very much. I beg leave to withdraw the amendment.

Amendment 9 withdrawn.

--- Later in debate ---

Moved by

[Lord McKenzie of Luton]

19: Clause 23, page 16, line 29, at end insert “or for a new scheme funder to be put in place in relation to the Master Trust in accordance with regulations under section 24.”

[Lord McKenzie of Luton]

My Lords, I shall also speak to our other amendments in this group, Amendments 20, 21 and 22. They take us back to another issue that we discussed in Committee: the substitution of a new scheme funder where a triggering event has occurred. Depending on the circumstances, one of two continuity options has to be pursued. Continuity option 1 requires the transfer out and winding up of the scheme, while option 2 involves an attempt to resolve the triggering event. At present, continuity option 1 is mandatory on the trustees where certain of the more significant triggering events are involved. These are where the Pensions Regulator issues a warning or determination notice concerning decisions to withdraw a scheme’s authorisation, or where a notification that the scheme is not authorised has been given.

In Committee we pursued an argument to the effect that the Pensions Regulator should be enabled to cause the matter to be resolved by the replacement of the scheme funder. We argued that transferring the responsibility for a master trust to a new scheme funder could provide a quick answer to a collapsing master trust, costing less and helping members because it keeps the scheme intact and avoids unnecessary investment transition costs and expenses for Members. This has been acknowledged by the Government. However, the Minister rejected our amendments, particularly on the grounds that it was the role of trustees to run and manage schemes. They have the fiduciary duty to act in the best interests of members and should not be second-guessed by the regulator in this regard.

The Minister asserted that the outcome of substituting a new scheme funder was available to the trustees under continuity option 2, subject to the full requirements of adoption including the preparation of a comprehensive implementation strategy. We accept that as far as it goes, and agree that the substitution of a new scheme funder can be a way of resolving the triggering event. However, it does not provide a route where option 1 is mandatory on the trustees. That is why our Amendment 19 would allow for a new scheme funder to be put in place under option 1, in accordance with regulations to be added to the long list included in Clause 24(4) under our Amendment 21. Amendment 22 would require the submission of an implementation strategy.

We have heard from the Government no good reason why the substitute scheme funder route should not be available for all triggering events, although the Government may argue that for triggering events one to three, matters are likely to be more serious than for a change in a scheme funder to be the way forward. Will the Minister confirm that he would routinely expect the regulation around option 2, including the substitute funder, to be considered before the regulator formally moves to withdraw authorisation?

Amendment 20 is a rerun of a debate in Committee, and on rereading Hansard we consider the matter sufficiently covered. I beg to move.

[Lord Freud]

I shall take the opportunity to go through the matter of transfers because there has been a lot of discussion of it and this at the heart of it. I will pick up what we did in Committee, where the amendment from my noble friend Lord Flight referred to automatic transfers. I confirm that we will look to revisit automatic transfers once the market has absorbed the recent reforms.

The next issue was that we announced in 2016 that we would ensure that the pensions industry launched the pensions dashboard, which would allow people to see in one place their retirement savings from across the industry, which they could consolidate, and the Government would support the industry in doing that.

We then moved on to touch on transfers between default funds—for example, where a trustee may wish to move members out of an old default fund into a new one because they think the old fund is not offering value for money. There, we were concerned whether members might get left behind. This would be for the trustees to consider and act on under their fiduciary duty, not for legislation.

Then we had issues about bulk transfers in place at the moment, which require an employer connection and an actuarial certificate. There, I confirm again that we would have a call for evidence to consider the potential changes to DC to DC transfers. The last point that we visited was about the transfer from a master trust which is failing. Again, I confirm that where a scheme is acting under option 1 following a triggering event, the Bill applies, not the current provision under legislation relating to bulk transfer without member consent.

I think that sets a useful context for consideration of the amendments. Amendment 20 makes two additions to what will be covered by the regulations that must be made under Clause 24. Clause 24 sets out the detail of continuity option 1 and the requirements. In this situation, the clause requires that the trustee must identify one or more master trusts to which members’ rights must be transferred. The regulation-making power set out a number of matters connected with how this process should work. The intent is for members to be able to continue to save with as little disruption as possible and to protect the rights that they have accrued.

The regulator is aware of the need for schemes to be available that have been authorised into which members can be transferred. Experience to date has shown that there are good-quality schemes in the market. From our discussions with both master trusts and pension industry bodies, we are aware that they are keen to demonstrate the reliability of master trusts and for members to have confidence in them as a vehicle for pension saving, and there are therefore likely to be some available to take in transfers. For many master trusts, making themselves available to take a transfer would offer the opportunity to take in a number of members that they have not had to actively source—clearly, they get the benefits of scale.

Employers and members also have reassurance provided by NEST. Although a master trust could not itself do a direct bulk transfer to NEST—as the employer must first establish a connection with NEST—an employer could chose to sign up to NEST and move its workers across. NEST is required to admit any employer and any worker enrolled by the employer to meet its automatic enrolment duties.

The master trust industry has expressed an interest in developing its own panel of providers to assist with addressing situations where a master trust fails. Although we cannot guarantee that there will be a large number of master trusts looking to take on members of any failed master trust, we are confident that there is adequate provision within the market overall.

The second part of Amendment 20 would require that regulations made under Clause 24 set out what would happen to any non-money purchase benefits where a master trust which has mixed benefits was going to transfer the money-purchase benefits out of the scheme and cease to operate in respect of those benefits. We do not believe that that is necessary. We have been careful to design the master trust authorisation to target the risks to money-purchase benefits in these structures.

Therefore, if authorisation is withdrawn from a master trust which offers mixed benefits, it will be required to stop operating in relation to the money-purchase benefits only. It may still continue to operate in respect of the non-money purchase benefits if it is compliant with the relevant requirements of the non-money purchase benefit regime.

Where the scheme as a whole is winding up, existing provisions governing how non-money purchase benefits are to be discharged will apply to those benefits. That is clearly an issue of avoiding duplication.

On the question asked by the noble Lord, Lord McKenzie, the regulator can decide to encourage the scheme to substitute the scheme funder where this is appropriate, and before it moves to withdraw authorisation. The flexibility is there. Adding on the requirement that one option must be looked at before the other would probably reduce flexibility.

Amendments 19, 21 and 22 seek to make provision that continuity option 1 also allows for the substitution of a new scheme funder. Clause 23 sets out the two continuity options that must be pursued by trustees when a master trust has a triggering event. Unless authorisation has been withdrawn or refused, trustees will have a choice as to which continuity option they pursue. Clause 24 describes continuity option 1. Continuity option 2, under Clause 25, is when a master trust resolves its triggering event itself. The legislation does not specify how the event can be resolved, which is deliberate. It means that it encompasses a wide range of options, including the substitution of a new scheme funder. The trustees have the freedom to choose how best to resolve the event their scheme has had.

Clause 26 sets out the duty on the trustees to submit an implementation strategy to the regulator. Our aim is that members continue to save in a pension. Under continuity option 1, the situation is such that to protect members’ rights it is necessary that the scheme transfer these rights out and wind up. The event that led to continuity option 1 will often not be about the scheme funder, so a new scheme funder would not rectify the issue. If the Pensions Regulator has had to withdraw authorisation, a new scheme funder will not be the right response. It is likely the regulator will have ensured the trustees considered this at an earlier stage. Under continuity option 2 the aim is that the triggering event is resolved.

The amendments seek to provide that continuity option 1 also covers the substitution of a new scheme funder, which seems to be a misunderstanding of what is provided in the Bill and would cut across how the two options are intended to work. Where the trustees have the choice about which to pursue, they can try to resolve it. Identifying a new scheme funder is just one of the ways to get that resolution. We do not want to limit schemes’ options which is why we did not list particular solutions. The substitution of a new scheme funder already comes within continuity option 2 and its process.

We agree that where a master trust has experienced a triggering event, a new scheme funder could be identified, and could be the most appropriate resolution of a triggering event. This should be an option open to the trustees. That is why we have made the provision for continuity option 2. Continuity option 1 is solely about transfer out and wind up. The amendments would cut across the way in which the options and indeed, the regime as a whole, works in the Bill. With these explanations I ask the noble Lord to withdraw his amendment.

[Lord McKenzie of Luton]

My Lords, I am grateful to the noble Lord for setting the context and picking up on some of our previous debate on transfers. The purpose of the amendment was to test whether it is possible to have a replacement of a scheme funder when you are in the triggering circumstances that take you into continuity option 1. As it stands, if you are in continuity 1 processes, you have to follow the route of transfer and wind-up; you cannot have a replacement scheme funder. The purpose of the probe is to try to understand why that is. One route to deal with it is that, before getting to a triggering event, 1, 2 or 3, the regulator will have a process with trustees and there can be a nudge which takes us into continuity 2. I understand that, but I think the Minister has confirmed that if it is just straight continuity then that is it, you have no hope of having a replacement scheme funder. I am still a little unclear as to why that would be so.

I think the noble Lord said that substituting new scheme funders would not generally be appropriate given the state of the scheme, so it has to be addressed by these other arrangements. But that does not mean that there would not be arrangements where that could be entirely appropriate. So I think that there is still a bit of a gap in the Bill. However, having said that, I think that we have given it a good airing. I beg leave to withdraw the amendment.

Amendment 19 withdrawn.

--- Later in debate ---

I had hoped to send a clean Bill back to the other place, but noble Lords have mucked that up for me; nevertheless, I hope that it will not be even more unclean than it was a few minutes ago. With that in mind, I ask the noble Baroness to withdraw her amendment.

[Lord McKenzie of Luton]

My Lords, perhaps I may take the opportunity from these Benches to place on record our thanks to the noble Lord, Lord Freud, for the engagement that we have had on pensions Bills and other Bills over many years. That engagement has always focused on data and evidence. We might have disagreed about their interpretation from time to time but the debates have always been robust. The noble Lord has been assiduous in engaging with Members across the piece, making sure that their points and concerns have been addressed and not just brushed aside.

We will have the chance to say something to the Bill team on another occasion—I hope some of us will still be here at Third Reading—and we will have another debate on Wednesday. However, we wish the noble Lord well in his retirement. I am not sure whether it will be his retirement, as I am sure he will go off to do something intellectual. We look forward to working with the noble Lord, Lord Young, in the future, but from the Labour Benches we express our best wishes to the noble Lord, Lord Freud.

[Baroness Bakewell of Hardington Mandeville]

My Lords, I wish to associate myself and our Benches with the comments that have already been made. We have always found the noble Lord, Lord Freud, extremely accommodating towards us as far as he has able to be so, and I will have something further to say when we come to universal credit. I have taken over this role only fairly recently but I thank the noble Lord for all the help he has given us during the passage of this Bill.

Pension Schemes Bill [HL]

Lord McKenzie of Luton Excerpts

3rd reading (Hansard): House of Lords
Monday 16th January 2017 Lords Chamber

[Lord Kirkwood of Kirkhope (LD)]

My Lords, it is a pleasure to follow my friend of many years’ standing, the noble Baroness, Lady Altmann. She is an expert on these things and is right that opportunities have been missed and there are still some bits of unfinished business. However, the House has acquitted itself well in the consideration so far. I welcome the noble Lord, Lord Henley, to his post. Those of us with long memories remember that he has been in this role before, so he is not without experience in these matters and our expectations of him are extremely high. I wish him well in his new responsibilities. I am sure he will continue his predecessor’s attempts at making sure that Members of this House are fully briefed on some of the technical provisions that we still have to deal with.

The Government were right to bring forward amendments to change a lot of the first-time affirmative resolutions and procedures for the statutory instruments that flow from some of these provisions. In passing, I note that this amendment to Clause 11 would introduce a negative procedure. I hope that is sensible, because the more affirmative instruments we get, the better our chance of understanding what is being brought before us. Despite that, I agree with the amendment as it stands.

I hope—this is merely a request for a repeat of an undertaking that was given earlier—that the Government will bring forward an updated impact assessment when, later this year and in 2018, we consider the secondary legislation that flows from this primary legislation. The impact assessment and the continuation of the consideration of the fine print of the provisions are still required to make sure that the Bill achieves its purposes in a way that is fair to all. In the process, I hope that, as the noble Baroness, Lady Altmann, said, the other place can pick up some of the opportunities that have been missed during the Bill’s consideration in this House. However, I wish the Bill well and I hope we continue to have the constructive and positive relationship with the noble Lord, Lord Henley, that we had with his predecessor.

[Lord McKenzie of Luton (Lab)]

My Lords, I begin by welcoming the noble Lord, Lord Henley, to his role, even at this 12th hour on the Bill.

We certainly do not oppose the amendment. As explained, it is intended to put beyond doubt the ability to introduce regulations relating to audit, particularly in relation to scheme funders, which under the Companies Act are not required to provide audited accounts. Perhaps for the record the Minister can set out the nature of scheme funders which might fall into this category. Presumably they could be partnerships, entities incorporated overseas or smaller entities, although I am not sure how they might feature in these arrangements. Can he also tell us whether it is planned to use these powers differentially in respect of scheme funders that fund benefits other than money purchase benefits? As an adjunct to that, we very much share the concerns expressed by the noble Lord, Lord Naseby, about how Clause 11, as it will now be, will work.

As the Bill passes to the other place, it is time to offer our thanks to the Minister, the noble Lord, Lord Young of Cookham, for the courteous and inclusive manner in which he has handled the Bill. We look forward to the same from the noble Lord, Lord Henley, on subsequent Bills. We have already given our thanks to the noble Lord, Lord Freud, for the role that he played. This is a narrow Bill but one with significant implications, which is why we want to see it make speedy progress. It has not been the easiest Bill to scrutinise, given the combination of the technical nature of its subject matter and the raft of regulation-making powers that it contains, but we have seen a Government in listening mode in some respects—although of course not all, and the noble Baroness, Lady Altmann, identified some of those.

I should take this opportunity to thank my noble friends who have participated in our deliberations—in particular, my noble friend Lady Drake for the expertise and precision that she has brought to our work. We trust that the important amendment concerning the scheme funder of last resort which she pressed on the Government will endure.

I also express our thanks to the Liberal Democrats, led by the noble Baroness, Lady Bakewell, the government Back Benches for their constructive approach, and indeed the Cross Benches. We have seen a Bill team who are thoroughly on top of their brief and have patiently spent time explaining to us aspects of the Bill which might otherwise have fallen on stony ground. Taking this matter forward now falls to the tender mercies of our colleagues in the other place.

[Lord Henley]

My Lords, I thank noble Lords for their very kind words and in particular, the noble Lord, Lord Kirkwood, for his high expectations of me in replacing my noble friend Lord Freud. If I do only half as well as my noble friend, I think I will be doing pretty well—I hope the House accepts that I will try my best. I can also confirm to the noble Lord that impact assessments will be updated for the new regulations. The timing for the formal consultation on the draft regulations will obviously depend on a number of factors, but we would expect that the initial consultation will take place some time in the autumn of this year.

I am very grateful to the noble Lord, Lord McKenzie, for not opposing the amendment. He had a number of questions, particularly in relation to scheme funders and I would prefer to write to him about those. He also asked whether the Government were going to table an amendment on scheme funders of a master trust that offers both money purchase and non-purchase benefits. I can confirm that they intend to table such an amendment and that can be a matter for another place.

My noble friends Lord Naseby and Lady Altmann raised concerns that go wider than this simple amendment, which merely relates to audit. Those matters can be considered and no doubt, will be noted by my noble friends when they take this Bill through another place. As I said in my introductory remarks, I expect another place, as always, to look at this Bill with its usual due diligence and I am sure that it will take note of the comments made by both my noble friends. If it can assist them, I shall try to write to them before that, but everything they have said will be noted by my honourable and right honourable friends. With that, I echo the remarks of the noble Lord, Lord McKenzie, in thanking all those who have been involved in this Bill.

Pension Schemes Bill [HL]

Lord McKenzie of Luton Excerpts

Ping Pong (Hansard): House of Lords
Wednesday 5th April 2017 Lords Chamber

Given the wide variety of master trust scheme structures and arrangements with scheme funders, the department will work closely with key stakeholders, as part of our ongoing consultation, to develop the first set of regulations. We will strike an appropriate balance between minimising the burdens on business and providing the Pensions Regulator with the appropriate level of transparency for its ongoing supervision of the financial sustainability of the master trust scheme. I beg to move.

[Lord McKenzie of Luton (Lab)]

My Lords, I thank the Minister for introducing this first group of Commons amendments—Amendments 1, 3, 4 and 20. By way of background, we should acknowledge a degree of consensus emerging on the Bill, which has indeed been helped by the amendments before us today, which deal directly with some of the concerns we raised earlier in the parliamentary process.

This does not mean that we consider, as should have been evident in the other place, that the Government are on top of the entirety of the pensions landscape. There is more to do on the level and transparency of charges; governance; extending the benefits of auto-enrolment; and addressing the lingering injustice felt by those women whose state pension age was raised quicker than expected. Of course, the Government will need to consider John Cridland’s analysis of the state pension age, emerging issues from the DB Green Paper, and the need to make progress on proposals for the Money Advice Service, not to mention the continuing combating of pension scams.

The Bill deals with a specific and technical issue and is important to protecting millions of savers and billions of pounds of savings, and we have sought to address it in these terms. One of the criticisms of the Bill is its heavy reliance on secondary legislation, although that has now been changed to affirmative on first use, as we have just heard. The aspiration, as we understand it—and the Minister may confirm—is for this process to be completed during 2018 to enable all the provisions to be commenced. Doubtless this timetable was contemplated without due regard to Brexit. What is clear now is that an enormous amount of legislation, mostly secondary, will be required to give effect across government to our exiting the EU. Can the Minister say what assessment has been made of the capacity of government—indeed, of Parliament—to cope with all of this? Will he undertake to publish a current timetable for implementation of the Pension Schemes Bill?

We support Amendments 1 and 20, which as we have heard deal with an unintended effect of the original drafting. It would have required the scheme funder’s activities to relate only to the money purchase benefits aspect of each scheme that is a mixed-benefit scheme.

As the Minister has outlined, Amendments 3 and 4 deal with Clause 11 and the scheme funder requirements. This clause generated considerable debate in your Lordships’ House and in the other place, as the Minister again acknowledged. This was not about challenging the policy, which quite properly seeks to ensure that the financial position of scheme funders and their financial arrangements with master trusts are transparent and clear to the regulator. The concern raised by a number of noble Lords as well as stakeholders was that the original requirement for separate legal entities and activities relating to just one master trust scheme were too restrictive, could force costly corporate restructuring and could detract from market opportunities to consolidate.

The remedy proposed is to allow the scheme funder to carry out activities that relate to more than one master trust and for the Secretary of State to have power to make regulations to except a scheme funder from the requirement that it must carry out only activities directly related to master trust schemes for which it is a scheme funder. The power can be used where a scheme funder meets additional requirements relating to its financial position, its arrangements with the master trust involved and its business activities. The regulations can also enable application by the relevant master trust scheme to seek to satisfy the regulator that the scheme is financially viable.

On the face of it, these amendments potentially enable concerns about shared services, FCA-regulated entities and consolidation opportunities to be addressed, but it would be helpful if the Minister put further flesh on the bones of how he sees these relaxations being used. As we expected, he has addressed the Delegated Powers and Regulatory Reform Committee’s requiring a more convincing explanation of why these regulations should be subject to the affirmative procedure on first use—bearing in mind that this is the case in a number of places in the Bill. Subject to any final matter the Minister may raise, we are inclined to support these amendments as they demonstrate that the Government have been listening to the genuine concerns about what the original Clause 11 would have generated.

[Lord Henley]

My Lords, I am most grateful to the noble Lord, Lord McKenzie, for the constructive approach he has taken to this group of amendments. I hope that this will continue for the rest of this consideration of Commons amendments. He raised various points about Cridland and the state pension age, which go wider than the Bill at the moment. I will not respond to those points but he made an important point about the degree of secondary legislation that will come forward not purely from the Department for Work and Pensions but from across government—he meant later this year, I presume, and throughout next year. He wondered whether we hoped to get all of it completed by 2018. I believe that we do but it will obviously be quite a trying matter. We will want to continue to engage with the regulator, the pension industry and other stakeholders throughout the year. That will be followed by formal consultation on those draft regulations, which we currently hope to get early next year so that we can get them coming into force from 2018.

What pressure there will be on this House and another place from all the various primary and secondary legislation coming before us is probably beyond the noble Lord’s pay grade, and certainly beyond mine. However, I am sure that the usual channels will discuss that and ensure that we give appropriate coverage to all these matters.

As to the detailed timetable of all that consultation with the regulator and pension stakeholders, the noble Lord asked for a table, but it might be helpful it I write him a short letter setting that out, if there is anything that I can add to what I have said. We aim to have those regulations coming into force from 2018, and nothing that I have seen so far seems to suggest that we will not be able to meet that. I think we can go ahead and agree these amendments. I hope the noble Lord will accept that.

--- Later in debate ---

[Baroness Altmann (Con)]

My Lords, I welcome much of the thrust of the Bill. I am also delighted to see Amendments 3 and 4, which, I hope, ensure that insured master trusts will not be forced to separate from their insurance parent, which would have forced them to face higher costs and reduced the security of their members. I am very grateful to my noble friend for taking on board the comments made during the Bill’s passage through this House.

It strikes me that Amendment 2 should be considered separately from those to which it has been joined. I reiterate my strong concern—notwithstanding the reassurances from my noble friend—about leaving out Clause 9. I understand that there is a view that it is unnecessary and that the new regime will ensure that master trusts have sufficient resources, are financially sustainable and have capital adequacy in place. However, even with new schemes and the best will in the world, capital adequacy tests may prove inadequate. No provision in the Bill would cover members of a very large pension scheme that suffered a catastrophic computer failure and lost member records. The cost of restoring that could be well above the capital adequacy put in place, and nothing in the Bill explains where the cost of restoring those records would be covered. The only place might be the members’ pots themselves, which is not supposed to happen.

I vividly recall assurances given by Ministers on defined benefit schemes during the 1990s, when the minimum funding requirement was supposed to ensure that schemes would always have enough money to pay pensions. No one foresaw the problems evident in the early 2000s, when schemes that had met MFR legislation wound up and ended up without enough money to pay any money to some members on the pensions that they were owed.

Even more concerning than that is that the Bill is being introduced when 80 or so master trusts are already in existence in the market with a huge number of members across the country already saving in a pension. These trusts have not been subject to the capital adequacy test or other tests that the Bill will rightly introduce. What is the protection for members of existing schemes who are saving in good faith? They are not protected at all. That was why I was very pleased that we passed the amendment concerning the scheme funder of last resort. I echo the question of the noble Baroness, Lady Drake: what discussions have taken place with the industry to find a solution to cover the eventuality—we do not expect it and it is, I admit, a small probability—that an existing master trust winds up without enough funding to cover the costs of administration to sort out its records and transfer them over to another scheme? I should be grateful for some information from my noble friend about whether there are ongoing discussions and how the department sees that eventuality being covered: where would the money be found?

On Amendments 5 to 19, I share some of the reservations mentioned by the noble Baroness, Lady Drake, such as the regulatory disparity between a master trust, which would be regulated by the Pensions Regulator—and therefore under its control, if you like —and a master trust transferred under the amendments to a pension scheme regulated by the Financial Conduct Authority. How would the regulatory systems work together when they are under different legislation?

I have other concerns, but I may raise them under the next group.

[Lord McKenzie of Luton]

My Lords, let me start by expressing our regret that the requirement for there to be a funder of last resort—successfully pressed by my noble friend Lady Drake on Report—has been deleted from the Bill. That concern was also expressed by the noble Baroness, Lady Altmann. We of course accept that the whole purpose of the Bill—its protections, including capital adequacy, financial sustainability, systems requirements, scheme funder and transfer regime—is to secure people’s pension pots, militate against scheme failure, and ensure good order when difficulties arise. But as my noble friend asserted on Report, notwithstanding this, it cannot be guaranteed that a master trust will not fail and when it does there will be an available master trust to step into the breach so that members’ funds are protected. The noble Baroness, Lady Altmann, has just expressed similar concerns with vivid potential examples.

In seeking to resist the funder of last resort proposition, the noble Lord, Lord Freud, claimed that it would be costly and a disproportional response to the issue and with moral hazard implications—arguments deployed by the Parliamentary Under-Secretary of State for Pensions in the other place. We remain unconvinced of these arguments when put in the balance against the importance of protecting people’s savings. Nevertheless, we need to examine how the Commons amendments to Clauses 25 and 34 contribute to ameliorating this risk, which at least potentially they do.

We acknowledge the amendments to Clauses 25 and 34 which potentially widen the scope of continuity option 1 and expand the prohibition on increasing administration charges or imposing new administration charges. In particular, they raise the prospect of the accrued rights and benefits under a master trust scheme being transferred to an alternative pension scheme which is not a master trust. No detail is offered in the amendment about the likely characteristics of an alternative pension, other than the fact that it must be a pension scheme under the 1993 Act. This of course will include both personal and occupational pension schemes. Regulations will spell out the circumstances when the alternative might be available, and the characteristics of an alternative scheme. Regulations will also spell out how such an option is to be pursued.

While we can see the benefits of a potentially wider pool of pension schemes which could be available in the event of a master trust failure, it begs a number of questions about how any alternative scheme would be regulated and what protection it would offer members. My noble friend Lady Drake, in particular, as ever has produced some forensic questions to seek at least some clarity on key issues: further actions and discussions that have taken place; whether a receiving alternative scheme is sustainable and well governed; how such a scheme can operate a prohibition on increasing charges and preventing members’ funds from being accessed; and consideration of how bulk transfers would work. The noble Baroness, Lady Altmann, joined in the same sort of inquiry.

It remains to be seen how much these amendments provide a real opportunity to add a layer of protection and whether the market will offer up alternative schemes which can assist. We look forward to the Minister’s reply, but we are not minded to oppose these amendments.

[Lord Henley]

I start by offering my thanks to the noble Lord for making it clear that he is not minded to oppose these amendments. I understand that noble Lords felt quite strongly about their amendments and for that reason wanted them in the Bill to be considered by another place. The other place has considered those amendments and we now have this opportunity for further debate. We can then get on with seeing the Bill on to the statute book.

Before dealing with the questions, I shall respond to the brief point made by my noble friend Lady Altmann about not being happy with the groupings. The groupings are a largely informal matter, sorted out by the usual channels. To my knowledge—and I think that it was probably done in discussion with the Opposition—they have changed a number of times, but that is not unusual. Very often we get it wrong in how things are grouped. But as is made clear on the bit of paper that comes to the House every day, groupings are an informal matter, and it is always open to all noble Lords to intervene on any appropriate amendment at the appropriate stage.

--- Later in debate ---

[Lord McKenzie of Luton]

I can confirm that it was me who suggested that Amendment 2 should be added to the list.