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.

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[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.

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[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.

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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.

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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.