Lord McKenzie of Luton
Main Page: Lord McKenzie of Luton (Labour - Life peer)
Lord McKenzie of Luton (Lab)
My Lords, I start by thanking the noble Lord, Lord Freeman, for facilitating this debate about the condition of private sector pension funds. It is good to see the noble Baroness, Lady Stedman-Scott, in her place; I detect that she is getting some enthusiasm for this role. It is surprising that this important and topical issue has not attracted more engagement; perhaps these are early signs of fatigue induced by Brexit.
In preparing for this debate, it has been assumed that the focus would be largely on the health of DB schemes, notwithstanding that the world of pensions is moving inexorably from DB to DC. Indeed, in evidence to a recent Work and Pensions Select Committee, one of the witnesses, a pensions lawyer, bemoaned the fact that young people coming through her business are likely to be experts in advising when a scheme is to be wound up, closed down or closed to future accrual, but claimed that no one of her generation knows how to set one up. That is possibly an exaggeration but it is perhaps a sign of the times. However, we should not write such schemes off, and I shall come to that in a moment. Before I do, I shall just range over the broader pensions canvas to illustrate its complexity and what is changing beneath our feet; the noble Baroness, Lady Altmann, has been involved in much of this.
Many recent pension policy changes, for both state and private pensions, have their origins in the recommendations of the Pensions Commission. These include: increasing the state pension age; simplification and restriction of pensions tax and tax relief; the new state pension; and, of course, auto-enrolment, the latter coming with mandatory employer and employee contributions; and the basic state pension coming with the triple lock. Along the way are further reforms to public sector pensions.
More recently, we have seen the demise of the default retirement age; abolition of the obligation to annuitise; the introduction of so-called pensions freedoms; and, notwithstanding the launch of Pension Wise, the rise in pension scams—but, thankfully, not a secondary annuity market, or not yet. We are on the cusp of a further exercise to embed the recommendations of the 2017 auto-enrolment review as we enter the era of increased employer and employee contributions and, along the way, the pensions dashboard. I very much join and have common cause with the noble Baroness, Lady Altmann, on the tax issues that she raises. It has been an anomaly outstanding for far too long and should be fixed.
Many of these changes have fuelled the rise of DC schemes. So, among all these changes, how have private sector DB schemes fared, and what is their future? We have the benefit of the recent Green Paper, referred to by several noble Lords, and insights into the Government’s thinking. There are around 11 million members of DB schemes, more than 50% down on the position 10 years ago. Most schemes are only small; only 4% have more than 10,000 members and these hold over 60% of the assets and around 70% of the members. Around £1.5 trillion is held under management.
From the 2017 Purple Book we learn that the proportion of schemes open to new members has fallen slightly in 2017 to 12%, although the decline since 2012 is slowing. The proportion of schemes closed to both new members and future accrual rose by some 4% in the period to 35%, while 21% of members were in open schemes and 55% in schemes that are closed to new members but open to new accrual. The number of active members has been declining over the past decade, and the total membership comprises 47% who are deferred, 40% who are pensioners and 12% who are active. Although continuing to be volatile on a full buyout basis, the aggregate deficit of such schemes fell to £736 billion and funding levels improved to 68%. However, as the noble Lord, Lord Freeman, mentioned, PWC Skyval, which sounds a bit like a Bond movie—I guess I must also declare an interest as a former partner of what was then just PW—points out the limitations of using the buyout basis for much, and prefers a gilts-plus method, which it says is widely used by actuaries. On this basis, it says that aggregate deficits rose by £40 billion to £450 billion at the end of November.
So although there is a clear direction of travel, the sector continues to provide secure retirement income to millions of people. We suggest that this is not the time to write off private sector DB schemes, notwithstanding that, as the Purple Book records, many members of DB schemes are choosing to transfer out for a variety of reasons, including a hitherto buoyant stock market. We should recognise that the switch to DC schemes is likely to accelerate under the 2015 pension freedoms and as schemes continue to de-risk, not only by closing to new accrual but by diversifying investments—moving away from equities towards bonds.
The Green Paper asserts that DWP modelling considers that scheme deficits are likely to shrink for the majority of schemes if promised levels of employer contribution are sustained. Smaller deficits have led to shortened recovery periods; the mean recovery period length is seven and a half years, although the spread is from 12.5 years to those schemes in surplus. We should not overlook that some 1,000 schemes are in surplus.
Some have suggested, particularly given the antics we have seem from some high-profile individuals and their corporate manoeuvring—the noble Lord, Lord German, touched on this—that there is a fundamental problem with the regulatory and legislative framework for DB schemes. The Green Paper concludes that, while not optimal, there are no major structural problems with the framework. It asserts that available evidence does not appear to support the view that DB schemes are generally unaffordable for employers. In this regard, we note the manifesto commitment of the Conservative Party to introduce punitive fines alongside a TPR contribution notice, and to make certain corporate transactions subject to mandatory clearance. That would help the noble Lord, Lord German. I am not sure whether that should be done by the regulator. We would support this approach, but perhaps the Minister will confirm that this is still the Government’s position. Could she put some flesh on the bones of the type of transactions the Government have in mind? Indeed, when will we see the White Paper that will spell this out? I think we were promised it in the spring, although I think spring has sprung.
My noble friend Lady Drake, when giving evidence to a recent Work and Pensions Select Committee, suggested improvements to the regime that included strengthening the duty and requirements on the sponsoring employer to consult and inform trustees, which is important where there is a sponsoring employer who does not want to engage. She further suggested a tougher regime on recovery plans, as well as the need for the regulator to be more proactive and focused on the use of information, albeit recognising that this has resource implications. How do the Government respond to these suggestions and are they satisfied with the level of resources available to the regulator?
The issue of corporate dividends has of course featured in recent cases and the potential conflicts between properly funding the pension scheme and supporting the share price of an enterprise on which executive bonuses may well be based. How do the Government consider the regime can be improved to prevent the deliberate enrichment of shareholders at the expense of the pension scheme? We were told recently by the Minister’s colleague that the regulator does not have the power to stop businesses paying bonuses to executives or dividends to shareholders. Could the Minister say what the alternative mechanisms are that can be used to substitute for the lack of such powers?
We should acknowledge the important role of the Pension Protection Fund in helping to sustain confidence in DB schemes. Given that its payments are met from levies on other DB schemes, it is doubly important that others are not allowed to escape their obligations by dumping schemes into the PPF. This is notwithstanding that the PPF has developed a robust business model that has enabled it to take on major schemes as well as a stream of smaller ones. We are told that 43 schemes entered PPF assessment last year—a declining number—with 130,000 members in receipt of compensation. This has been a major success and important in helping to sustain the DB sector.
In considering whether the existing regulatory arrangement is appropriate, it should be borne in mind that it is a scheme-by-scheme approach and its effectiveness depends on the strength of the employer covenant in each case. As has been said, there are a number of large schemes but also many smaller schemes, often covering older, industrialised, sometimes family-owned, businesses. Smaller schemes may struggle to obtain benefits of scale for their investment strategy and, in terms of governance, to readily attract independent and member-nominated trustees. The possibility of consolidating smaller schemes has been raised, although one can see that this would bring considerable challenges. How might this be helped?
Private DB schemes continue to make a significant contribution to the UK savings market and to help alleviate poverty in retirement. But there is a growing move away from them towards DC arrangements, particularly from the success of auto-enrolment. This changing environment requires alternative approaches to regulation but does not negate the need to strengthen the DB regime. We look forward to the White Paper and follow-up legislation in due course. As others have noted, the Financial Guidance and Claims Bill now wending its way through the Commons should provide some key and necessary safeguards to help members of DC schemes, or of DB schemes switching to the DC market, build better protections. It is right that we proceed on both fronts.