Pension Schemes Bill [HL]

Lord Naseby 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.

[Baroness Altmann (Con)]

My Lords, I will make just a few remarks at this stage. My noble friend Lord Flight mentioned the position of the NAME schemes. There are significant problems with the DB sections of those schemes, and a number of employers have written to me who are about to go personally bankrupt because they cannot meet the obligations—and that is setting aside the defined contribution issue that we are talking about today. From the perspective of the Universities Superannuation Scheme and other schemes that may have AVC-only sections to them, it would seem to me that we cannot, given the intentions of the Bill to protect scheme members’ benefits in the event of wind-up, just assume that the money will come from somewhere if there is not any proper provision for it—and currently there is not. It would suggest—my noble friend the Minister might consider this—that there may be a case for extending the Pension Protection Fund itself, which already covers the DB benefits of those schemes, to take care of any residual risk in the AVC section.

Indeed, the capital adequacy mentioned in the Bill will not necessarily achieve the aim that the Pension Protection Fund achieves for defined benefit schemes. In the event of wind-up, with a scheme’s records in disarray, it is not clear that any initial estimate of capital adequacy might be sufficient to cover those costs. I would be grateful for some comment from the Minister on the possibility of some sort of backstop or tail-risk insurance. That could also pick up the AVC schemes that have been mentioned. I understand the points that have been made there.

--- Later in debate ---

[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.

[Lord Naseby]

I raised a point on the specifics of the universities superannuation scheme, which is really very large. I do not expect a concrete answer this afternoon, but could my noble friend cover it for me in writing or make sure that it comes back in some form so that the universities can be reassured?