Pension Schemes Bill [HL]

Lord Sharkey Excerpts

Committee stage & Committee: 1st sitting & Committee: 1st sitting : House of Lords
Monday 24th February 2020 Grand Committee

Moved by

[Lord Sharkey]

2: Clause 9, page 5, line 37, at end insert—
“( ) that the scheme provides for intergenerational fairness among its members, specifically in connection with the amount of benefits paid to pensioners, proposed adjustments to annual benefits and cash equivalent values provided to members wishing to transfer out of the scheme.”

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[Lord Sharkey (LD)]

My Lords, this is a probing amendment to allow discussion of the intergenerational fairness of CDC schemes. The Government’s excellent policy brief notes say on page 9 that concern about intergenerational fairness was raised by many respondents to their consultation on collective money purchase schemes. They then say explicitly that they recognise that younger members in CDC schemes

“may get less value from flat-rate contributions … if they decide to”

leave the scheme and transform their credits into a cash equivalent. The Royal Mail CDC scheme proposed here is such a flat-rate contribution scheme.

The Government clearly accept the possibility of less favourable treatment of the young, but both the likely scale of this or proposals for its mitigation are not an obvious feature of the Bill or its associated documents. The Government say that they will ensure that

“both benefits in accrual and pensions in payment”

must be adjusted

“to preserve the collective nature”

of the scheme. They go on to talk about sharing the current effects of investment being out and under-performance. This seems a little vague in a vital area. The details will presumably surface in an unamendable SI generated by Clause 18(4), to which we will return later. It also seems not to address the question directly. The question really resolves into this: “What protection or protective mechanism is there for young members against older members expensively cashing in?” An alternative way of putting this is to say what detriment younger members could suffer, or what limit will be put on such suffering, under the scheme. This is surely vital information for anyone trying to understand the likely risks and returns.

The situation here is that many of those consulted raised concerns about intergenerational fairness and the Government admit that it is a possibility. The Government have chosen to press ahead without either quantification of the possible disbenefits to younger members or a clear mechanism for reducing or limiting any disbenefits. This is not only unsatisfactory in its own right; it runs counter to the Government’s repeated acknowledgement that communicating the key elements of the scheme clearly and understandably is vital to its success.

There is a connection, of course, between intergenerational fairness and capital buffers. We will debate capital buffers later but it is worth noting the actual connection here. In an analysis in late 2018 of the DWP’s proposal for the CDC scheme, AJ Bell noted:

“It’s clear from the DWP’s preference not to allow so-called ‘capital buffers’—where funds are built up in reserve to make payouts more predictable—and the proposed removal of any trustee discretion in adjusting benefit levels that concerns about intergenerational fairness in CDC are front-and-centre of ministerial minds.”


It went on:

“And by suggesting any outperformance or underperformance should be reflected in the benefits paid to all members—including those already receiving their pensions—the DWP leaves us in little doubt it will not allow schemes to be skewed in favour of one cohort of members over another. This fairness will, however, potentially make outcomes in CDC less predictable and raises the spectre of pension cuts should investments consistently underperform over … time. The DWP itself notes any reductions in benefits will not be well received, and so clear communication of this—not just upfront but on an ongoing basis —will be absolutely essential.”


We will turn to that later in our discussions. AJ Bell concluded:

“Simply referring disgruntled members to a complex set of scheme rules they signed up to blindly years ago won’t be good enough. Getting these communications right will arguably be the biggest challenger for employers who choose to go down the CDC route.”


The Government, in their Royal Mail CDC proposals, choose mechanisms for intergenerational fairness over benefit stability. This may well be entirely the right choice but it is very hard to tell, since the mechanism for bringing about this fairness is not explicit and no quantification is yet possible. Equally, it is not clear what benefit variations are likely without the smoothing potential of a capital buffer. More clarity is surely needed before employees are asked to sign up to buffers, or no buffers, and on the optimum position. Is the choice really between intergenerational fairness and stability? Is that not a false dichotomy and is there not a middle position combining elements of both, which is likely to be more appealing than the Government’s decision in this Bill not to allow capital buffers as an aid to benefit stability?

Our amendment tries to push the Government a little into being more explicit and much clearer. It adds one further condition to the list of authorisation criteria in Clause 9(3): that

“the scheme provides for intergenerational fairness among its members”

in specified areas.

The objective of the amendment is, of course, to allow discussion of the whole issue of intergenerational fairness, but also to suggest a non-prescriptive way of ensuring that the issue is properly and explicitly addressed in scheme design and to allow discussion of the right balance between intergenerational fairness and benefit stability.

I very much look forward to Members’ contributions and the Minister’s reply. I beg to move.

[Lord Vaux of Harrowden (CB)]

My Lords, I rise to support Amendments 2 and 7 and speak to my Amendment 6.

Intergenerational fairness is probably the single biggest issue that is generally raised about CDC schemes. The noble Lord, Lord Sharkey, has set the case out well. As an extreme example, if returns were zero or negative but the trustees wished to continue paying the target level of benefits to existing pensioners, the scheme would become in effect a Ponzi scheme, with payments to existing pensioners wholly dependent on a steady stream of new joiners. That is an extreme example, and to call CDCs Ponzi schemes, as some commentators have done, is overstating the situation. However, at a less extreme level, if we look at what is currently happening in the Netherlands, schemes have recently been able to avoid, temporarily, making cuts in benefits by the Government temporarily lowering the minimum funding requirement. While this has avoided immediate pension cuts, primarily for political reasons, it quite clearly pushes the risk on to the younger generation as benefits are paid out at a higher rate than they should be. That is a real and live example of how intergenerational unfairness can and does arise in CDC schemes. It is therefore essential that this enabling Bill deals explicitly with this issue. CDC schemes will fail if such unfairness is allowed to occur or is seen to be a risk.

I support Amendment 2, which requires schemes to provide for intergenerational fairness among members as a prerequisite for gaining authorisation. I also support Amendment 7, which introduces the concept of intergenerational fairness when transfer values are calculated.

Amendment 6 is very simple. It requires that the scheme must have rules to ensure fairness among all members when setting benefits. I have deliberately left that quite wide. I have not referred only to intergenerational fairness because I would like also to cover fairness within generations. For example, in the event that someone makes a transfer out of the scheme, it could impact intergenerationally and also intragenerationally if the transfer valuation is too high.

Royal Mail kindly contacted me before this debate to explain that its proposed scheme has intergenerational safeguards in place, which is good to hear. However, this Bill relates not just to the Royal Mail scheme, but to other schemes in future. Just because Royal Mail may comply does not remove the need to ensure that fairness is very clearly built into the legislation. It is a critical issue.

It is probably arguable whether Amendment 6 is required if Amendment 2 is accepted, although I see no downside, and considerable merit, in making explicit that a scheme must have rules to ensure fairness when the rate or amount of benefits is determined, along with the other rules already set out in Clause 18.

As an aside, any changes made in this part will need to be reflected in the Northern Ireland part.

The Government have recognised the concerns around intergenerational fairness inherent in CDC schemes, so I hope that the Minister will consider these amendments seriously. This is too important a risk not to be dealt with in the Bill.

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[Lord Sharkey]

My Lords, I am grateful for the Minister’s explanation and for her invitation to discuss the issue further. I will definitely take her up on that.

At Second Reading, I talked a lot about the huge reliance in the Bill on secondary legislation and the difficulty that it presents for Parliament to assess such things as intergenerational fairness provisions, as we simply do not know the detail of the mechanism. The Minister explained that it is envisaged that legislation under Clause 18, which means secondary legislation, will set out how intergenerational fairness will be built into the schemes. I am sure that that is everyone’s intention but it will be by secondary legislation and, realistically speaking, Parliament itself will not have an opportunity to make changes to secondary legislation. It would be much better in the case of intergenerational fairness, and when it comes to buffers, to have this in the Bill, given that I think all of us in this Room acknowledge the tremendous importance of getting this matter right. Getting it right via secondary legislation is entirely possible, of course, but it rather excludes us and Parliament from a detailed examination of what this vital mechanism is. I urge the Minister to think about trying to accelerate the process of defining the mechanism so that we get a chance to look at it before we have finished our proceedings on the Bill. Having said all that, I beg leave to withdraw the amendment.

Amendment 2 withdrawn.

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[Baroness Stedman-Scott]

I thank my noble friend for her intervention. My understanding is that CDC schemes are obviously new and will not carry any legacy data issues, which should lower the initial risk. The focus will be on not cleaning old data but establishing strong processes for loading, managing and maintaining data, with regular checks to ensure that quality is maintained. If that does not answer my noble friend’s point in the way she would like we can deal with it when we meet later in the week, if that is acceptable.

I appreciate the importance of good systems and processes. However, the proposed addition to the illustrative list is unnecessary, as we already envisage that appropriate requirements relating to the accuracy of member data and record keeping will be included in regulations. Schedule 5 of the illustrative CDC regulations provides an early indication of our thinking in respect of member records. However, we will consult to ensure that what is included in the regulations is appropriate and that sufficient scrutiny is applied. We also want to ensure that any requirements are proportionate.

In conclusion, I hope that my statements today and the illustrative regulations deliver sufficient reassurance of our commitment to ensuring that CDC schemes are financially sustainable and that systems and processes for member data are sufficient and effective. With that, I ask the noble Lord to withdraw his amendment.

[Lord Sharkey]

I should like to ask one or two questions about the buffer concept. It seemed to me that a lot of what was being described was the equivalent of a buffer in some ways, but it was not entirely clear how it would be produced, brought forward and exercised. It was not entirely clear to me whether the members of any proposed CDC scheme would be given a choice or say in whether the scheme should go ahead without buffers, as the RM scheme will, or whether it should include buffers. It seems to me that there is merit in consulting the workforce about which they prefer.

In paragraph 1.3 of the consultation response the Government said:

“We do not want to preclude or legislate against buffers in CDC schemes—there are perfectly good reasons why employers and workforces may wish to provide for a scheme that mitigates volatility in this way, and we agree that a buffered scheme could be appropriate in some circumstances.”


Those circumstances might very well include avoiding frequent and disconcerting changes in benefits but also the provision of wind-up or restructuring costs, even if that does somewhat impact intergenerational fairness. My request is for clarity about this cloud of assets or obligations that might substitute in some way for capital. I am not clear about how that will happen. It would be good idea to make sure that in any future schemes the workforce is consulted about whether or not they prefer a buffer.

[Baroness Sherlock (Lab)]

May I, too, seek clarification? I was not entirely sure what the Minister was saying about where the money could come from for a buffer. I think I understood her to say that the regulator would not approve a scheme unless the sustainability criteria had been met and that they could be met only if an adequate amount of money was placed in, for example, escrow. Is she saying that a scheme would be approved only if the regulator was satisfied that enough money had been provided up front by the sponsoring employer to fund the continuity options in the event of a triggering event? If so, why does she not simply accept this amendment? That is all it says.

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[Baroness Stedman-Scott]

Let me try to be helpful and to placate noble Lords on this: money needed to wind up should come from the employer. A scheme would not be authorised if it did not have this financial sustainability from the employer. Is that helpful?

[Lord Sharkey]

But the scheme does not include a buffer and I am still not clear about the money. If it is going to come from the employer, where does it say that they have to do that? All we are talking about is a notion of fairness, but people may disagree about what that means.

[Baroness Stedman-Scott]

I think the original question was around the consultation we are going to do on this. This will be resolved in the consultation.

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Moved by

[Lord Sharkey]

8: Clause 18, page 11, line 34, leave out subsection (4)

[Lord Sharkey]

My Lords, I shall speak also to Amendment 14 as well as to my clause stand part Motion.

Amendment 18 is a probing amendment whose purpose is to enable discussion of the powers given to the Secretary of State to make regulations altering various key aspects of the scheme. Clauses 18(4) to (8) set out what those powers are. The Government’s policy brief discusses Clause 18(4), and it is worth quoting what it says:

“Concern has been expressed that the Government could therefore use regulations to make changes to the basic principles underpinning a CDC scheme’s financial model, potentially leaving it financially unviable.”


It goes on:

“Concern has also been expressed that changes to the regulations under this clause could have the effect of re-designing an existing collective money purchase scheme—potentially years down the line—by overriding what the scheme rules say about the methods and assumptions to be used in calculating benefits. If this happened, it could undermine the actuarial modelling on which the initial design was based and change the deal offered to members when joining the scheme. It can also affect the intergenerational balance of the scheme.”


The Government’s response to this very serious set of concerns is in three parts, none of which seems to be particularly compelling. The first is to deny that any of this is the purpose of the power to make regulations, but Mandy Rice-Davies would have known to how to respond to that. The second is to say that the Government will expect Parliament to reject any attempt by a future Government to use them in such a way, but these powers will be exercised by secondary legislation so how will Parliament stop or modify that? What precedents can the Minister point to there? The third response by the Government in support of these powers is that they will consult before using them. None of these arguments strikes me as particularly convincing. The powers granted are enormously wide and unconstrained. Their existence would certainly not add to confidence in the stability of the scheme.

There is surely a more proportionate way of doing what is required. The Government say that without these powers, there is a risk that they would not be able to stop schemes operating on principles that run contrary to the basic principles underlying the provisions in this part of the Bill. If that is the case, surely it would be simpler and proportionate to set out in the Bill these basic principles and that compliance with them as a condition of the scheme’s authorisation. I look forward to the Minister’s response to that proposal. If the Government insist on proceeding with these wide and unconstrained delegated powers, I am sure that the House will want to return to the issue later in our discussions.

I turn to Amendment 14. The Government’s policy brief describes Clause 47 as allowing the Secretary of State to make regulations using the affirmative procedure to remove the restriction on CDC schemes for single employers or connected employers. This would open CDC schemes to multiple employers and master trusts. The DPRRC and the Constitution Committee have both examined the powers in the clause, and the Constitution Committee agrees with the DPRRC that the power granted in it is inappropriate. It notes that the clause is skeletal and contains a broad Henry VIII power. In paragraph 28 of its report on the Bill, the DPRRC states:

“The fact that the Bill currently prohibits multiple-employer collective money purchase schemes suggests that such schemes may give rise to significantly different regulatory issues from those presented by single employer … schemes which are currently allowed under the Bill. This is … supported by the fact that clause 47(3) to (5) gives the Secretary of State such wide powers to make changes to the provisions that govern single employer schemes”.


In the very next paragraph of its report, the committee says:

“Given this background, we consider it is inappropriate to leave the provisions for regulating multiple-employer collective money purchase scheme to subordinate legislation; and, therefore, that the delegation of powers by clause 47 is inappropriate”.


Subsection (5), the subject of my amendment, is a naked Henry VIII power, including as it does the delegated powers to

“(a) modify a provision of this Part, or any other enactment, as it applies to relevant schemes; (b) amend, repeal or revoke a provision of this Part or any other enactment.”

This kind of unfettered licence to amend, repeal or revoke primary legislation by statutory instrument has always been unattractive to this House. My amendment proposes to remove subsection (5) but I ask the Minister to consider withdrawing the whole clause. As the DPRRC and the Constitution Committee have said, if we want to legislate for multiple employer CDC schemes then it should be via primary legislation, not via the use of secondary legislation and Henry VIII powers.

I have also given notice of my intention to oppose the Motion that Clause 51 stands part of the Bill. I have done this so that we may ask the Government about their use of delegated legislation in Part 1. Clause 51 contains very wide-ranging powers, which

“may be used … to make different provision for different purposes; … to make provision in relation to all or only some of the purposes for which it may be used … confer a discretion on a person … make consequential, supplementary or incidental provision … make transitional, transitory or saving provision”.

The last two are probably okay—they seem boilerplate, to have common-sense meanings and to be properly restricted—but the first three powers are very wide. What exactly is it to confer discretion on a person? What does that allow in practice and what limitations are there to it? It is rather attractive but, I would be grateful if the Minister could explicitly answer those three questions when she replies, as well as explaining why the first two very wide powers are needed at all.

The Government have attempted some kind of explanation of Clause 51 on page 13 of their policy briefing note. It states:

“Clause 51 … (2) allows the regulations made under Part 1 to make different provisions for different purposes.”


That is not an explanation; it simply repeats the text of the Bill. I take it that what is meant is that the regulation-making powers set out in Part 1, in their proper context and given their proper purpose, may be amended to encompass different purposes in any way the Government might choose. Why is that necessary? The Government try to explain by way of example. They say:

“This will allow us to make different regulations to provide for different CDC scheme structures if necessary. They cite by way of example Clause 51(2) would allow us to introduce a different regulatory framework for the way in which multi-employer CDCs must calculate and adjust benefit values compared to single-employer CDC schemes should that prove necessary.”


This power already explicitly exists in Clause 47(3) to (5), which we have already discussed. As we have noted, both the Constitution Committee and the DPRRC thought these powers inappropriate. If they were inappropriate in Clause 47, they are no less inappropriate in Clause 51.

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[Baroness Stedman-Scott]

I thank the noble Lord for that important point, which we will certainly consider.

[Lord Sharkey]

Before I come to the meat of the matter, may I ask what it means to “confer discretion” on a person?

[Baroness Stedman-Scott]

It would be very helpful if the noble Lord would repeat that for my officials.

[Lord Sharkey]

I am delighted to repeat it. What does it mean to “confer discretion” on a person?

[Baroness Stedman-Scott]

As I understand it, it means to delegate powers.

[Lord Sharkey]

If that is what it means, and I am sure it does, then we are giving the absolute, unrestricted authority for delegation of any power to anybody at all. That seems to me to be slightly wider than is normal.

I shall move on. I will have to read tomorrow’s Hansard very carefully to understand exactly what the Minister said, but there were several points that struck me as really quite controversial. One of those is about Clause 51. The Minister said, and she is obviously entirely correct, that you cannot set up a multi-employer CDC scheme by regulation if you remove Clause 51. Yes, that was the point of my amendment: it seemed wrong to introduce multi-employer CDC schemes by regulation. That is also exactly what the DPRRC said. It is wrong, or inappropriate, to do it that way: that was the whole point of my amendment. I do not think it is a substantive response to that to say, “Well, if we accept it, we cannot do it.” That was the point of the amendment.

I thought I also heard the Minister say that one of my amendments—I cannot now remember which—would adversely affect the ability to reduce intergenerational fairness because it would remove a delegated power. I am not at all certain, having thought about it, that it would have that effect, but in any case we have already heard very strong arguments for intergenerational fairness mechanisms being in the Bill. I did not hear in the Minister’s reply a lengthy argument against the view of the DPRRC that the powers in Clause 47 are inappropriate. I understand their absence is inconvenient, but it does not address the central argument put forward by the DPRRC that it is inappropriate to create these new schemes entirely by regulation.

To make a general comment about the framework Bill, a lot of what is going on seems to be effectively cutting Parliament out of meaningful participation in critical aspects of scheme design. I understand that there is a need for a strong element of a framework Bill when you are dealing with these kinds of pensions, but it seems wrong to deploy them so widely that Parliament itself is effectively cut out of the process. Parliament is cut out. No matter how many times we mention secondary legislation in this debate, it is clearly the case that we cannot amend and do not reject secondary legislation. It is difficult to see exactly what our participation in secondary legislation would amount to. Having said all that, I beg leave to withdraw the amendment.

Amendment 8 withdrawn.

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[Baroness Stedman-Scott]

I thank noble Lords for raising these amendments that relate to events which can occur in an authorised CDC scheme and which must be notified to the Pensions Regulator. The amendment in the names of the noble Lords, Lord Hutton and Lord McKenzie, would require the trustees of an authorised CDC scheme to notify the regulator where a person assumed a role that was subject to the fit and proper persons assessment. This notification would be required within two weeks of the change. The regulator would be required to assess whether the new person met the fit and proper persons requirement. Where it was not satisfied, the amendment would require it to consider withdrawing authorisation from the scheme.

The fit and proper persons requirement is set out in Clause 11 and is one of the authorisation criteria. The aim is to ensure that only suitable people are involved with a CDC scheme in order to protect the interests of members. It is also worth noting that the Bill already includes a power in Clause 30 for the regulator to withdraw a scheme’s authorisation if it is not satisfied that the authorisation criteria are met. The regulator will need to be satisfied that this is the case on an ongoing basis, including that the fit and proper persons requirement continues to be met. Some events would still warrant consideration by the Pensions Regulator because they could affect the ability of an authorised CDC scheme to continue to meet the authorisation criteria.

Clause 28 covers such “significant events”, which must be notified

“as soon as reasonably practicable”

to the Pensions Regulator. The draft illustrative regulations that we shared with noble Lords, and which have been placed in the House Library, provide an indicative list of potential significant events. Noble Lords may be reassured to know that the event in their amendment is contained in the illustrative regulations. We will work with the Pensions Regulator and others to develop the CDC significant events; we will also consult on the draft regulations in due course.

Amendment 11, tabled by the noble Lord, Lord Sharkey, would mean that the decision of any employer or relevant former employer

“to withdraw from the scheme”

would automatically be considered a triggering event. It may be helpful to point out that the triggering events listed in Clause 31 are already intended to capture withdrawal events that pose a significant risk to the future of a CDC scheme. For example, the withdrawal by the employer from a single employer-established CDC scheme or the largest employer in a connected employer scheme may trigger the winding up of a scheme. The withdrawal may also have arisen as a result of employer insolvency. In this scenario, it is clear that such a decision could risk destabilising the scheme. As such, it should be treated as a triggering event and be subject to greater scrutiny and oversight by the Pensions Regulator to ensure that the trustees are taking all necessary steps to address the issue and protect members.

Not every withdrawal of an employer, however, may pose such a significant threat to the scheme. For example, the impact of a small connected employer deciding to withdraw from a CDC scheme may be minimal on the viability and sustainability of the scheme; it may not warrant a decision to wind up the scheme as a whole. Such an event would be more appropriately dealt with as a significant event. We intend that such events should still be reflected in the continuity strategy, so that the regulator is aware that this risk has been considered and planned for.

We propose that regulations would provide for such events to be a significant event, which would need to be notified to the regulator. Such a notification will allow the regulator to engage with the trustees to ascertain the impact on the scheme’s viability and continuity, and whether this should lead to a formal triggering event or other regulatory action. This approach allows the regulator to retain appropriate oversight of withdrawal decisions and resulting actions, while providing some flexibility and proportionality in approach where the withdrawal of the employer is not expected to impact significantly on the scheme. I am also pleased to advise the Committee that the regulator will engage with the scheme to look at the options before withdrawing authorisation. For the reasons I have set out, I urge the noble Lord to withdraw his amendment.

[Lord Sharkey]

I thank the Minister for her comprehensive explanation of why it may not be necessary to add what I proposed. However, I am uncertain on one thing about triggering events. It concerns the fifth of the triggering events which we have been talking about. I could not find anywhere in the Bill what the trustees must do in the event of an Item 5 triggering event apart from notifying the Pensions Regulator that such an event had occurred. I acknowledge that I may have simply missed it but I would be grateful if the Minister could say what the trustees are supposed to do after an Item 5 triggering event. What actually gets triggered?

[Baroness Stedman-Scott]

I thank the noble Lord for his question. I am advised that we will write to him with the answer.