Pension Schemes Bill [HL]

Lord Vaux of Harrowden Excerpts

Report stage & Report stage (Hansard) & Report stage (Hansard): House of Lords
Tuesday 30th June 2020 Lords Chamber

[Baroness Bowles of Berkhamsted [V]]

My Lords, I have signed my name to both these amendments, which follow on from significant debate in Committee. I agree with what the noble Baroness, Lady Drake, said about how Amendment 8 bolsters the importance of ensuring adequate finance for the administration of a scheme in all circumstances. It is necessary to have certain requirements specified and agreed in advance rather than to rely on negotiation at what might be a difficult time or, indeed, where it might be impossible. I therefore wholeheartedly support Amendment 8.

Amendment 32 is important and reflects the matter of general fairness and, in particular—although it is not specified—intergenerational fairness, which was discussed in Committee. My noble friend Lord Sharkey will explain further, but I wish to make the point that we should remember that CDCs have shared risk, that their strength is that returns can be more predictable, and that there is intergenerational solidarity so that good times and bad are to some extent smoothed. That solidarity cannot be undermined by allowing market highs to be carried away by those who may chose to leave the scheme. It surely must be possible to devise mechanisms, whether by way of buffers, conservative valuations, a delayed retained part or something else, to prevent the problem that those wishing to transfer their pensions out essentially ruin what is left for everybody else. The point is that fairness has to extend over more than a snapshot in time. That is the only way that you will have fairness in the sense of shared risk to all the members.

[Lord Vaux of Harrowden (CB) [V]]

My Lords, I wish to support Amendment 32, tabled by the noble Lord, Lord Sharkey, to which I have added my name. I should add that I also wholeheartedly support Amendment 8, but I will restrict my comments to Amendment 32.

While there seems to be general support for the introduction of this new type of pension—collective money purchase schemes, or CMPs; I am going to try very hard not to call them CDCs as we go through this—they are not without risk. As we discussed at some length in Committee, one of the greatest risks that is often raised in respect of CMPs relates to intergenerational fairness. Indeed, at the extreme, in a situation where no returns are being earned but pension levels are maintained for existing pensioners, the pensions being paid would be dependent on the funds being put by new joiners, as in a Ponzi scheme. That is very extreme, as I say, but it demonstrates that there is the possibility of one cohort being disadvantaged by the treatment of another cohort. If existing pensioners are paid too much, those currently paying in will suffer, and if the scheme is overcautious in what it pays out to pensioners, pensioners will suffer and current workers will gain.

This is not theoretical. We only need to look at what is happening in the Netherlands to see that the question of whether to cut benefits when returns are not as good as expected is a real and current issue. In a standard defined contribution scheme, the risk is not pooled, so the issue does not arise. In a defined benefit scheme, the matter is dealt with by the employer making up the difference. However, in a CMP, there is no possibility of that happening. If you want to maintain the level of pensions when returns are low, the future pensions of those still contributing will be impacted and vice versa, so the issue of intergenerational fairness is specific to CMP schemes.

It is also worth pointing out that CMPs have implications for not only intergenerational fairness but fairness more generally. For example, as the noble Baroness, Lady Bowles, pointed out, if someone wants to transfer their fund out of a scheme, how do you value their share? The benefits that arise from the scheme are uncertain, being targets only, so if you value a transfer based on the target benefits, which seems to be what is proposed, that will not take account of the risk that those benefits may not be achieved. In that situation, the person transferring out is getting a better deal than those staying, unless that risk is taken into account in the transfer valuation. The issue is complicated further because of the pooling of longevity risk in a CMP. For example, if someone has just a couple of years to live, there would be a strong incentive for them to take their money out to the detriment of those staying in.

Given that fairness is the single most commonly raised risk that relates to CMPs, it is curious that there is no explicit mechanism in the Bill to deal with it. In our previous discussions, we were pointed in the direction of Clause 18 to see how the matter is dealt with, but in fact that clause sets out only how benefits and so on will be calculated and says that regulations will be made in that respect; nowhere does it mention the critical question of fairness. I imagine that that is because it has been based on other pension legislation, which, as I said, does not suffer from this risk.

Amendment 32 introduces as very simple means by which to ensure that intergenerational fairness and fairness more generally must be assessed by the trustees. Given the importance of this issue, I urge the Minister to consider it really seriously.

[Baroness Altmann [V]]

My Lords, I have enormous sympathy with the aims of the two amendments in this group. Amendment 8, in the names of the noble Baronesses, Lady Drake, Lady Sherlock and Lady Bowles, was expertly moved by the noble Baroness, Lady Drake, and deals with situations where a pension scheme may not have enough money to meet its obligations and there is a risk that it will need to draw on the funds in the members’ pension pot rather than have money coming in from outside.

As I mentioned in debate on earlier stages of the Bill, I am particularly concerned about the situation where a scheme has had a triggering event or is winding up and may not have sufficient administrative budget to cope with, for example, a significant IT failure in which member records are lost or transposed from one to another so that it is an enormous job to unscramble each member’s entitlement. The costs of that work can be significant; if no reserves are in place to meet those costs and the employer is in financial difficulties, what will a CMP scheme be able to do to fund the costs of sorting out the records? It is true that the aims of the CMP scheme as set out in the Bill will be to have central estimated assumptions for guiding benefit adjustments to ensure that there is no difference of treatment between different members, but on the particular issue that I am referring to and that Amendment 8 refers to, the continuity strategy outlined in the Bill is supposed to have money to meet a triggering event, including its costs, but may not do so.

Therefore, as I understand it, the thrust of this amendment is to ensure that the Pensions Regulator requires a separate capital buffer, or that an insurance arrangement will cover the costs incurred in winding up, or that, in exceptional circumstances, the costs required to administer the scheme are met other than from members’ funds. When we set up this new regime, it is important that we make sure that we cater for eventualities that we do not expect to happen but which we know could in theory happen. Having seen with defined benefit schemes the devastating impact of scheme wind-up without sufficient resources and the amounts of money taken out of defined benefit schemes when an employer has failed or walked away from the scheme—those cases have reduced the amounts available for pensioners, in some cases to zero—there is a real need to look at some catastrophe insurance, disaster-type insurance or capital buffer of some kind to make sure that we have catered for that before it happens.

I think it would be wise for my noble friend to consider what else might be done over and above what is in the Bill. I also look forward to her answer to the specific question asked by noble Lords about what would happen in practice should a scheme require money that does not currently exist within the fund, other than in members’ entitlement pots, to cover the costs of wind-up. Of course CMP does not give each person an individual pot, but if the overall assets have to be raided to meet these costs, their pensions will be impacted.

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Moved by

[Lord Vaux of Harrowden]

50: Clause 109, page 95, line 15, at end insert—
“( ) In particular, the declaration of a share buy-back by the employer is a notifiable event for the purposes of subsection (1) if the value of the assets of the scheme is less than the amount of the liabilities of the scheme.”Member’s explanatory statement
This amendment makes the declaration of a share buy-back by a company notifiable to the Pensions Regulator if the scheme is in deficit.

[Lord Vaux of Harrowden [V]]

My Lords, in moving Amendment 50 I will also speak to Amendment 51 in my name. I thank the noble Baronesses, Lady Bowles and Lady Altmann, for their support and the Minister and officials for the time they have given to discuss the issue on a number of occasions.

Both these amendments relate to a similar concern: shareholders of companies with pension deficits removing excessive value from companies and thereby increasing the risk relating to their pension schemes. We had a long discussion about this in Committee, so I shall try not to duplicate that too much, but I will briefly explain the issue for those coming to this for the first time. I suggest that events since Committee have conspired to make the matter more rather than less relevant.

The Bill introduces a requirement that the regulator should be notified in advance of notifiable events and that the notification should be accompanied by a description of how the notifiable event might impact the pension scheme and what is being done to mitigate that impact. The Bill does not say what those notifiable events will be; they are to be prescribed in future.

However, it is understood that the Government intend these to be, first, the sale of all or a material proportion of the assets or business and, secondly, the granting of security on a debt in priority to a debt of the scheme. An email I received from the regulator describes the purpose of the notifiable event regime as being to act as an early warning system so that it is alerted to corporate actions that may have a detrimental impact on the scheme and that it may otherwise not have been aware of.

The easiest way for shareholders to remove value from a company is through either a dividend or a share buyback. While the regulator will be able to find out about these after the event, it has no way of seeing them in advance. Once the money has gone, it is too late; it is very hard to recover, especially if it has gone abroad. We have seen high-profile examples of companies going under after large dividends have been paid, leaving pension schemes with deficits—BHS and Carillion being just the two most high-profile ones. It is not a theoretical risk and, sadly, recent events have made such situations only more likely.

The Government rightly argue that we should not restrict the payment of normal, reasonable dividends; I completely agree with them. Restricting the payment of normal, non-excessive dividends could have a negative effect on the company and therefore on the pension scheme. Anyway, many dividends end up in pension schemes. It is only excessively high dividends, compared with the deficit repair payments, that I am trying to catch here. Even then, I am asking only that they be notified in advance so that the regulator can consider whether they have a negative impact on the pension scheme. I am not trying to block them, despite some noble Lords wishing that were the case.

Secondly, the Government also rightly argue that we should not overburden the regulator with too many unnecessary notifications. Again, I agree with them, so I have changed the amendment we discussed in Committee so that Amendment 51 now allows the regulator to set the level of dividend at which it should be notified. Share buybacks are a less common action, so I suggest that they should always be a notifiable event.

Amendment 50 simply says that any company with a pension deficit should notify a share buyback to the regulator in advance. Amendment 51 says that a company with a deficit should notify the regulator in advance if the dividend is bigger than the deficit repair contribution and the deficit repair period is longer than a period to be specified by the regulator.

It is interesting to note that if a company borrows more than £50 million under the Coronavirus Large Business Interruption Loan Scheme, the Government forbid it to pay dividends, make a buyback or pay a bonus. They have taken that view presumably because they are worried that if it pays a dividend or a buyback it will increase the risk of non-payment of the loan.

By contrast, we are allowing companies that owe large sums to their pension schemes and deferred salaries to their employees to pay whatever they want without even a notification. That feels slightly like “one rule for us”. I do not think that the Minister will accept these amendments, and I would prefer not to push them to a Division. The Bill allows the Government to prescribe events as notifiable events in the future. The noble Baroness, Lady Stedman-Scott, has kindly confirmed to me that the Government will keep the issue of dividends and share buybacks under review, and take appropriate action if they or the regulator feel that they are becoming a potential problem. If the Minister could kindly confirm that understanding for the record, I will not seek to divide the House over these amendments. I beg to move.

[Baroness Altmann [V]]

My Lords, I am grateful to the noble Lord, Lord Vaux, for moving these two important amendments. I have added my name to Amendment 50, which requires share buybacks to be notified to the regulator if a company is responsible for a pension scheme in deficit.

The case for accepting this amendment seems quite overwhelming. The noble Lord has been extremely reasonable in only requiring notification of a buyback. Equity buybacks are sometimes used by companies to distribute to shareholders what is considered surplus cash where management believes that it has no better use for that money. That suggests that sometimes, management believes that the current share price is undervalued. Of course, the buyback improves reported earnings per share and flatters financial statements, but these measures are sometimes used as a yardstick to determine top executives’ pay or bonuses. Many receive a large element of their compensation in the form of stock options, and a buyback can offset the dilution of existing share values and any potential reduction in earnings per share that might otherwise come from their options. Therefore, buybacks could be considered a ploy to boost reported earnings per share or share price levels.

It should be remembered that although the buyback may increase earnings per share, it does not increase the fundamental value of the company. Even more worrying, sometimes, companies engage in buybacks funded by increased borrowing. One of the reasons given for taking on the increased debt to fund such a buyback is that it is more efficient, because the interest on the debt is tax-deductible, unlike with dividends. However, clearly, this will reduce the financial resilience of the company when the debt must be repaid or the gearing level rises, leaving less money available to fill a pension deficit.

A company’s financial difficulty results from lack of cash, not lack of profits, and for a company which sponsors a defined benefit pension scheme with a deficit, the buyback would allow shareholders to enjoy rewards at the expense of pensioners. Ultimately, if the cash has gone into buying shares, it is no longer available to fill the deficit. The buyback itself cannot be argued to generate future growth, because a company’s investing its cash in the business would be a reason to suggest that it will be better off as a result of that decision. However, where spare cash is simply given to shareholders to boost share prices and potentially boost management remuneration, this requires some oversight by the regulator.

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However, for all the reasons that I have given, the face of this Bill is certainly not the way to try to do that. I hope your Lordships will recognise that the measures elsewhere in this Bill, taken together, are a far better way to tackle the problem of employers who do not direct an appropriate proportion of available resources to managing the pension scheme deficit. With that plea, and in the light of all that I have explained, I urge the noble Lord to withdraw his amendment.

[Lord Vaux of Harrowden [V]]

My Lords, I thank all those who have taken part in this short debate. While I do not entirely agree with the Minister on everything he said, I do agree that a strong recovery plan is the most critical element of making sure that deficits are dealt with. I part company with him on the idea that taking excessive dividends out does not impact on the ability of companies to strengthen the deficit repair plans. However, I thank him for the confirmation that he has given, which I asked for in my earlier speech. On that basis, I am content to beg leave to withdraw Amendment 50 and not to move Amendment 51.

Amendment 50 withdrawn.

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[Baroness Bowles of Berkhamsted [V]]

My Lords, I shall speak briefly to each amendment in this group. The noble Baroness, Lady Altmann, has a series of amendments on data accuracy—there was also one in the first group—which I have signed. It is important to have accuracy, especially when there are matters of significant value and security. Ensuring that records are accurate and are kept up to date should be in-built from the start of operations, and as the dashboard is starting out there is no reason not to take that precaution.

I have expended time and energy tracing and correcting inaccurate records on pensions and with banks. Key causes of corruption and inaccuracy have been that information was not transferred accurately, or sometimes was not entered accurately in the first place but particularly when legacy systems did not join up with a new system. It is immensely important that pensions information is not lost or inaccurate, as that can also open the door to potential scams or other sales pressures built around tracking pensions or correcting pension data.

With regard to the pensions dashboard, I agree with what has already been laid out by the noble Baroness, Lady Drake, so I will not repeat it. Transactions are the dangerous point. They are certainly not where the focus should be as dashboards are set up and their operations tested, but it is going to be very tempting for commercial dashboards. Commercial companies may find a way to get around that, but this information would give the FCA as the regulator a direct guide to what is to be expected so that it could take action against any circumvention of the intentions of the amendment. I therefore support all the amendments in this group.

[Lord Vaux of Harrowden [V]]

My Lords, I support all three amendments. The grouping is slightly odd, mixing the question of transactions with that of data accuracy; there is a relationship but it is only tangential. The noble Baronesses, Lady Drake, Lady Altmann and Lady Bowles, have already explained the reasoning for the amendments so I shall try to be brief.

Amendment 52 would prevent a dashboard service from engaging in financial transactions. The matter has been well explained by the noble Baroness, Lady Drake, so I will just say that the risks around pension-related transactions happening without proper advice are very well known. Dashboards are being created primarily for the purpose of allowing people to obtain better information about their situation. That information will be helpful when deciding whether to carry out some transactions but it does not in any way negate the need for proper advice, so allowing dashboards to become transaction platforms would make ensuring that proper advice had been taken much more difficult. At least until they have been fully established and the implications well understood, it really must make sense to prohibit dashboards from becoming transactional platforms.

The other two amendments along with Amendment 13, which was discussed in the first group, are about establishing appropriate processes to ensure the accuracy of the data on the dashboard. It almost goes without saying that a dashboard containing inaccurate information may actually be more damaging than no dashboard at all; I apologise for the echo of something else there. These dashboards are intended to help people and their advisers to make decisions about their future pensions. Inaccurate data will lead to wrong decisions being made. It is therefore critical that data must be fully and regularly checked and audited, so I urge the Minister to accept these amendments.

[Baroness Neville-Rolfe [V]]

My Lords, as noble Lords know, I am as concerned as anyone with consumer protection. I therefore welcome the amendment which we have agreed to during the passage of the Bill to ensure that the Money and Pensions Service provides a public-owned dashboard. That was a great step forward, and we will come on to that on the next amendment.

However, I fear that this amendment could stop commercial experimentation, which is desirable if properly regulated. As I understand it, any organisation providing a pension dashboard must achieve authorisation from the FCA. Innovation is important and can help consumers and pensioners. If the amendment were passed, it could have a chilling effect and prevent innovation until another Bill had cleared Parliament—not, I suspect, a welcome prospect for HMG after the extent of the amendments made to this Bill.

I have a question for the Minister. I am a little concerned about compliance with GDPR, which obviously is important in securing equivalence in the EU context, where portability is a key requirement. I wonder if the amendment could run us into any trouble on that aspect of regulation.

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[Baroness Altmann [V]]

My Lords, I want to speak briefly in support of Amendment 63. I have also added my name to Amendment 65. As the noble Baroness, Lady Drake, has just outlined, consumer protection has to be paramount. There has to be significant concern that, once a dashboard is up and running, we will need to learn lessons before further activity takes place. If we have a public service dashboard for a minimum of a year, we will have chances to learn lessons that otherwise might not be learned—particularly in light of such issues as data concerns, types of protected benefits and requirements for MaPS guidance. I am most grateful to the Minister for accepting the concept of requiring MaPS advice or guidance before any transfers. This is an important issue. I therefore hope that the Government will recognise the necessity of ensuring that private dashboards do not start before the public dashboard has been tried, tested and reported upon in Parliament.

The principle of Amendment 68, tabled by my noble friend Lord Young, is right. I would just advise caution on the issue of data accuracy and the lack of data standards, and the fact that it may simply not be possible for a dashboard and the data to be ready in the timescale he is suggesting, but the thrust of it and having an end date is absolutely the right way forward.

[Lord Vaux of Harrowden [V]]

My Lords, I have added my name to Amendment 63 in the name of the noble Baroness, Lady Sherlock. This amendment is very simple. It seeks to ensure a period of a year from the establishment of the publicly operated dashboard before competing commercial dashboards are allowed to operate. This may seem a small point, but it is quite important. Dashboards are a new concept and will include large amounts of sensitive and complex data from many sources. We do not yet know how they will used, whether the current design concepts are suitable in practice and whether changes will need to be made to ensure that they operate well and safely. Therefore, it must make sense for the system to be tried out in one place, with proper controls, and reviewed and reported upon, before we open it up to the commercial world. This period of a year will allow us to see how a dashboard is used and whether any unforeseen problems and consequences arise.

I am grateful to the ABI for its commentary on the amendments to this Bill, but I am afraid that I disagree with it on this matter. The ABI is right that making dashboards as accessible as possible is desirable, but that must be done in a way that ensures that unforeseen consequences are avoided. As I mentioned in an earlier debate today, a bad dashboard is worse than no dashboard. A year’s grace period to ensure that what the noble Lord, Lord Young, called the plumbing is working well, and to make any tweaks, seems a common-sense safeguard.

[Lord Sharkey [V]]

My Lords, I have put my name to Amendment 63 because it is vital to allow the MaPS dashboard the best possible chance of reaching a wide public and establishing MaPS as a trusted and independent operator. This amendment would provide the MaPS dashboard with a head start of about 12 months. Without that, I doubt that MaPS would be able to do any of those things very successfully. I doubt that it could establish a wide customer base. If it is competing from the start with rival commercial organisations and their dashboards, those rival dashboards, whose eventual presence I would welcome, would be provided by organisations that have more resources than MaPS does, more consumer-facing expertise and more experience and skill in communications with consumers. Many would also have a very large existing consumer contact base, firmly established brands and loyalty, whereas MaPS would find it very hard to establish itself as a distinct, recognised and trusted independent operator in the clamour of a vigorous competitive marketplace. You need market share, visibility and actual customer experience to do that. That is probably impossible for MaPS in a very busy, very fragmented and possibly very confusing marketplace.

To make the MaPS dashboard work, we need lots of people to know about it and lots of people to use it. If we are to generate trust, we must provide high levels of consumer satisfaction and embed the notion and value of independence in the MaPS brand. The only way to do this is to allow MaPS a head start, to properly fund its launch and its communication campaigns, and to give it time to use what it learns in its first year. That would enable it to offer a very high level of service by the time that the huge marketing expertise of its well-funded and contact-rich competitors arrives on the scene. That is why I support Amendment 63.

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[Baroness Drake [V]]

My Lords, I speak in support of Amendment 71. Given the hour, the noble Baroness, Lady Bowles of Berkhamsted, with her usual skill, has captured the issues clearly and succinctly. It is clear that there is genuine concern among those running DB schemes which are materially open to new members with strong employers, such as the sections of the Railways Pension Scheme and the Universities Superannuation Scheme. They fear that they will be forced to de-risk unnecessarily, with all the implications that that carries and all the potential detriment for both employers and employees in the scheme.

The amendment seeks to address two issues: first, that it should not be government policy to require trustees of pension schemes materially open to new entrants with strong employer covenants to adopt a strategy that will result in them de-risking their investments unnecessarily and prematurely, for all the reasons that other noble Lords have clearly articulated; and, secondly, that the Secretary of State, in exercising powers under Schedule 10 to make provisions through regulation on the funding of defined benefit schemes, should make provisions that are consistent with the policy in the White Paper statement that running on with employer support could be an acceptable long-term strategy for a materially open scheme. The amendment is consistent with any reading of the government policy in the White Paper, but it seeks to ensure that it happens.

[Lord Vaux of Harrowden [V]]

My Lords, I had intended to add my name to this amendment, and I apologise that I failed to do so. The noble Baroness, Lady Bowles, has raised an extremely important issue in the amendment and has eloquently set out the reasons.

We are often guilty of looking at defined benefit schemes as a concept that is on the way out—that we are only really talking about the run-out of closed schemes —but that ignores the fact that many DB schemes remain active and open to new joiners. I am very grateful to the Railways Pension Scheme for explaining the potential implications for such schemes of the regulator’s consultation on the defined benefit funding code of practice.

For schemes that are mature or closed and in the run-down phase, it makes complete sense to minimise the risk of the investment strategy so that there is a high degree of certainty that the fund will be able to meet its obligations. The flipside of that, of course, is that a low-risk investment strategy means a low return. That is fine for mature schemes, but schemes that are not mature and still live would suffer from being restricted to a low-risk, low-return investment strategy. As the noble Baroness, Lady Bowles, said, the largest part of benefits paid from a fund typically come from the investment returns earned over its life. If forced to take such a low-risk, low-return approach in order to meet a certain level of benefit, they would have to massively increase contributions from either the employer or the employee or a combination of both. Indeed, I confess that I had not understood that there are DB schemes that specifically share such risk between employers and employees.

A higher-risk investment strategy with the ability to earn better returns is entirely appropriate for schemes that are not mature. I think that it was the noble Lord, Lord McKenzie of Luton, who, in Committee, raised a concern about hastening the demise of defined benefit schemes. If the regulator, in taking an overly risk-averse approach, insists on too low a risk and a low-return approach for open or immature schemes, they will inevitably become less attractive to employers and possibly to employees. All we will achieve is the hastening of the end of defined benefit schemes, which are the gold standard for pension saving, especially for those on lower earnings.

The amendment is therefore critical to ensure that the regulator takes into account the state of maturity of a fund when looking at scheme funding and to ensure that trustees have sufficient discretion to be able to act in the best interests of their beneficiaries.

[Lord Berkeley (Lab) [V]]

My Lords, I too congratulate the noble Baroness, Lady Bowles, on bringing forward this amendment. It is vitally important that the many contributors to these open schemes have comfort that these schemes will continue and will provide them with a reasonable level of benefit when they retire. I am grateful to the Railways Pension Scheme for a very useful briefing, which other noble Lords have seen. I myself am not a member of that pension scheme, but I have a large number of friends who are among its 350,000 members. I think it is relevant that 100,000 of them are still active, and that number will probably continue. That will happen, as the noble Baroness said, in the schemes for local authorities, nuclear decommissioning and many other sectors.

The real point is that many of the people contributing to these funds are comparatively low paid. Perhaps the Minister when she comes to respond can explain why the Government think it is a good idea to allow the schemes to require a greater contribution from the members and from the employers for no particular benefit. It seems absolutely clear that open and closed schemes must be treated separately. In ending, I ask the Minister to explain to me and other noble Lords why Ministers are not going along with this amendment. It seems so simple and well thought through, and I will certainly support it if the noble Baroness decides to divide the House.