Pension Schemes Bill [HL]

Lord Young of Cookham Excerpts

Committee: 1st sitting (Hansard): House of Lords
Monday 21st November 2016 Lords Chamber

[Lord Flight]

My Lords, I support Amendment 8. It is disappointing that reference to the master trust assurance framework was not already in the Bill, particularly given that the accreditation procedure confirms the rigour in the administrative procedures within the master trust. It is right that that should be added.

My Amendment 9 is a probing amendment to ask whether a continuity strategy not be the ongoing responsibility of the trustees rather than something which the regulator determines.

[Lord Young of Cookham (Con)]

My Lords, this group of amendments relates to the nature of the authorisation regime, the requirement to meet the criteria, the information provided in the application and the regulation-making powers to vary the scope of the regime in respect of specified characteristics.

Amendment 7, tabled by the noble Lord, Lord McKenzie, and the noble Baroness, Lady Drake, would modify the central tenet of the authorisation regime: the prohibition on a person operating a master trust scheme unless the scheme is authorised. It would amend Clause 3(1) so that it read:

“A person may not operate a Master Trust scheme unless the scheme is authorised under all of the provisions of Part 1”.

The prohibition on operating a master trust scheme has been drafted so that a person may not operate a master trust unless it is authorised and that, to become authorised, the master trust must satisfy the Pensions Regulator that it meets the authorisation criteria. As is set out in the Bill, these are that the persons involved are fit and proper, that the scheme is financially sustainable, that the scheme funder meets certain requirements, that the scheme has sufficient systems and processes to run the scheme and that the scheme has an adequate continuity strategy.

All the criteria must be met in order for the master trust to be authorised. They must continue to be met on an ongoing basis, with the Pensions Regulator having the power to withdraw authorisation if it ceases to be satisfied that all the criteria are met. It is these criteria that are relevant for determining whether a master trust should be authorised. For that reason, I am happy to be able to reassure the noble Lord that all the authorisation criteria must be met for the scheme to be authorised and for the master trust to be allowed to operate. I hope that he will agree that the amendment is not necessary.

[Lord McKenzie of Luton]

I would be delighted to agree that the amendment was unnecessary, but Clause 39 is about the Secretary of State making regulations,

“applying some or all of the provisions of this Part”,

and in particular,

“disapplying some or all of those provisions to Master Trust schemes that have the characteristics set out in the regulations”.

This is the point that we are getting at: if you are in, you should be in in respect of all the provisions. What alternative situations are envisaged in which just some of them might apply?

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[Lord Young of Cookham]

I will come to Clause 39 in just a moment but my understanding is that at this stage all the criteria must be met. Clause 5(5), for example, says:

“If the Pensions Regulator is not satisfied that the Master Trust scheme meets the authorisation criteria, it must … refuse to grant the authorisation”.

That implies that it must tick all the boxes. I will come to the point that the noble Lord just raised about whether Clause 39 trumps some of the requirements in Clause 5.

In the hope that some in-flight refuelling might arrive on Clause 39 in the meantime, let us turn to Amendment 8. Tabled by the noble Lord, Lord McKenzie, and the noble Baroness, Lady Drake, it would add to the information that the trustees of a master trust scheme seeking authorisation must submit as part of their application. Specifically, it would require that the scheme must submit policies that relate to the systems and processes authorisation requirement of the Bill, and it would require that the scheme submits some form of statement setting out the extent to which it is prepared to adopt the standards set out in the master trust assurance framework.

The first part of the amendment points to the regulations made under Clause 11, which are quite extensive. That clause deals with the requirement for a master trust to have adequate systems and processes. The Bill provides that these regulations may cover certain areas, such as processes for risk management and resource planning, which the Pensions Regulator must take into account in deciding whether the requirement is met. However, the Bill contains no provision for schemes to have policies in relation to the systems and processes requirement. It requires only that the scheme meets those requirements to become authorised. Requiring master trusts to include this information as part of an application creates a new requirement for those running schemes, who will have to develop these policies, but would not of itself ensure that the systems and processes are suitably robust. It is not clear how placing that additional requirement on the industry would increase protection for the members of master trust schemes.

Of course, it is important that the regulator has enough information to be able to assess whether schemes meet the criteria and it is in the interests of any applicant to provide such information to ensure that the regulator can be satisfied that the criteria are met and the application granted. Certain key documents are required under Clause 4, which also contains a regulation-making power to allow the Secretary of State to set out further information to be included in an application. We wish to consult on this matter before deciding what this information should be, and in that context can take on board the point made by the noble Lord, Lord McKenzie. We would also wish to retain appropriate flexibility to update the requirements at a future point to reflect experience of operating the new regime or changes in market practices.

The second piece of information that this amendment would require is a statement setting out the extent to which the scheme is prepared to adopt the standards set out in the master trust assurance framework. This would not be appropriate given the stringent new requirements the Bill introduces for master trust schemes, which go beyond those required to achieve accreditation under the framework. The master trust assurance framework provides a valuable set of principles and standards for good governance but it is and was always designed to be voluntary. I agree with what the noble Lord just said—we should encourage people to sign up.

In addition, as the amendment itself notes, the ownership of this framework rests with the Pensions Regulator and the Institute of Chartered Accountants in England and Wales. It will be for them to determine the future of the framework in the light of the new legislative requirements. It would not be appropriate for the Government to point towards this framework in primary legislation when we do not know what direction it will take or what its future will be. I hope that provides clarity about the relationship between the master trust assurance framework and the authorisation regime, and I trust it explains why the Government do not consider this amendment appropriate.

Amendment 9 is a probing amendment from my noble friend Lord Flight, which would remove the requirement for a master trust scheme to submit a continuity strategy to the Pensions Regulator as part of an application for authorisation. The master trust authorisation regime put forward in the Bill has been designed to protect the interests of scheme members by addressing the specific risks that arise in master trust schemes. The key to the regime is that master trust schemes will not be able to operate unless they have obtained authorisation to do so from the regulator. To do this, the trustees must satisfy the regulator that the scheme meets the authorisation criteria. One of those criteria is that the scheme must have an adequate continuity strategy.

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[Baroness Drake]

I listened carefully to what the Minister said. Clause 39(1) has two parts, (a) and (b). Paragraph (a) would apply some of the modified applications in respect of schemes that are currently not master trusts, while paragraph (b) would disapply some of the provisions in respect of schemes that are already recognised as master trusts. There is no question of their identity under Clause 39(1)(b): they are master trusts. The Minister said that the Government’s policy was that they would not modify any application on the authorisation criteria for master trusts, or that they would modify those criteria for existing master trusts only if there was an alternative regulation in place somewhere else. Are we therefore talking about a substitution, so that the authorisation criteria for master trusts would be modified only if there was a pre-existing regulation or piece of legislation that met the part that it needed to play? Is that what I understood him to have said?

[Lord Young of Cookham]

The noble Baroness has accurately summarised what I said. We would use this clause to disapply only if we did not think that it was proportionate to apply the regime due to other existing protections in place.

[Lord Kirkwood of Kirkhope]

My Lords, perhaps I may make two quick points in response to the Minister’s explanation on these amendments, which was on the whole very helpful. The first is a wide point in support of the plea of the noble Lord, Lord Flight, that trustees need to be left with some discretion. I understand the responsibilities of trustees in a defined benefit context and I cannot believe that they are that different in a DC context. There is a body of trust law which they can found on; they have duties and responsibilities flowing from that. I think that a scheme’s continuity strategy would be an integral part of what trustees would want to do anyway. They would be derelict in their duty if they were not doing that, so the point made by the noble Lord, Lord Flight, is important. Other amendments which we shall come to later in Committee seem to take trustees for granted and use primary legislation to require them to do things that would interfere with their proper trustee duties. I would like the Minister to reflect on that.

My other point is that although I agree with the case of the noble Lord, Lord McKenzie, on Amendment 8 in preparing to adopt a master trust assurance framework— I do not make this as a cheap point just because I am Scottish—the Pensions Regulator and the Institute of Chartered Accountants in England and Wales may give the best advice in town but there is another part of the United Kingdom with a trust law which is, in some respects, slightly different from that of England and Wales. The Minister is on pretty firm ground in saying that putting this into legislation might startle the horses north of the border. We need to remember that trust law differs in some respects on each side of the border. However, the point made by the noble Lord, Lord McKenzie, was in principle the right approach. I support what he was trying to do but the Minister was also right to say that Amendment 8, as drafted, would not be acceptable—certainly not to me, if nobody else.

[Lord Young of Cookham]

If I may respond briefly to the first point made by the noble Lord, Lord Kirkwood, we are rolling out auto-enrolment, where employers have to enrol employees into a policy. Very substantial sums of money are in the process of being invested and it is crucial that there should be public confidence in the regime. I accept entirely what he said about the responsibility of trustees but we want to go beyond that and have a statutory framework in which people can have confidence that their master trust, which is getting their money and the employer’s money, is robust, has been approved and ticks all the boxes that we have outlined in earlier clauses. This is not to take away from the responsibilities of trustees but to give an added bonus of public endorsement and confidence in an area of public policy.

[Lord McKenzie of Luton]

I thank the Minister for his detailed reply to the amendments. In relation to the amendment tabled by the noble Lord, Lord Flight, we, too, would not be able to support it. The continuity strategy is very important. It sets out how members’ interests are to be protected if a triggering event occurs. Crucially, it sets out levels of administration charges which apply, and it must be approved by each of the scheme funders. It is a fundamental part. As for ignoring the trustees, the trustees themselves have to start the process to apply for authority, so they are covered in that respect.

I note what the Minister and the noble Lord, Lord Kirkwood, said about the institute’s framework. I am not sure I need to declare an interest as a retired member of the institute. It is a long time since I did any meaningful work in that regard.

My noble friend Lady Drake properly probed the Minister’s response to misapplying parts of these provisions. I think we want to go away and think long and hard about getting some more information on that. Basically, the Minister is saying that they would not apply this unless they were certain there was a satisfactory alternative in place. That is fine as a matter of principle but we would like to understand a bit better what likely alternative arrangements would be in place for the sorts of disapplications we would seek to engender by this. I beg leave to withdraw the amendment.

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[Lord Young of Cookham]

I am very grateful to all noble Lords who have taken part in this debate, and I agree with nearly everything that the noble Lords, Lord Monks, Lord McKenzie and Lord Stoneham, and my noble friends have said. We should encourage people to take an interest in their pension pot. Having auto-enrolled them, we should enfranchise them by giving them regular information. I agree with those who suggested that the pressure should come not just from the top down but from the bottom up. These amendments, in their various ways, all address the issue of how trusts should communicate and engage with their members. Then there is an amendment on the procedure for the regulation-making power about the time within which the implementation strategy must be made available.

As I said at Second Reading, I support the principle of member engagement and communication. Master trusts are no exception to any other pension scheme in seeking to keep their beneficiaries in the loop. Having said that, I may have one or two issues with some of the amendments. First, however, I shall deal with the three amendments relating to general communications. The first two relate to proposed member communication and member engagement strategies, and the third would make provision requiring the trustees of an authorised master trust scheme to hold an annual member meeting. I will then pick up on the important matters raised in the last four amendments in this group relating to communications during the triggering event period. Perhaps I may write my noble friend Lady Altmann about the position of those on just £11,000, who may be disadvantaged by the current regime.

Amendment 10 would add to the information that the trustees of a master trust scheme seeking authorisation must submit as part of their application for authorisation. Specifically, it would require the scheme to submit a member engagement strategy. As I said a moment ago, I have a lot of sympathy with the rationale behind this amendment. It is important for schemes to operate in a transparent manner, and for members to be kept informed on key matters, such as the charges that apply to them and the amount of money they have accrued in the scheme, which, as the noble Lord, Lord Monks, said, is their pot.

Indeed, the position of this and previous Governments on this matter is reflected in the various comprehensive statutory requirements that already apply to all schemes, including master trust schemes. These requirements set out the minimum standards for communicating with their members. The Pensions Regulator also publishes guidance for trustees which sets out the further standards it expects quality schemes to meet in relation to communications.

Some of the key requirements include the following. Trustees must provide members with basic information about the pension scheme within two months of their joining. There are also requirements to provide members with updates where this information changes. Trustees must provide most members with a statutory money purchase illustration, which illustrates a member-specific projected pension, and an annual benefit statement that provides details of contributions credited, before deductions, to the member in the preceding scheme year. That information must be provided within 12 months of the end of each scheme year.

Trustees must provide other information on request, including: the trustees’ annual report, including the scheme’s investment report, audited accounts and the auditor’s statement; scheme rules or other documents constituting the scheme, including names and addresses of participating employers; a statement of investment principles; and finally, ad hoc benefit statements and transfer values—obviously key pieces of information.

Those are just the statutory measures. The Pensions Regulator publishes detailed guidance for trustees about the standards it expects quality schemes to meet to ensure they communicate effectively and transparently with their members. Details of that can be found on its website.

The Bill does not seek to stipulate how the trustees of a master trust should run an excellent scheme, or to replicate other general requirements that apply to schemes more broadly. It seeks to address the key risks that arise in relation to master trust schemes to ensure that the interests of scheme members are protected. The Government’s view is that, provided that the communication requirements which already apply to all schemes are met, the trustees of an authorised scheme should have the ability to exercise their discretion in considering the most effective forms of member engagement without being unduly constrained by an additional prescriptive statutory requirement. In this debate we have heard many examples of good practice in that area. It is also worth noting that the amendment does not define the term “member engagement strategy” so, as tabled, it is not entirely clear what this would constitute. I hope that explains that, while I agree with the principles behind the amendment, I am not of the view that it should form part of the Bill.

I shall now touch briefly on Amendment 25, as tabled by the noble Lords, Lord McKenzie and Lord Monks, and the noble Baroness, Lady Drake. This amendment is very similar to the one that I have just touched on, although the precise wording is:

“The scheme must set out a communication strategy to define how it will communicate with members”,

and the amendment is inserted into a different clause. The effect of the amendment would be very similar, in that the content of such a strategy would become a matter the regulator must consider when determining whether it is satisfied that the scheme meets the authorisation criteria relating to the adequacy of systems and processes. As with the amendment we have just discussed, the effect would be that the trustees of a scheme must prepare such a strategy, although again its proposed content is not entirely clear. For this reason, the points that I would raise regarding this amendment would mirror the points I set out a moment ago, which I shall not repeat. I hope that argument might be accepted.

Amendment 31 would require the trustees of an authorised master trust scheme to hold an annual meeting which would be open to all members of the scheme and made accessible online. While I have set out my views on the more general matter of member communications, there are specific implications raised by this amendment which need further consideration. It is not clear that requiring trustees to hold an annual member meeting is necessary, nor that such a measure would significantly improve communications between the scheme and its members. Some master trust schemes have hundreds of thousands of members—indeed, I think we heard a higher figure from the noble Lord, Lord Monks. It is not clear that there is demand among this membership for such a meeting, nor is it clear what the financial and administrative implications of hosting such a meeting would be for master trust schemes.

According to the amendment, the meeting would need to be capable of hosting every scheme member. While a great many would in theory be able to connect to the meeting online, it seems likely that, in a scheme with hundreds of thousands of members, a significant number might need or want to attend in person. The cost of hosting a meeting capable of accommodating that number of attendees, in person and online, has not been set out, but it could be significant and might not be in the best interests of scheme members, especially if, in the event, demand turned out to be low. That is not to say that schemes should not hold such a meeting but, as I have said, the Government’s view is that, provided that the communication requirements which already apply to all schemes are met, the trustees of an authorised scheme should have the ability to exercise their discretion in considering the most effective forms of member engagement without being unduly constrained by additional prescriptive statutory requirements.

I turn to the amendments related to the triggering events—and here the balance is crucial. My noble friend Lord Flight touched on that issue in his intervention. Amendment 36 requires the trustees of master trust to notify members when it has a triggering event. Amendment 41 requires the trustees to notify the employers and members in the master trust that the Pensions Regulator is satisfied that the triggering event has been resolved. Amendment 43 requires the implementation strategy to be made available to members, in addition to employers.

The principles that we have applied to the policy and the Bill measures about communicating with members during a triggering event period are to consider, first, the current level of member engagement and understanding; secondly, the potential effect of the provision of certain types of information, which, again, my noble friend touched on; and thirdly, the level of protection afforded to provide demand-side pressure, in the absence of the provision of information or assumed member engagement. It is the consideration of these principles that leaves me with some doubt that the amendments as proposed are appropriate.

Amendment 36, tabled by the noble Lord, Lord McKenzie, and the noble Baroness, Lady Drake, would require the trustees of a master trust that had had a triggering event to notify the members of that scheme that this event had occurred, and other such matters as will be set out in regulations under this clause. Triggering events are events that pose a risk to the scheme and could lead to it failing. These events could put members’ pension pots in the scheme at risk. The scheme’s trustees must notify the participating employers that the event has occurred, and such other information as will be set out in regulations.

A master trust that has had a triggering event poses an increased risk to the members’ savings in the scheme. That is why additional measures and protections are required at this point—this is, indeed, what the Bill does. These aim either to resolve the issue the scheme has had and, with the regulator’s approval, enable it to continue, or, where this is not appropriate and the scheme is going to wind up, make sure that the members are transferred out. Following a triggering event, additional measures are in place to protect members’ pension pots and enable the Pensions Regulator to have more involvement with these schemes. The regulator will have additional oversight over schemes that have experienced a triggering event and extra controls that it can use. For instance, where the regulator was very concerned about a master trust, these controls include the regulator being able to direct the scheme not to take on any new members. This might be where the regulator considered that there was an immediate risk to the interests of the members of the scheme and that it was necessary to protect the interests of the generality of the members. This is covered by Clause 31.

This amendment would require the trustees to notify the members of the same information that they notify employers of. We specifically did not require schemes to notify members at this stage—again, for the reason that my noble friend gave—as we did not want to worry members unnecessarily and at a point when definitive information about the next steps may not yet be available. This is because informing members could risk them opting out of the scheme and stopping to save in a pension. We have instead provided additional protections during this period. Many members will have joined because they were automatically enrolled into the scheme by their employer. It will not have been an active decision on their part. Also, many members in this situation tend not to actively engage with the scheme of which they are a member. We would hope that, in many cases, the triggering event the scheme has experienced will be resolved and the scheme will simply continue, so in that case the members should not see any disruption to their pension saving, and we would not want them to be unduly alarmed or confused.

If members thought that their scheme was going to collapse and could not be given information about the next steps to maintain and protect their pension savings, they might opt out of saving in their current scheme, as I just said, and even lose confidence in pensions and not continue to save in any pension at all. Where the scheme is going to have to wind up, members would be informed ahead of this in accordance with requirements under Clause 24 and the regulations made under it. If the scheme is going to pursue continuity option 1, members will be informed of the situation well ahead of anything directly impacting them and given information about options.

The aim behind the clauses in this section of the Bill is that, where a master trust experiences a triggering event, members of the scheme continue to save in a pension. To this end, we do not think that members should be informed at the stage set out in the amendment because of the adverse implications it could have and the absence of any practical advantage to the members that would flow from them being informed at such an early stage. However, we recognise how important it is that members are informed well ahead of something happening that directly impacts on them and may disrupt their pension saving, and I think the Bill gets the right balance.

Amendment 41 seeks to make the trustees notify the employers and members in the master trust that the Pensions Regulator is satisfied that the triggering event has been resolved. This situation is where a master trust has experienced a triggering event but has resolved it, and the regulator is so satisfied. The aim behind Clause 25 is that, where trustees try to resolve the triggering event, they have the opportunity to do so, so the scheme can continue and members continue to save with as little disruption as possible. Amendment 41 seeks to make the trustees notify the employers and members in the master trust that the Pensions Regulator is satisfied that the triggering event has been resolved, where the regulator has notified the trustees to this effect. The Bill already provides employers with sufficient sight of this under Clause 22. Once the implementation strategy is approved, the trustees have to pursue the continuity option identified in the strategy and take the necessary steps. If something dramatic happened that caused the choice of continuity option to be changed or if the implementation strategy was required to be altered for some other reason, the trustees would have to seek the regulator’s approval. In principle, we agree with the objective of this amendment. However, we consider that we achieve the same outcome as intended but through a different route.

I am conscious that this group of amendments is taking a long time.