Pension Schemes Bill [HL]

Lord Young of Cookham Excerpts

Report stage (Hansard - continued): House of Lords
Monday 19th December 2016 Lords Chamber

[Lord Flight (Con)]

My Lords, Amendments 11 and 12 in my name seek broadly the same objective as that of the noble Lord, Lord McKenzie, and would enable a funder to do other things but subject to the regulator having to approve them. The fundamental issue here for the insurance industry is that the funder being a separate entity does not really work. The Bill will introduce additional cost for master trusts offered by insurers, potentially to the detriment of existing scheme members, as these schemes already operate under stringent FCA and PRA regulation.

As noble Lords will know, a number of insurers offer master trusts to members in addition to group personal pensions and alongside other business lines. Insurers currently manage risks across a number of product lines and they all operate under stringent FCA and PRA regulation. It seems to me that members of master trust schemes used for automatic enrolment should meet high solvency and reporting standards but that the Bill should not introduce additional requirements on master trusts offered by insurers where suitable protections are already in place.

The key concern is the definition of a scheme funder as set out in Clause 10, which specifies that it,

“must be constituted as a separate legal entity”,

and must not carry on any other activities. The Government have stated that the purpose of this clause is to better enable the Pensions Regulator to assess the financial sustainability of the scheme by increasing transparency of the assets, liabilities, costs and income of the master trust. I do not really see that Clause 10, by itself, meets the policy intent of providing the transparency to assess the financial sustainability of a master trust, since as a “separate legal entity” it can still transfer risk to other entities.

A key benefit of a master trust being part of a wider and well-capitalised legal entity is that the scheme can, if necessary, draw upon this capital. Members of master trust schemes offered by insurers currently benefit from this additional security. Many of the ABI’s members view this as a key selling point to employers who have chosen their master trust schemes. It is fortunate that the Bill will be moving on to the other place because I would ask the Government to continue negotiations with the insurance industry on this point, either with a view to satisfying it that the Government are right or to accepting its views. It is not entirely satisfactory if the key provider industry is not comfortable with this issue. This does not go into territory which I would personally want to put to a vote, but it needs further discussion with the industry.

[Lord Young of Cookham (Con)]

My Lords, I am grateful to the noble Lord, Lord McKenzie, and to my noble friend Lord Flight for tabling amendments which are, in their objectives, all broadly supportive of the Government’s position: that there should be transparency about a master trust’s financial position, including the financial arrangements between it and the scheme funders and the strength of those funders, in order to support the Pensions Regulator’s financial supervision.

Amendments 9, 10 and 11 would all have a similar effect: to remove the requirement that the scheme funder,

“be constituted as a separate legal entity”,

that does not carry out any activities other than master trusts. Although they are well-intentioned, these amendments raise problems of their own. Amendments 9 and 10 would have the opposite effect to transparency, because scheme funders would be unclear as to whether the manner in which they carry out their activities and are constituted is sufficiently transparent to the regulator for the purpose of its financial supervision. This is partly because the arrangements between scheme funders and master trusts will vary enormously across schemes. Amendments 9 and 10 would, by removing much of the substance of the scheme funder requirement in Clause 10, make it more difficult for the regulator to assess compliance and make its financial supervision of the scheme more challenging.

Following the exchange in Committee, we have explored this issue further, but the Government and, more importantly, the Pensions Regulator believe that ensuring transparency about the status of the financial arrangements between the master trust funder and the master trust is essential to this new regime and to the regulator’s assessment of the financial sustainability of the scheme. The requirement to be a separate legal entity achieves this objective. I do not pretend that this is not without cost to some insurance companies—a point that was raised earlier—but the alternative provided by this amendment is not equipping the regulator to make a key decision that could impact on the security of thousands of scheme members.

Amendment 12 may be technically flawed because Clause 8 relates to the financial sustainability of the scheme, not of the scheme funder. It is worth noting that the regulator can assess the financial strength of the scheme funder through its accounts, required under Clause 14, in any event. The Government believe that the most clear and straightforward way to achieve the desired level of financial transparency is through the requirement in Clause 10 for the scheme funder to be set up as a separate legal entity whose only activities relate to the master trust. This will also protect the interests of master trust scheme members. However, this does not prevent scheme funders, such as insurance companies, operating other lines of business through another vehicle.

I was asked whether a scheme funder can support more than one master trust. A scheme funder can support more than one master trust by setting up separate legal entities for each scheme. On the question of whether there is anything in the Bill to inhibit the flow of dividends from the scheme funder outwards, the Bill does not impose any direct restrictions on the flow of dividends from or to a scheme funder, so long as the scheme is financially sustainable. The noble Lord also asked whether the provision of a guarantee by a scheme funder is an activity which the clause prohibits. A scheme funder can provide a guarantee in respect of the master trust to which it is the scheme funder.

It may be that the amendments are intended to address certain underlying concerns: first, about the cost of corporate restructuring to meet the requirement to be a separate legal entity; and secondly, about double regulation, an issue that was raised in Committee. The practical and legal requirements for setting up a business entity should not of themselves be burdensome. It is quick and easy to incorporate a company in the UK, and the Government make a company’s ongoing filing requirements as simple as possible to comply with. However, we recognise that, to meet this requirement, some companies offering master trusts among other lines of business would have to undergo corporate restructuring. To address this, we are working with key stakeholders to develop a proportionate approach to regulation that minimises the burden on business without undermining the Pensions Regulator’s ability financially to supervise schemes through transparent financial structures and reporting.

Noble Lords may recall from earlier debates that the financial sustainability requirements that master trusts have to meet in order to operate have been developed to address the specific risks faced by the members of master trusts. However, if we identify an overlap between our requirements and those of other regulatory regimes, the Secretary of State has a regulation-making power in Clause 8 that can require the regulator to take those regulatory requirements into account when assessing whether a scheme is financially sustainable. We believe that power to be sufficiently flexible to prescribe, for instance, that if the scheme funder has an enforceable guarantee from a financially sound parent company, such as one that meets the PRA’s capital requirements, the regulator must take that into account when assessing whether the scheme has sufficient resources to meet the specified costs. Let me re-emphasise our commitment to proportionate regulation, striking an appropriate balance between member protection and minimising the burdens on business. We are working with key stakeholders to ensure that we understand their concerns.

Noble Lords also expressed related concerns about how the requirement for a separate scheme funder in Clause 10 applies to master trust schemes that offer both money purchase and non-money purchase benefits, a point raised by the noble Lord, Lord McKenzie, a few moments ago. Noble Lords have highlighted the interaction of that requirement with the provision in Clause 1 that the provisions are to be taken to refer to the master trust,

“only to the extent that it provides money purchase benefits”.

My noble friend and I have had productive conversations with noble Lords opposite in the past week, although not as productive as they would have liked. I expect those to continue. The team at the DWP is looking at all options that are open to us, but at this stage I regret I cannot commit to a timetable, nor can I commit to returning to the issue before Third Reading. However, noble Lords should be reassured of our very firm intention to take further action during the passage of the Bill.

I hope that the points I have made are sufficient to explain why the Government are of the view that these amendments would not be appropriate, and that the noble Lord will feel sufficiently reassured not to press them.

[Lord McKenzie of Luton]

My Lords, I am grateful to the noble Lord, Lord Young, for his response to the amendments. I would say to the noble Lord, Lord Flight, that we end up with the same objectives and the same analysis about what we want to achieve, if with a slightly different way of going about it. However, I am disappointed with the response from the noble Lord, Lord Young. I am not sure whether he specifically dealt with the point about whether Clause 39 could be used to carve out some of the schemes in some of the circumstances we have particular concerns about, and, if so, which of those schemes could be the subject of that carve-out. That might be one route to partially addressing some of the problems. I do not know whether the noble Lord wants to come in.

[Lord Young of Cookham]

I am happy to give the noble Lord the assurance he has just asked for.

[Lord McKenzie of Luton]

I was not asking for an assurance but for an answer.

[Lord Young of Cookham]

The regulations in Clause 39 give the flexibility the noble Lord has just asked for.