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.

Pension Schemes Bill [HL]

Lord Young of Cookham Excerpts

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

[Lord Kirkwood of Kirkhope (LD)]

My Lords, I strongly support the case made by the noble Lord, Lord McKenzie. In my experience, in a defined benefit situation the trustee is rightly prescriptive with regard to the steps that need to be taken to satisfy a reasonable test of an engagement and communication strategy. It is blindingly obvious that it is different with master trusts, because they deal with a number of employers. Some of them might be very different in the work they do and the way they do it, so the extra link in the chain justifies this. No sensible person wants to litter primary legislation with a lot of detail. However, at the very least, the master trust needs to be constrained in law by satisfying itself in some way that it is taking steps, not just to ensure that the employers within the scheme are acting properly but so that the members of those individual schemes get the benefit of a flow of information and data which is appropriate to support the important provision of their pensions in the future. The case is well made. As I say, I am not in favour of adding things for the sake of it, but the cause is just. If, as the noble Lord, Lord McKenzie, suggests, it is kept skeletal, as long as there is some duty in the primary legislation, the Committee would be much happier to consider the passage of this legislation.

[Lord Young of Cookham (Con)]

My Lords, I begin by responding to the point that the noble Lord, Lord McKenzie, made in his introduction about whether, if one was dealing with a start-up, it would have to provide accounts. Of course, it does not, because it cannot, so that bit of Clause 4(2) would not apply.

A range of amendments relating to member engagement were put forward for consideration in Committee, and during that debate and at Second Reading I made it clear that I had sympathy with the principle behind them, as I have with the case that has just been made. Member engagement is important, and members should be encouraged to develop a strong sense of ownership of their pension saving. As the noble Lord, Lord Monks, noted when we last debated this issue, the money that the scheme is managing belongs to them. I also agree that it is important that schemes should keep their members well informed, especially—again, as the noble Lord, Lord McKenzie, noted in Committee—as a member approaches retirement.

That earlier debate focused largely on member communications. Communications are not quite the same as engagement, which is a somewhat broader notion including the idea of a two-way exchange. Effective communications certainly contribute to good levels of engagement but they are not the only factor that determines whether a member develops a sense of ownership of their savings. Noble Lords may also have drawn this distinction, which is why the amendment requires that broader “engagement” strategy. In practice, however, I believe that that strategy would inevitably contain significant detail on communications from a master trust, which is why I would like briefly to revisit some of the arguments on communications which I set out in Committee.

The purpose of this part of the Bill is to introduce robust minimum requirements which ensure that the interests of master trust scheme members are protected from the risks that arise in these types of schemes; it is not a Bill that seeks to prescribe every facet of running an excellent scheme. Some of those aspects, including how required outcomes may best be achieved in relation to an individual scheme, are matters for the trustees. That is why the documents listed in Clause 4 relate to the key risks and documents directly required under the authorisation criteria, rather than to wider documentation that the scheme may have.

I also noted that there is already a series of legal requirements setting out the minimum standards for communications in occupational pension schemes, which the noble Lord, Lord Kirkwood, may have referred to. It is worth briefly recapping those requirements. Trustees must provide members with basic information about the pension scheme within two months of their joining, and they are required to update them if this information changes. They must provide most members with a member-specific projected pension and an annual benefits statement. They must also provide a wide range of information upon request, including the annual report, the scheme rules, information about the investment principles and information about benefits and transfer values.

I re-emphasise that those are only minimum standards. The Pensions Regulator publishes codes of practice and detailed guidance for trustees to help them run their scheme according to good practice. This includes guidance on member communications. Our view remains that, provided the statutory requirements are met, it should be for trustees to decide how best to manage member communications. This is one area where a good scheme has an opportunity to distinguish itself. Once the regime commences, our assurance regarding the calibre of trustees of master trust schemes will be further enhanced because they will all have passed the new fit and proper persons requirement.

I also take this opportunity to respond to a specific point that was raised in Committee. The noble Lord, Lord McKenzie, argued:

“The Pensions Regulator should have the opportunity to review the systems and processes related to communications just as much as the features and functionality of the proposed IT system”.—[Official Report, 21/11/16; col. 1754.]

I thank the noble Lord for that contribution, which I have considered further. Although I cannot go as far as he would like me to, I hope that I can go a little further than I did in Committee. I can confirm that the Bill as drafted allows the regulator to take into account the systems and processes relating to communications and engagement when assessing the adequacy of a scheme’s systems and processes more broadly. I can also confirm that the Government would intend—subject, of course, to consultation—to use the regulations under Clause 11 to ensure that the regulator specifically considers a scheme’s systems and processes in relation to these important communication matters when deciding whether the scheme is run effectively.

There is of course the wider point of the engagement of individuals with workplace pension savings, which we take seriously. As part of the review of automatic enrolment that we announced on 12 December, the Government specifically committed to consider member engagement. In a Written Statement, the Minster for Pensions confirmed that the review would include,

“how engagement with individuals can be improved so that savers have a stronger sense of personal ownership and are better enabled to maximise savings”.—[Official Report, Commons, 12/12/16; col. 38WS.]

This review will be supported by an external advisory board, which will include pension provider representation, and we will ensure that we engage closely with the industry as part of that review.

Pension Schemes Bill [HL]

Lord Young of Cookham Excerpts

Committee: 2nd sitting (Hansard): House of Lords
Monday 28th November 2016 Lords Chamber

[Lord McKenzie of Luton]

My Lords, this small, probing amendment would reduce the application period from six months to three. It was conceived by seeking to deal with the question: for how long can an authorised master trust remain in operation unauthorised under these provisions? That is what sparked the thoughts. I acknowledge that the consequential amendment to paragraph 8(7), which should have followed, has not been made, so in effect we have just part of the amendment here.

The purpose of this probe is to test the rationale for the length of the period during which an existing master trust can continue to operate without authorisation. As it stands, a master trust must apply for authorisation by the end of the application period. The application period in the Bill is six months—three in our amendment—beginning with the commencement date. The commencement date is the date on which Clause 3—“Prohibition on operating a scheme unless authorised”—comes into force, which is to be fixed by the Secretary of State but is expected to be some two years away. The Pensions Regulator must make a decision on the application within six months and, if it is refused, can be referred by the trustees or others to the tribunal.

From today, absent an appeal, an existing master trust could remain in operation for two years before the commencement date; then there are six months before it applies, with a six-week extension, and six months during which the Pensions Regulator must give it consideration, assuming that there is no appeal. This is potentially a long time. It is accepted that the transitional provisions will be in place from the date the Act is passed, or 20 October, concerning triggering events, the prohibition on increasing charges and the scheme funder’s liability for the costs of winding up the scheme. Of course, all this is happening nearly two years after the commencement of auto-enrolment, which has been the spur to the growth of master trusts.

My plea is: should we not be making faster progress? Given the commitment to consult on regulations, the shape of the detail required for an application will surely be evolving long before the commencement date. Is there not a way we can make faster progress in this very important area, where billions of pounds of people’s investments are at risk? I beg to move.

[Lord Young of Cookham (Con)]

My Lords, as we have just heard, the amendment tabled by the noble Lord, Lord McKenzie, and the noble Baroness, Lady Drake, would reduce the time period an existing master trust scheme will have in which to apply for authorisation from the commencement of the relevant provisions of the Bill from six to three months. While I have some sympathy with the amendment, for the reasons set out by the noble Lord, the Government’s view, which is informed in part by the Pensions Regulator, is that there is a compelling case for allowing a maximum of six months.

My expectation is that some schemes will have relatively little to do in order to align their businesses with the new requirements and, as a result, will be in a position to apply for authorisation early in the six-month application window. Others may face more of a challenge and may need time to consider the final legislation in full—including, of course, the regulations, which will come out next year—before they determine whether to apply for authorisation or withdraw from the market. We do not want to risk losing good schemes from the market because they have not had sufficient time to make the necessary changes to meet these new requirements. Having consulted the regulator, our view is that six months will give schemes the time they are likely to need.

I appreciate the noble Lord’s concern that members should be protected as quickly as possible but we must get the balance right between achieving that and placing demands on existing businesses. As I think the noble Lord recognised in his remarks, an additional key protection for members is set out in the Bill, which will apply from the beginning of the application window. This is in addition to the retrospective provisions in the Bill, which mean that a scheme that experiences a triggering event from 20 October this year will be unable to increase charges on members to pay for scheme wind-up. The additional protection is that if a scheme experiences a triggering event during this period, and the regulator has reason to believe that there is an immediate risk to the interests of scheme members, the regulator will have the ability to issue a pause order under Clause 31, which we have just been discussing, regardless of whether or not the scheme has submitted an application for authorisation.

Finally, on the overall length of time it will take, as the Bill stands, from the date on which regulations fully commence master trust schemes will have six months to submit an application for authorisation. The Pensions Regulator will then have six months from the point of receiving an application to decide whether to grant or refuse authorisation. This means that the vast majority of existing schemes will be either authorised or not authorised within one year of full commencement. Where trustees are unsuccessful, they can appeal to the First-tier Tribunal or the Upper Tribunal. The master trust will be able to continue operating pending the outcome of that appeal.

--- Later in debate ---

Moved by

[Lord Young of Cookham]

57: Schedule 2, page 38, line 9, at end insert—
“3A Existing Master Trust schemes: pause orders(1) This section applies where the trustees of an existing Master Trust scheme have applied for authorisation of the scheme under section 4 and the decision on the application has not yet become final (see section 35).(2) The Pensions Regulator may make a pause order in relation to the scheme if it is satisfied that—(a) there is, or is likely to be if a pause order is not made, an immediate risk to the interests of members under the scheme or the assets of the scheme, and(b) it is necessary to make a pause order to protect the interests of the generality of members of the scheme.(3) A pause order under this section is to be treated as if it is made under section 31.(4) But in its application to a pause order under this section, paragraph 2 of Schedule 1 is to be read as if sub-paragraph (3) were omitted.””

[Lord Young of Cookham]

My Lords, government Amendment 57 would allow the Pensions Regulator to issue a pause order to an existing master trust at any point between the scheme submitting an application for authorisation and the decision on the application becoming final, regardless of whether or not a triggering event has occurred in relation to that scheme. Once an existing scheme has submitted an application for authorisation, the Pensions Regulator will have access to a significant amount of new information about the scheme. That information may alert the regulator to members’ interests or assets being at risk in the scheme. Clearly, the regulator will not grant authorisation in such circumstances but it needs to be able to take immediate steps to protect the members.

A decision to refuse authorisation is one which must be taken by the determinations panel. It is right that this is so, but it means that there could be a period of time between the regulator recommending to the determinations panel that the scheme should not be authorised and the panel reaching its decision. During this time, the interests of scheme members need to be protected. The Government’s proposed amendment therefore provides that the Pensions Regulator may make a pause order in relation to a master trust scheme which has submitted an application for authorisation,

“if it is satisfied that—

(a) there is, or is likely to be if a pause order is not made, an immediate risk to the interests of members under the scheme or the assets of the scheme, and

(b) it is necessary to make a pause order to protect the interests of the generality of members of the scheme”.

These conditions mirror those we have just been discussing for making a pause order following a triggering event.

The proposed amendment would introduce an important protection for the members of existing master trust schemes during the period when such schemes are applying for authorisation. In the light of what my noble friend Lord Freud has just said, I too apologise for not making this provision in the Bill as introduced, and I beg to move.

[Baroness Drake]

My Lords, I intervene at least for the record. It is absolutely understandable why the Government seek to extend the pause-order powers to a master trust which has not yet received authorisation if the members’ interests are at risk. I will not repeat the arguments that I made when speaking to Amendments 46 and 50, but they remain valid here. During the period of the pause order which is applied in this circumstance, the issues of what happens to the contributions to which members would otherwise be entitled and how those vulnerable to loss of payments during a pause order are treated remain equally valid under this provision as under the previous one. However, I understand why one would want to extend the pause-order power to an unauthorised scheme.

--- Later in debate ---

[Lord Young of Cookham]

My Lords, it is quite right that we debate whether this clause should stand part of the Bill, because it is an important one. I hope to persuade noble Lords who have spoken that the powers we are taking are proportionate and indeed necessary in order to deliver the commitments that the Government have made to beneficiaries of pension schemes. As the noble Lord, Lord McKenzie, said, we are seeking here to bring occupational pensions into line with the regime that already exists for other pensions.

In a nutshell, the clause amends existing legislation in Schedule 18 to the Pensions Act 2014 to allow regulations to be made that enable a term of a relevant contract to be overridden to the extent that it conflicts with a provision in those regulations. I emphasise that the power would allow a contract to be overridden only where there is a conflict with a provision in regulations. This ensures that relevant contracts are consistent with the regulations, and provides certainty to the parties involved. It may be helpful if I clarify that Clause 40 is distinct from the previous clauses in this Bill that referred to charges; those clauses all relate to the proposed master trust authorisation regime.

We intend to use Clause 40, alongside existing powers in the Pensions Act 2014, to make regulations to cap or ban early exit charges. Early exit charges are any administration charges that are paid by a member for leaving their pension scheme early when they are eligible to access the pension freedoms, which they would not face at their normal retirement date. The Financial Conduct Authority intends to make rules by April 2017 to cap or ban early exit charges in personal and workplace personal pension schemes. Parliament has already approved amendments to the Financial Services and Markets Act 2000, which broadly allows contracts to be overridden.

Together with the existing powers in relation to charges, Clause 40 will enable us to make regulations that introduce similar protection to members of occupational pension schemes. It will also be used to override contractual terms that conflict with the ban on member-borne commission arising under existing contracts in certain occupational pension schemes. By “commission contracts” we mean the contracts between trustees or managers and a person who provides administrative services to the scheme, which permits the person to impose the member-borne commission charge. Existing contracts are those that were entered into before 6 April 2016. This will complete the ban that already exists for commission arrangements entered into on or after 6 April 2016.

The consultations that we undertook on early exit charges and on member-borne commission showed us that these charges generally arise in contracts between trustees or managers of certain occupational pension schemes and those who provide administration services to the scheme. Our existing powers in Schedule 18 to the Pensions Act 2014 enable us to make regulations that override any provision of a relevant scheme where it conflicts with a provision in those regulations. For example, we have used that power in relation to the appointment of service providers in the scheme administration regulations. The reason why we are taking this power is that this does not extend to the contracts under which the charges arise. Clause 40 therefore extends the existing power in Schedule 18 to allow the overriding of a term of a relevant contract that conflicts with a provision of the regulations. The relevant contract is defined as those between a trustee or a manager of a pension scheme and someone providing services to the scheme. The regulations that we intend to make will apply to charges imposed from the date when the regulations come into force, even where they are charged under existing contracts. We expect them to come into force in October 2017.

As noble Lords may be aware, the pensions market is continually evolving and modernising, and this extends to charging practices. It may be necessary to alter the charges requirements to reflect any changes in the pensions market that may disadvantage members. We intend to consult on the draft regulations early next year. In addition, any potential further regulations made under the power in Clause 40 will be subject to public consultation. The requirement to do this is set out in paragraph 8 of Schedule 18 to the Pensions Act 2014.

Such regulations would also be subject to parliamentary scrutiny through the negative resolution procedure. I note that this House’s Delegated Powers and Regulatory Reform Committee was content with this approach. This allows legislation to be amended reasonably quickly to provide the member protection that may be needed. Together with the consultation, we believe there is effective scrutiny and scope for challenge over the Government’s intended use of these powers.

I would be disappointed if any trustees felt that they had to resign over this. I regard these measures as benefiting scheme members, for whom trustees are acting to defend their interests. In response to the charge that we are interfering with contracts signed in good faith, we consulted on this. We made it clear that it is generally undesirable to interfere with existing contractual rights; it can be justified only in circumstances such as this, where it is necessary to achieve important public policy goals—we have given a commitment to do this—and where the action is proportionate in the public interest. We expect trustees and service providers to work together when renegotiating for amending contracts to reflect implementation of the charge cap, and our consultation and engagement with the pensions industry and other stakeholders on capping or banning early exit charges and spanning existing member-borne commission showed that, by and large, the Government’s intentions were widely welcomed. We continue to engage with industry and stakeholders on those two areas.

I hope that I have convinced the House that the clause should stand part of the Bill.

[Baroness Bakewell of Hardington Mandeville]

My Lords, I thank all noble Lords who have taken part in this short debate, especially my noble friend Lord Kirkwood of Kirkhope. I am reassured by the Minister saying that it is undesirable generally to interfere with contractual rights, completely concur that we must have member protection and welcome the public consultation that will take place in the near future. I am also reassured by much else that the Minister said and am content for the clause to stand part of the Bill.

--- Later in debate ---

[Lord Young of Cookham]

My Lords, as we reach the last amendment in Committee, I point out that the Bill has been in the hands of two distinguished psychoanalysts—Freud and his disciple “Jung”. Between us, we have tried to look at the disorders in the Bill and prescribe appropriate remedies.

I thank the noble Baroness for raising this important issue. I understand the strong feelings that she expressed when she moved her amendment. In 2015, the Government introduced pension flexibilities, which gave people the freedom to choose how they use their pension savings. Over 300,000 people have chosen to flexibly access over £6 billion since they were introduced, and the Government are committed to keeping these freedoms in place.

In March 2015, the coalition Government announced proposals to remove the current restrictions on assigning existing annuities and to create the conditions for a secondary market to develop. The proposed reforms were in two main areas—removing the unauthorised payment tax that deters people from assigning their annuity, and working with the Financial Conduct Authority to establish a comprehensive consumer protection package. The Government engaged extensively with industry and consumer groups on how they could establish the conditions for an effective market to develop. It would not have been right to introduce measures before understanding the impact that they might have on consumers and ensuring that the necessary conditions for a successful market were in place. In the course of this engagement, it became increasingly clear that creating the conditions to allow a vibrant and competitive market to emerge, with multiple buyers and sellers of annuities, could not be balanced with sufficient consumer protection. I am grateful to the noble Lord, Lord McKenzie, for setting out so clearly the problems that would have ensued had we proceeded.

On 19 October, Simon Kirby, Economic Secretary to the Treasury, made a Statement in the other place about the Government’s decision not to take this policy forward, which I repeated for your Lordships on the same day. Our investigations showed that many annuity providers were willing to allow consumers to assign their annuities. Of course, the market for annuities is itself undergoing change following the introduction of the pension freedoms. What became apparent is that, at this time, there would be insufficient purchasers to create a competitive market. Without a competitive market, consumers were likely to get poor value for their annuities and incur high costs for selling.

The Government are committed to the principle of giving people the freedom to make decisions about what to do with their money, which is why we have explored in detail how we could allow this market to emerge and protect consumers at the same time. But what has become clear is that the steps the Government would need to take to create demand in the market would undermine protections and increase the risk for consumers. The noble Lord, Lord McKenzie, cited Steve Webb, the Pensions Minister at the time, who said in the context of this decision:

“There did need to be a lot of potential buyers for this market to work”,

and that while the decision is,

“disappointing it is understandable”.

Rather than being to the benefit of British pensioners, this market would instead be to their detriment. It would clearly not be in consumers’ interests to continue with this policy. Only this afternoon, we have had a number of debates about the importance of protecting consumers, and this would be a step in the opposite direction.

I accept that some people will be disappointed, as the noble Baroness explained, although our analysis indicated that only 5% of annuitants would be interested in taking this option forward. While we accept the disappointment, I hope that noble Lords will agree that it would not be right at this time to allow a market to develop when it is likely to lead to poor consumer outcomes. With this in mind, I ask the noble Baroness to withdraw her amendment.

[Baroness Bakewell of Hardington Mandeville]

My Lords, I thank the Minister for his response, which I obviously find extremely disappointing. This is a very serious issue. I understand that there were difficulties in producing a competitive market and that the Government support freedom of choice. However, pensioners will not have freedom of choice while they cannot access the secondary annuity market. I thank the noble Lord, Lord McKenzie, and the Minister for mentioning my colleague Steve Webb. His view is that the policy was abandoned because the Government did not put enough weight behind moving it forward. Had they done so, there might have been a different outcome.

At this time, I beg leave to withdraw the amendment but reserve the right to return to it on Report.

Pension Schemes Bill [HL]

Lord Young of Cookham Excerpts

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

[Lord Young of Cookham (Con)]

My Lords, after some five hours of debate there is now a glimmer of hope for one of the amendments moved by the noble Lord, Lord McKenzie. Its intention appears to require the trustees of an authorised master trust scheme to submit the scheme’s annual governance statement to the Pensions Regulator each year.

The annual governance statement, sometimes known as the chairman’s statement, which trustees of most money-purchase occupational pension schemes are required to produce, provides information on the scheme’s compliance with governance measures such as the charge cap. It sets out, among other things, the level of charges in the scheme and the trustees’ assessment of the extent to which these represent good value for members.

I understand why this amendment may have been tabled, and I agree that it is important for schemes to operate transparently and demonstrate that they represent good value for money for members. This information would indeed be valuable to the regulator in its assessment of the master trust against the authorisation criteria. However, I have reservations about whether the approach, as drafted, represents the best way of achieving this. From a drafting perspective, there is a risk in making a provision of this kind in primary legislation which relies on a reference to a provision in regulations—in this case the Occupational Pension Schemes (Charges and Governance) Regulations 2015. Should those particular regulations be amended in the future—for example, so that the statement is no longer required under the same specific provision—there is a risk that this provision of the Bill would no longer have the desired effect.

A safer approach is to make use of the existing provision in the Bill, which enables regulations to specify that the regulator may require that further information is submitted to it. That provision is in Clause 15(2). I can confirm that it is intended that the provision of the annual governance statement to the regulator will be dealt with in these regulations by enabling the regulator to require the statement to be included in master trusts’ supervisory returns. We will of course consult on these regulations and we cannot confirm the final content until the consultation is concluded. I hope that I have explained to noble Lords that I resist the amendment not because I disagree with it but because there is a better way of getting there. The Bill already allows equivalent provision to be made in a manner more likely to secure the desired outcome in the long run. Against that background, I hope that the noble Lord will withdraw his amendment.

[Lord McKenzie of Luton]

My Lords, I am grateful to the Minister for that response. I thought for a moment that the glimmer of hope was going to be completely snuffed out, but I am pleased to know that it has not been. I accept the point about drafting and will look forward in due course to seeing this in the regulations. Having said that, I beg leave to withdraw the amendment.

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[Baroness Altmann (Con)]

My Lords, I want to raise an issue which is very relevant to this point. As the Bill will, rightly, require continuity strategies for the event of failing master trusts, I ask the Minister to consider introducing measures that will facilitate bulk defined contribution pension transfers. At the moment, the bulk transfers are governed in a way that would be suitable for defined benefit schemes rather than defined contribution schemes. It seems that we have an opportunity to disapply Regulation 12 of the 1991 preservation regulations and to introduce measures in this Bill to directly facilitate defined contribution pension transfers, which could also cut the costs of transferring across.

[Lord Young of Cookham (Con)]

My Lords, I am grateful to the noble Lord, Lord McKenzie, for proposing his amendment. I am afraid that I am back in the default mode of resisting.

Before I address the amendments, I say to my noble friend Lady Altmann that I would like to reflect on what she said about the transferability of defined contribution pots and perhaps write to her, because I am not sure that it directly arises from the two amendments before us.

Clause 24, and the regulations to be made under it, sets out the detail of continuity option 1 and the requirements relating to it—where a master trust chooses or is required to transfer out its members and wind up. This option would be pursued where a master trust scheme could no longer satisfy the regulator that it met the authorisation criteria and had its authorisation withdrawn or refused, or where, for any other reason, it could no longer continue to operate and the trustees chose to pursue continuity option 1 rather than resolve the triggering event and keep the scheme running.

To protect the rights that members have accrued in the scheme, it is necessary that these rights be transferred to alternative schemes or pension arrangements. Clause 24 therefore requires that under option 1, the trustees of the scheme must identify a master trust to which members’ rights and benefits can be transferred. Then the trustees have to notify members and employers of the transfer, as well as of other information that will be set out in regulations.

The aim of Clause 24 and the related clauses is that members will continue to save in a pension despite the master trust of which they are a member experiencing a triggering event that results in the scheme having to wind up. In this situation members should be transferred out to an authorised master trust and continue to save with as little disruption as possible. We want to encourage and facilitate the continuity of pension saving. Therefore, when a master trust is going to close, the provisions in the Bill will mean that members have the reassurance that, if they do not make an active decision to go elsewhere, they will become a member of an alternative master trust that has been authorised by the Pensions Regulator.

Amendment 37 provides that where the trustees have the choice, and have decided to pursue continuity option 1, they can do so, except where the Pensions Regulator decides that continuity of saving for members would be best achieved by the substitution of a new scheme funder. I think that the noble Lord, Lord McKenzie, was seeking to give the regulator some sort of power to require the trustees to follow continuity option 2 instead of continuity option 1, where the trustees had chosen the latter. However, in effect the amendment would give the regulator the power to exempt a scheme from fulfilling the requirements under continuity option 1 where the trustees have decided or are required to pursue this option and where the regulator is satisfied that continuity is best achieved by the substitution of a new scheme funder. I see real difficulties in what the noble Lord has proposed.

Trustees are responsible for running and managing their scheme and making decisions in relation to it. They have a fiduciary duty to act in the best interests of the members of their scheme—a point that the noble Lord, Lord Kirkwood, made during our discussions. This amendment would effectively allow the regulator to second-guess and overrule trustees and to make a decision about a pension scheme. This would be a fundamental change to the principle that trustees have responsibility for managing their scheme. We do not think such an intervention by the regulator would be appropriate.

The option of finding a new scheme funder, as proposed by the noble Lord, is already open to trustees as a means of resolving the triggering event and continuing. Depending on what triggering event the scheme experienced, there could be a variety of ways of resolving it. We consider it important not to limit these, but to give trustees the freedom to resolve the event and the regulator the power to decide whether it is satisfied that the triggering event has been resolved. Where the sourcing of a new scheme funder is the most appropriate resolution of a triggering event, as suggested by the noble Lord, it should be up to the trustees to identify this funder. It should not be the Pensions Regulator’s responsibility to decide what the resolution method should be, for example, that the method should be a new scheme funder, or to source that funder. That is not the regulator’s role and it would be overruling the trustees, who rightly have ultimate responsibility for the scheme and its members.

We consider it important that any resolution of the triggering event and continuation of the scheme be subject to the full requirements of option 2. These requirements include the preparation of a comprehensive and detailed implementation strategy by the trustees, having certain safeguards in place for members and employers, additional support and assistance for them, and greater protection for members. Further, there is oversight of the adequacy of the strategy by the regulator.

We agree that where a master trust has experienced a triggering event, a new scheme funder could be identified and could be the most appropriate resolution of a triggering event. However, the Government believe that it is the trustees’ responsibility to make decisions for the scheme, and that if they want to resolve the triggering event by finding a new scheme funder, they should go down the route of continuity option 2.

Amendment 38 makes two additions to what will be covered by the regulations. The first part of the amendment would require the regulations made under this clause to set out what happens where the trustees have not been able to identify a master trust into which their members will be transferred. As the Bill makes clear, there will be a comprehensive set of regulations under Clause 24 that will cover many areas. These regulations will cover members’ right to transfer to a scheme of their own choosing, if they do not wish to transfer to the trustees’ choice of scheme. Members could also take up other pension options open to them, where relevant. Where a member is in receipt of a pension from the failing master trust, they will have the right to transfer their benefits to an alternative appropriate arrangement. For example, this could include a draw-down arrangement or the purchase of an annuity.

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?

--- Later in debate ---

[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.

--- Later in debate ---

[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.

Pension Schemes Bill [HL]

Lord Young of Cookham Excerpts

Monday 21st November 2016 Lords Chamber

[Lord McKenzie of Luton (Lab)]

My Lords, I shall speak also to Amendments 14 and 15. I shall be brief. Clause 7 deals with the fit and proper persons regime and sets out which persons the Pensions Regulator must assess. It provides that regulation should set out matters which must be taken into account.

Clause 7(2)(e) identifies as one of the persons who must be assessed as fit and proper,

“a person who (alone or with others) has power to vary the scheme (where the scheme is not established under a trust)”.

By way of a probe, Amendment 13 would delete the reference to a scheme not established under trust. We ask the Government to spell out the type of arrangement they envisage would not be established under a trust and, where responsibilities are placed on trustees in the Bill—for example, in Clauses 14 and 15—by whom they would be discharged. Amendment 14 would ensure that the Pensions Regulator was subject to an ongoing requirement to ensure that specified persons remained fit and proper. Can the Minister advise whether and how such a requirement is envisaged to be met? Amendment 15 would change the nature of the resolution from negative to affirmative. I trust that the amendments will receive the same favourable response as those raised previously. I beg to move.

[Lord Young of Cookham (Con)]

My Lords, I am grateful to the noble Lord, Lord McKenzie, for his introduction to the amendments. I hope to be able to respond almost as briefly—and as eloquently.

Amendment 13 would amend the description of one of the people whom the Pensions Regulator must assess as fit and proper. It would change the description of a person who,

“(alone or with others) has power to vary the scheme (where the scheme is not established under a trust)”,

by removing the words,

“where the scheme is not established under a trust”.

The preceding paragraph refers to a person who has the power to vary the terms of the trust under which the scheme is established, and the paragraph in question here is a counterparty to that provision. The two paragraphs work together to ensure that any person who has the power to vary the terms of the trust or the scheme is subject to the fit and proper person test. Clause 7(2)(d) describes the persons who have this function under a trust-based scheme and Clause 7(2)(e) describes an equivalent for schemes which are not set up under trust. Clause 7(2)(e) is therefore specifically to cater for those relatively rare exceptions where a master trust may be set up outside the trust-based structure and to ensure that we do not create an avoidance loop hole.

Incidentally, we have maintained the term “master trust”, as that is how such schemes are known in the industry, even where they may be set up outside the trust-based structure. Clause 1 defines what the term means for the purpose of this part of the Bill, to ensure that there is clarity about who is in scope of the new regime, but it is not necessarily the case that it would be possible only ever to set up the sort of scheme captured under trust. It would be relatively rare, but we need to cater for such circumstances. We would want the regime to bite where schemes were not set up under trust, and this is one place in the Bill where something separate is needed to provide such cover. The two paragraphs provide that anyone who has power to vary the terms of the master trust must be subject to the fit and proper test.

I welcome the sentiment expressed in Amendment 14, which would require the regulator to ensure that the authorisation criteria had been met continuously and that it should not be a “once and done” affair. I agree that it would not be sufficient to require the scheme to satisfy the regulator on these matters only once at the point of application for authorisation. The intent of the Bill is that the standards must be maintained continuously.

Clauses 3, 4 and 5 together ensure that a scheme cannot operate unless it is authorised—with various modifications for existing schemes in Schedule 2, which we will come to later—and provide for a clear application process and decision by the regulator. Clause 19 also allows for the Pensions Regulator to withdraw that authorisation at a point at which it stops being satisfied that the criteria are met. To be clear: this does not mean that the scheme will be asked to reapply for authorisation regularly and that, if it fails, this is the only way to change its status. Nor does it mean that, once the test is passed, the scheme will always remain authorised; the criteria must continue to be met. It does mean that the regulator can withdraw authorisation if it is no longer satisfied that the criteria are met. The scheme must be able to show to the regulator’s satisfaction that it is meeting the criteria on an ongoing basis.

[Lord Hutton of Furness (Lab)]

I am grateful to the Minister for his comments, which have been very clear, but where I am struggling with his account of this part of the Bill is his saying that the regulator has almost an implied power to review, for example, whether a newly appointed trustee is a fit and proper person. There is nowhere in the Bill so far as I can see where that implied power is expressed. It is always better for such matters to be dealt with by giving the regulator an express power than to rely on some clever interpretation of words to get to the point where it is implied the regulator has a power to review when all it has is, in the words of the Minister, the power to withdraw authorisation, which is altogether different.

[Lord Young of Cookham]

I take the point that the noble Lord has just made. I hope to be able to reassure him that other provisions in the Bill will satisfy him that the regulator will have the necessary information to withdraw authorisation if something happens that requires it. I will come to that shortly.

As a public body, the regulator must exercise its general functions reasonably and consistently with its duty to be satisfied that the scheme meets, and therefore continues to meet, the authorisation criteria. With respect, a specific regulation-making power to require the regulator to review fitness and propriety is not necessary.

I turn to other clauses, which I hope shed some light on the issue raised by the noble Lord, Lord Hutton. Clause 14, requiring the submission of annual accounts, Clause 15, requiring the submission of a supervisory return and, crucially, Clause 16, which creates a duty to notify the regulator of significant events, all serve to ensure that the Pensions Regulator can take an ongoing view of risk in relation to whether it remains satisfied that the scheme continues to meet the criteria.

Additionally, the regulator also has its information-gathering powers to bring to bear, so it can ask schemes for information to assist in assessing whether it remains satisfied that a scheme continues to meet the criteria and inquire for more information about reported events or information provided. The duty to notify the regulator of significant events, which is provided for in Clause 16, will be supplemented by regulations which specify the events which must be reported. Although we intend to consult on the regulations, our current thinking is that such events will include a change in status of anyone subject to a fit and proper test and any change in the personnel who are subject to the fit and proper test. The use of the significant events regime in Clause 16 to achieve this end is not set out in express terms in the Bill because of the detail which will follow in regulations, but I hope that my outlining of the intent above has helped to clarify this. I have no doubt that later we will return to Clause 16 for further debate.

Amendment 15 would change the regulation-making procedure in Clause 7 from the negative procedure to the affirmative procedure. I note that in an otherwise critical report, the Delegated Powers Committee acknowledged that this clause was one where the negative procedure might be appropriate. None the less, I refer to what my noble friend said in earlier debates about wanting to stand back and look at the totality of procedures, affirmative and negative, and then come to a conclusion at the end on whether we strike the right balance. On that basis, I hope the amendment might be withdrawn.

[Lord McKenzie of Luton]

I am grateful to the Minister for his response to those amendments, and am certainly grateful to my noble friend Lord Hutton for that important point about how, in the circumstances, it is better to have an express provision than an implied one. I will work through the record of what the Minister said to see how close we got to that express provision, or whether it is still essentially an implied power. I understand what the noble Lord said about the nature of the regulations. That will run through this Bill.

I return briefly to this question of when master trusts are set up but not under a trust. I think the noble Lord said that would be a rare or unusual occasion. I do not know whether he can say a bit more about that. Particularly, the raft of the Bill focuses on the obligations for the trustee or trustees who set up master trusts, but where it is not set up under trust, does it evolve into something that becomes a trust and therefore you get trustees in the normal way or does it continue with some other existence? If the latter, what is the nature of the person who would be a trustee were it set up under trust? That puzzled me a little. If the noble Lord felt it would be better to write to me, I would be happy with that, but if we could deal with it now that would be helpful.

[Lord Young of Cookham]

The noble Lord is very generous in suggesting that this matter might be addressed better in a letter than in an exchange across the Dispatch Boxes. I made inquiries and it is indeed the case that some are established other than under trusts. Obviously, we do not want a loophole that people can use because they are not formally constituted as a trust. However, I accept the noble Lord’s generous offer and will write to him giving a more detailed response to the issues he raised.

--- Later in debate ---

[Baroness Altmann]

My Lords, I echo the comments made by my noble friend Lord Flight. Why do the draftsmen of the Bill think that having a separate legal entity is definitely a good thing? What are the risks that this approach tries to close down? Perhaps if we could understand those risks better, we might be able to address the issue in a slightly different way. Is the aim somehow to ring-fence the DC covenant of the scheme funder and prevent them from having other financial obligations that might take away from the support for this master trust, or to minimise the burden on checking accounts? Obviously, it is easier to review the accounts of a stand-alone entity than of a much broader group. Hopefully, if we could better understand what the rationale is, it might be possible to address some of the very important concerns that have been expressed by some of our major insurance companies.

[Lord Young of Cookham]

I am grateful to the noble Lord, Lord McKenzie, for his amendment. I gently point out that there is a spelling mistake in it, but there are other reasons for resisting it.

Amendments 19 and 20, tabled by the noble Lord and the noble Baroness, Lady Drake, deal with Clause 10, which sets out the requirements that a scheme funder must meet in order for a master trust to be authorised. I hope to explain to noble Lords, particularly my noble friend, the thinking behind insisting that there is a separate legal entity behind each scheme. A scheme funder by definition is key to the master trust’s financial sustainability. By “scheme funder” we mean a person who is liable to provide funds in relation to the scheme when the administration charges paid by and in respect of members are not sufficient to cover the scheme’s costs, or someone who is entitled to receive profits when the scheme’s charges exceed its costs.

Amendment 19 would remove the requirement for the scheme funder to be a separate legal entity that carries on business activities only directly related to the master trust, and would replace it with a requirement for the scheme funder to be approved by the Pensions Regulator. I listened with interest to the points that noble Lords made in respect of that amendment. Amendment 20 would similarly remove the requirement for a master trust’s scheme funder to be a separate legal entity that carries on only the master trust business. The effect of both amendments would be to allow the same legal entity that acts as scheme funder to engage in business activities not directly related to the master trust, making it more difficult for the Pensions Regulator to identify matters relevant to the master trust and therefore to assess the financial sustainability of the scheme.

To enable the regulator to assess the financial position of the scheme with certainty when deciding whether the master trust should be authorised or remain authorised, the scheme funder must be set up as a separate legal entity. This is defined in the Bill as meaning, in effect, a legal person whose only business activities are in relation to the master trust. Requiring scheme funders to be separate legal entities will make their financial position, and the financial arrangements between them and the master trust, more transparent to the regulator and provide greater clarity regarding the assets, liabilities, costs and income in relation to the master trust business. This will greatly assist the regulator in carrying out its assessment of schemes’ financial sustainability.

There will be greater transparency regarding any additional funding streams coming into the scheme funder entity, and the level of commitment of those funds for the purposes of running the master trust, should the scheme funder be in receipt of income generated from other lines of business carried on by connected entities. The amendments would remove that transparency by making it possible for the scheme funder to carry on business activities not related to the master trust under the same corporate entity. It would therefore be difficult for the regulator to identify the financial sustainability or otherwise of the master trust.

One of the other authorisation criteria of which the regulator needs to be satisfied is that the people involved in the master trust scheme are fit and proper. Clause 7 specifies people that the regulator must assess for this purpose, including the scheme funder. It is not clear to what extent Amendment 19, requiring the scheme funder to be approved by the regulator, would differ from the assessment that the regulator is already required to carry out under Clause 7. Requiring the regulator to approve the scheme funder in general terms, rather than setting out requirements in the primary legislation requiring the scheme funder to be set up as a separate legal entity, would not only potentially make the financial sustainability of the scheme less clear to the regulator but would also give master trusts and scheme funders less certainty about the conditions that must be met for authorisation.

To turn back to the requirement for the scheme funder to be set up as a separate legal entity, I am aware that a number of concerns have been raised about the impact that this will have on existing businesses, such as the removal of protection and cross-subsidy through diversified lines of business supporting the master trust, restrictions on the use of shared services and the disruption of existing business. I shall come to each of these in turn, but I reassure the House that this authorisation criterion is not designed to prevent funds from flowing from one business to another, nor is it our intention to disrupt existing arrangements unnecessarily. The overarching aim of the requirements is transparency in the cash flows to and from the master trust business, and the assets and liabilities related to it, so that the regulator can readily ascertain the financial position of the scheme funder and the financial arrangements between the funder and the scheme. I think that paragraph answers the question asked by my noble friend Lady Altmann.

The requirements in Clause 10 do not prevent the master trust benefiting from the support of other businesses. Support can be offered from the scheme funder’s wider group explicitly through the provision of a legally enforceable guarantee or other formal arrangement from another group company of sufficient financial strength. Where the scheme funder currently conducts other businesses, a degree of cross-subsidy may already take place, and there is no intention to prevent this.

--- Later in debate ---

Finally, Amendment 27 in the group provides for regulations on systems and processes requirements—the key authorisation criteria in this Bill—to be subject to affirmative resolution. I accept that it is not unusual in pension legislation for detail to be delegated to regulation. I am not seeking to row against that. However, I believe the circumstances in this instance are different. These requirements go to the heart of how these master trusts are to be run. This is a new regime. There are no draft regulations before the House and policy matters are still to be resolved. This is a new regime of protection for what could be 6 or 7 million savers, or more. It is not a trivial matter. When the noble Lord is balancing whether they believe the Government have it right in terms of negative and affirmative resolution, I ask that the Minister focuses on these requirements and the regulations, certainly in the first instance.

[Lord Young of Cookham]

My Lords, I am grateful to those who have spoken to this group of amendments to Clause 11, which sets out one of the authorisation criteria, namely,

“that the systems and processes used in running the scheme are sufficient to ensure that it is run effectively”.

Amendment 21, tabled by the noble Lords, Lord McKenzie and Lord Monks, and the noble Baroness, Lady Drake, would amend Clause 11(4)(d) by making it clear that regulations on the matters that the regulator must take into account in deciding whether the schemes, systems and processes are sufficient to ensure that it is run effectively may include provisions about the processes that master trusts are required to follow in relation to environmental, social and governance risks. I think the intention behind the amendment is to do it in relation to the transactions and investment decisions of the scheme, rather than across the range of systems and processes that a scheme may operate on a day-to-day basis, such as staffing and travel. I see the noble Baroness nodding in assent.

Given that this amendment adds environmental, social and governance risks to subsection (4)(d), alongside processes relating to transactions and investment decisions, I am responding on the basis of that first interpretation. Clause 11 sets out specific areas that the Secretary of State may include in regulations and that the Pensions Regulator must take into account when deciding whether it is satisfied that the systems and processes adopted by schemes are sufficient to ensure that they are run effectively.

I have enormous sympathy with the case made by the noble Baroness that environmental, social and governance risks should feature in the way she described, but I remain to be persuaded that it needs to be included in the Bill. There are a number of reasons why. The current regulatory framework allows for ESG—environmental, social and governance—issues to be taken into account. TPR guidance makes it clear that trustees should take into account long-term financial sustainability in their investment strategies and new requirements can be inserted without primary legislation.

Environmental, social and governance issues are already, broadly, taken account of through the existing regulatory arrangements which apply to trustees of pension schemes with 100 or more members, including the statement of investment principles for their scheme, as set out in the investment regulations. The statement must include details of the extent to which the trustees take environmental, social and other factors into account in selecting, retaining and realising investments. These principles have been further supported by the Law Commission’s review of fiduciary duty, which confirmed that trustees should take these factors into account when they are financially material.

The Pensions Regulator has incorporated the Law Commission’s conclusions into its guidance for trustees and its code of practice on “Governance and administration of occupational trust-based schemes providing money purchase benefits”, which gives practical guidelines on how to comply with the legal requirements of pensions regulation. This guidance sets out the regulator’s expectation that when setting investment strategies, trustees will,

“take account of risks affecting the long-term financial sustainability of the investments”.

In addition, Regulation 4 of the investment regulations supplements trustees’ fiduciary duties under trust law by requiring that the assets of all pension schemes must be properly diversified in such a way as to avoid excessive reliance on any particular assets, and to avoid accumulations of risk in the portfolio as a whole. Should the Government subsequently decide to make regulations about the adequacy of the processes that master trusts are required to take into account in relation to environmental, social and governance risks in relation to investments, I can assure noble Lords and the noble Baroness that regulations would be able to cover this even if it was not specified in the Bill, as is done by the amendment. I hope I have said enough to explain why I am not of the view that the amendment should form part of the Bill.

Amendment 22 seeks to insert a new subsection into Clause 11 (4)(g) to make it clear that regulations about the processes used in running the scheme, which the regulator must judge are sufficient to ensure that the scheme is run effectively, may include provision about identifying, reporting, managing and minimising conflicts of interest relating to the work of trustees. The noble Baroness spoke about some of the risks involved here. The objective of Clause 11 is solely to ensure that the schemes are run effectively. It is not directly concerned about the conduct of the trustees undertaking their duties in relation to the pension scheme.

The Government recognised the potential for trustees’ conflicts of interest to arise in some multi-employer schemes and addressed this by introducing additional governance requirements for multi-employer schemes. These provisions were introduced in the Occupational Pension Scheme (Charges and Governance) Regulations 2015, which amended the Occupational Pension Schemes (Scheme Administration) Regulations 1996 to require, first, that there should be a minimum of three trustees, and that a majority of these three or more trustees, including the chair, must be independent of the scheme’s service providers. Furthermore, the trustees must be subject to fixed-term appointment and appointed via an open and transparent recruitment process. The trustees must make arrangements to encourage members to make their views known to trustees on matters concerning the scheme. When establishing whether a trustee is independent of the scheme’s service provider, various matters must be taken into account, which are set out at Regulation 28(3) of the scheme administration regulations 1996 as inserted by Regulation 22 of the charges and governance regulations. An example is whether the trustee is a director, partner, or employee of an undertaking which provides advisory, administration, investment or other services in respect of the scheme.

In addition to these requirements that are currently placed on trustees, Clause 7(2)(c) places a requirement on the Pensions Regulator to assess whether a trustee of a master trust scheme is a fit and proper person as part of the decision on the application to establish a master trust, as set out in Clause 5(3)(a). Clause 7(4)(b) provides for the Pensions Regulator to take into account any matters it considers appropriate that are not covered by regulation when assessing whether a person is a fit and proper person to act.

When the Pensions Regulator is no longer satisfied that an authorised master trust scheme meets the authorisation criteria, including whether a trustee of the scheme is a fit and proper person, Clause 19(1) allows for the authorisation to be withdrawn. Clause 19(2) and (3) provide the process that the Pensions Regulator must follow once a decision has been made to withdraw authorisation. So, in light of existing legislative requirements setting out the required propriety and conduct of trustees of pension funds, and the clear role of the Pensions Regulator set out in the Bill to ensure that trustees of master trust schemes are fit and proper persons, I believe that this amendment is not necessary.

Amendment 23 requires the Secretary of State to make regulations that set a minimum requirement for each of the processes listed in subsection (4)(a) to (g) of Clause 11. I agree in principle that the question of minimum standards is a key one, but I reassure noble Lords that the clause as drafted enables the Secretary of State to set out in regulations factors and standards to which the Pensions Regulator must have regard when deciding whether it is satisfied that a scheme’s systems and processes are sufficient. However, the key difference between the drafting of the Bill now, compared to how the amendment would alter its meaning, is that the amendment states that regulations “must” make minimum requirements.

There are two closely related reasons why I shall ask the noble Baroness not to press her amendment. Both my points flow from the principle that the regime has been designed to ensure that we do not mistakenly apply a one-size-fits-all requirement to schemes. A minimum requirement, as something that necessarily has to be set out in regulations, may have some unintended consequences. First, were a minimum requirement to be applied, there is a risk that the one-size-fits-all approach could cause some schemes to fail to meet the criteria and therefore fail to achieve authorisation, despite having systems and processes which are sufficient to ensure that the scheme is run effectively.

Secondly, not all of the specified processes easily lend themselves to a minimum requirement. This brings a similar practical consequence to the point that I have just mentioned. Further, addition of the “must” in this amendment may result in finding the Secretary of State in a position where he cannot comply with his regulatory duties because there is no one-size-fits-all requirement in that case. An example for both these scenarios would be resource planning, where flexibility would be needed to cater for different scheme requirements. Another would be in relation to records management or administration, where flexibility would be needed to cater for different scheme requirements, sizes and structures.

For example, we would want to ensure that administrative systems must be adequate to support current operations; regularly monitored to ensure capacity; and adequate to support the anticipated growth of the scheme. This is more flexible than a minimum standard and tailored to a scheme’s own strategy for achieving sufficient scale. I hope that I have said enough for noble Lords to concur that the question of minimum standards is a key one, and that we will seek to use the regulation-making power in this way when appropriate, taking account of considerations to which I have just referred.

Finally, Amendment 20A stipulates that regulations about the processes must include provision about the areas listed under subsection (4) of the clause. As I have noted previously, we want to consult industry and other interested parties on the content of regulations made under Parts 1 and 2. The list provided at subsection (4) has been included in the Bill to provide clarity to industry now about the areas that the Government believe such regulations are likely to cover. However, the Government do not intend to stipulate the areas that must be included in the regulations made under this clause without consulting on those regulations. I hope that I have made the right assumption about what the amendment is aimed at and explained why the change would not be appropriate.

Finally, we have our old friends, negative and affirmative. I can only repeat what I have said on earlier occasions, and what my noble friend has said before—namely, that we would like to reflect on the balance of affirmative and negative in the Bill as a whole and come up with a balanced assessment of what we believe to be appropriate. On that basis, I hope that the amendments will not be pressed.

[Lord Kirkwood of Kirkhope (LD)]

My Lords, I support the case that the noble Baroness made for Amendment 22. I am very worried about conflicts of interest. The Minister was very generous and set out a detailed explanation that will repay careful study by us all tomorrow. I will certainly do that. What happens to trust deeds in all this? My experience as a defined benefit trustee is that the trustees have control, responsibilities and duties and are able to effect measures through the trust deed. We seem to be leaving all that to one side in this legislation. There may well be a case for not including measures such as Amendment 22 in the Bill. However, fundamentally different conflicts of interest face trustees in a profit-making master trust situation when they have members on the one hand and providers on the other. I am sure that the noble Baroness, Lady Drake, who knows a lot more about this than I do, makes an important point here. I am willing to discuss how we resolve this issue and whether we include the relevant measure in the Bill, but I will be following it very carefully as this legislation goes through.

[Lord Young of Cookham]

I take the noble Lord’s point. Under the authorisation criteria, the Pensions Regulator has to assess,

“whether each of the following is a fit and proper person”,

and one of them is a trustee. However, I take on board what the noble Lord says, which echoes what he said in an earlier debate—namely, that we should not lose sight of the responsibilities of trustees when we focus on the Pensions Regulator and everybody else. I should like to reflect on the point he has made and, indeed, the other point made about potential conflicts of interest and master trusts.

[Baroness Bakewell of Hardington Mandeville]

I thank the Minister for his very full response on all the amendments in this group. I agree that long-term financial sustainability is very important. I noted that when he talked about the responsibilities of trustees, he said that they “must” do certain things, not “may”, yet the Bill says “may” and not “must”. I will look in detail at what the Minister has said and I will be looking for clarity in the Bill. However, given the hour, I beg leave to withdraw the amendment.

Pension Schemes Bill [HL]

Lord Young of Cookham Excerpts

2nd reading (Hansard): House of Lords
Tuesday 1st November 2016 Lords Chamber

[Lord Young of Cookham (Con)]

My Lords, the noble Lord, Lord Hunt, reminded your Lordships that he had form in this area after being a Minister in the DWP at the beginning of the century. Two can play at that game. I was a Minister in the DHSS, as it then was, from 1979 to 1981, since when there have been many changes.

We have just had a three-hour masterclass on pensions policy, much of it about master trusts but also covering much wider issues. I am grateful to all noble Lords who have taken part in a fascinating and, for me, very illuminating debate about the range of possibilities in this vital area.

Much of the debate was supportive of what we are doing, although a significant part of the discussion raised issues of concern. From the point of view of Ministers in charge of the Bill, the good news is that the supportive comments were about what is actually in the Bill and the less supportive comments were about what is not in the Bill, but those are serious concerns, which I hope to say a word or two about as we go through. I want to focus on the issues raised by what is in the Bill. I know that any of the issues that I do not have time to deal with will be dealt with in Committee.

The Bill’s midwife was my noble friend Lady Altmann, and I am very sorry that she is not winding up this debate herself, when she would be able to answer the many questions that she has posed. We are all grateful to her for her work on it, which has enabled us to provide a fit-for-purpose framework for master trusts as auto-enrolment gathers momentum.

The noble Lord, Lord McKenzie, made the case for regulation in this area and I am grateful for his support for the Bill. He asked about the timing of the Green Paper. I can go no further than “winter”. Winter is a more broadly defined target than a specific month, and winter is when we plan to publish the Green Paper.

The noble Lord raised a number of issues, including a very important one about the resources of the Pensions Regulator. Indeed, whether the Pensions Regulator would be able to resource itself up to deal with the obligations posed on it by the Bill was a theme raised by a number of noble Lords. The Government and the Pensions Regulator are working together to ensure that the regulator has the resources that are needed. The Pensions Regulator’s resourcing will flow from an annual business planning process developed with input from the DWP, and its budget reflects its agreed priorities. Work has already started on the implications of the new regime we are discussing and will continue as we develop the secondary legislation.

With regard to the initial peak as master trusts apply for authorisation, that work has been anticipated and provision has been made in the Bill to cover the costs of processing the applications for authorisation through a one-off fee. I can confirm that the pots are protected from the date that the Bill was introduced, assuming it becomes law. If a master trust fails before it is authorised, the beneficiaries are protected and there is also a cap on the charges.

The noble Lords, Lord McKenzie and Lord Hunt, and others raised the issue of communication with members. I have some sympathy with the point that has been made. I do not want to go beyond my negotiating brief, but it is important that where it is practical the beneficiaries of auto-enrolment should have some idea of what is going on, and I would like to think about how we might do that within the constraints of the Bill.

The noble Lord, Lord McKenzie, and others raised the issue of the earnings trigger for automatic enrolment. It is not actually aligned with the personal income tax threshold but we review the earnings trigger annually, paying particular attention to the impact of this on groups currently underrepresented in pension saving, such as women and low earners, mentioned by the noble Baroness, Lady Hollis. This year’s review for the trigger for 2017-18 will consider how to get the balance right between the importance of saving for the future and the affordability of pension contributions for those on lower incomes. At this stage, as noble Lords will understand, I cannot pre-empt the outcome of the review.

There was much comment about the regulations and questions were asked about when we might see them. I take on board the point that the noble Lord, Lord Hunt, has just made. The timing of formal consultation on draft regulations depends on a number of factors. At the moment, we anticipate that the initial consultation to inform the regulations may take place in autumn 2017, but I was impressed by what was said during the debate about whether there might be more involvement at an earlier stage.

A number of noble Lords raised the issue of transparency and where we are on the consultation which took place on that last year. The Government remain committed to improving transparency through the disclosure of transaction costs, and on 4 October the FCA published a consultation proposing requirements on asset managers to disclose information about transaction costs to trustees and independent governance committees. We are working closely with the FCA and await the outcome of this consultation with interest. Pending its outcome, we will then consult on the onward disclosure of costs and charges to members.

The noble Lord, Lord Stoneham, mentioned the importance of building and maintaining confidence in master trusts—a theme that ran through the debate. He made a good point about the impact of volatility in the movement of interest rates on deficits. I would like to say a word about that in a moment.

On pension advice, as my noble friend Lord Freud said when introducing the debate, we are consulting on how we get that right. Public financial guidance is an important issue for both the Treasury and the DWP. Ministers in both departments are working towards a common goal to ensure that consumers can access the help that they need to make effective financial decisions. We intend to consult later this year and that document will, as my noble friend said in his opening speech, include proposals for a single guidance body and its governance structure. In the meantime, the Money Advice Service, the Pensions Advisory Service and Pension Wise will continue business as usual.

The noble Lord, Lord Stoneham, raised an interesting point about portability. I do not have the answer but given how many people move jobs, it is an interesting question: what happens to the auto-enrolment with a particular employer which they started with? I would like to reflect on that point.

Related to what I said earlier about communication with members, member engagement has been quite a challenging area in which to legislate. We will return to this in later debates. Although they are not specified in the Bill, there are apparently existing powers in relation to communication. I would like to take that forward, as I said a few moments ago.

My noble friend Lord Naseby welcomed the Bill but asked why there was not a de minimis level of capital adequacy. The answer is that we have got to the same destination but taken a slightly different route by looking at financial sustainability. As a number of noble Lords raised this point, it is perhaps worth clarifying how the regulator will determine how much funding a scheme has to hold before it gets authorised. The regulator, taking account of members’ interests and the circumstances of the master trust as set out in its business plan, will have to be satisfied that the scheme has adequate resources available to meet its set-up costs and running costs, particularly until it reaches break-even point, and to cover the cost of complying with its continuity strategy and legislative requirements, should the scheme have a triggering event. This includes sufficient capital to cover the costs of winding up the scheme without recourse to members’ savings, if this becomes necessary. We think that is a slightly better bespoke model to adopt, rather than a one-size-fits-all model for capital requirement.

My noble friend Lord Naseby also raised a theme which ran through the whole debate, about balancing the freedom of the individual to do what he or she wants with his or her money against the need to make sure that individuals do not run out of funds as they grow older. In that connection, he raised exit charges. I understand that few schemes covered by the Bill have exit charges and I will say a word or two about that in a moment. On his question about the mutual or not-for-profit sector, these are usually defined benefit schemes. As such, they are not subject to the authorisation regime in the Bill.

My noble friend also raised a point, which was raised by the noble Lord, Lord Hunt, my noble friend Lord Flight and others, about the impact that changes in interest rates have on the deficit in a pension fund. I was struck by the force of those arguments and wondered whether there was not a better way of measuring this, as my noble friend Lord Flight suggested. You can have a perfectly well-run pension fund that has consistently outperformed the index and has all the liquidity it needs to meet its immediate obligations, with a well-resourced employer standing behind it. But the way that the deficit is measured can mean that, if interest rates go down, a huge deficit may suddenly appear as if from nowhere—with the implications that my noble friend mentioned on dividend policy and investment policy. This issue needs exploring and the Government are responding to these concerns. We will issue a Green Paper over the winter, which will explore this area and seek to stimulate an informed debate on whether government intervention would be helpful, as my noble friend suggested, and whether there are other ways of measuring the deficits in pension funds.

[Lord Naseby]

If my noble friend went back in history he would find that prior to FRS 17, there was a different system. It was a system that looked at the mix a pension fund has and whether that was viable. All the recent work that has just been done— I referred to what one company had done in my speech—proves that it is probably the way forward, so it is not terribly novel. We could dust down what was there before.

[Lord Young of Cookham]

I welcome in advance my noble friend’s contribution to the Green Paper that is about to be launched.

The noble Baroness, Lady Hollis, with her background in this area raised a number of points. I think I have nine pages of briefing to deal with all her points; I hope she will understand if I do not go through all of them. She raised a serious point about those on zero-hours contracts, who may have a number of jobs and fall out of the system. There is a wide gateway at the moment to national insurance cover, with the lower earnings limit, and the threshold for access to contributory benefits, including the state pension, is set at the equivalent of less than 16 hours per week at the national living wage. Having made some inquiries as a result of the noble Baroness’s intervention, there is no evidence that this is a growing problem. The number of women working in two or more jobs has hardly changed in the last 10 years—it is around 5% of those in work—and there is always the option of buying into the national insurance scheme if, for whatever reason, you are outside it.

A number of noble Lords raised WASPI. I am only sorry that I cannot be more forthcoming on this than Ministers have been in the past. As your Lordships will know, during the passage of the Pensions Act 2011 a concession was made which slowed down the increase of the state pension age for women so that no one would face an increase of more than 18 months, compared to the increase as part of the Pensions Act 1995. To help older women remain in work, we have abolished the default retirement age and extended the right to request flexible retiring to all employees.

The noble Baroness, Lady Hollis, also raised an interesting proposition about merging ISAs on the one hand and pensions on the other. This is a very radical proposal, as ISAs and pensions have different regimes and objectives. I will need to think about that very radical proposal, with all its implications. Perhaps a debate might take place in the first instance within the Labour Party, to see whether it might mature in that environment. She implied, as others did, that one could not trust people with their pensions. I hope no one wants go back to the old days of having to take out an annuity. My noble friend Lady Altmann made the case for enfranchising people and trusting them to act sensibly with the freedoms that we have given them.

My noble friend Lady Altmann also reminded us of her record in campaigning for reform. As I said, we are very grateful for the offspring, which we are debating today. She mentioned the importance of protecting pension pots from raids. She is quite right that at the moment a pension pot could be raided for wind-up costs. As of the date of publication, assuming the Bill becomes an Act, there is protection. There is also protection from an increase in the percentage taken in charges.

A number of noble Lords asked about the interrelationship between the voluntary framework master trusts have adopted and the statutory framework we are introducing in the Bill. The Bill goes further than the framework of master trusts; it builds on it and builds in added protections. As my noble friend Lord Naseby said, the association of master trusts has welcomed the Bill, which implies that master trusts are able to come to terms with the extra measures they will have to take if they are to be authorised.

Perhaps I may skip over decumulation-only schemes and multi-employer schemes and deal with them in Committee.

My noble friend Lady Altmann asked whether the 1% cap on early exit charges will be confirmed. We are currently considering the level of the cap for occupational schemes as part of our response to public consultation on early exit charges. We intend to publish the response in the coming weeks. My noble friend asked some highly technical questions about definitions, which we can perhaps come to in Committee. She and other noble Lords asked about cold calling and scams. I understand that there will be an announcement in a few weeks’ time. At this stage, I can say no more than that, but I hope it will meet the expectations that have been aroused during this debate.

The noble Lord, Lord Monks, made an interesting point, which I had not expected to hear to from the Benches opposite, about whether NEST, a publicly promoted scheme, is unfair competition to the private sector. It is a good point. NEST is a critical partner in the successful implementation of automatic enrolment. In particular, it is playing a key role in supporting small and micro employers to meet their automatic enrolment responsibilities. It is unique in having a public service obligation. What the noble Lord, Lord Monks, said about the need to build a consensus, the need to move incrementally and the need to win public support for the reforms was spot on.

There was an interesting suggestion about whether there should be a new contribution basis for the low paid of a certain amount per pound rather than a threshold. That is also something I would like to think about.

My noble friend Lady Wheatcroft reminded us of the size of the pot people need to put on one side to cater for their old age and welcomed the impact the Bill will have on protecting the brand of master trusts and ensuring confidence in it. She asked about consolidation. I suspect consolidation is likely. Whether the regulator has a proactive role in promoting it, I am not sure. As implementation comes in in 2018 and a number of master trusts look at the authorisation process, it may well be that they decide to merge with others.

My noble friend also mentioned trustees and asked whether they should have greater powers in the event of a takeover. She will know that the DWP Select Committee is conducting an inquiry into this. We are determined that the regulator should have the powers needed, and if legislation is needed, we will legislate.

I apologise for any discourtesy in curtailing my remarks. My noble friend Lord Flight asked whether there will be an ongoing assessment of financial sustainability. Yes, there will. The noble Baroness, Lady Drake, made a number of very detailed and valuable points, which I look forward to addressing in Committee.

There were concerns about the robustness of the Bill due to its reliance on secondary legislation. I hope we have got the balance right. We have put as much as we can in the Bill—all the key elements of the scheme—and left the details to secondary legislation. I welcome what the noble Lord, Lord Hunt, said about the Bill and building trust and confidence.

The Bill builds on the radical changes made to the pension system over the past 10 years. We need to ensure that savers can be confident that their savings are being well managed. The measures in the Bill will help to protect them and to maintain their confidence. I thank all noble Lords for their contributions, and I invite the House to give the Bill a Second Reading.

Bill read a second time and committed to a Committee of the Whole House.

Fit for Work Scheme

Lord Young of Cookham Excerpts

Wednesday 19th October 2016 Lords Chamber

[Lord Luce]

To ask Her Majesty’s Government what progress has been made with the Fit for Work scheme in enabling those with long-term health problems like chronic pain to return to or stay in work.

[Lord Young of Cookham (Con)]

My Lords, as this is now last business, the time limit has been extended to 90 minutes and the limit on individual speeches to 10 minutes.

[Lord Luce (CB)]

My Lords, I am most grateful to the Minister for replying to this debate and to all noble Lords who will be offering their distinctive contributions. In July 2010 I led a short debate asking the Government what was being done to provide access to multidisciplinary pain management services in the NHS for those suffering chronic pain. Since then, the work of the Chronic Pain Policy Coalition and other specialist bodies has ensured progress, but it has been too slow.

I have suffered from chronic pain, caused by musculoskeletal problems, for more than 45 years. Thanks to prompt and effective support from private sector specialists in partnership with NHS doctors, I have been fortunate enough to be able to perform a wide variety of public responsibilities. Many people with chronic pain do not have the same opportunity to find effective support to keep them in work. I want all who suffer to have sufficient support to enable them to stay in or return to work after absence through sickness.

The latest available research, published by the British Medical Journal, estimates that 8 million adults are living with chronic pain serious enough to prevent them from working or participating in normal everyday life. Moreover, the research estimated that over 40% of the population suffer chronic pain at some stage in their working lives which will affect their ability to work. This evidence makes it clear that it is not only the individual who suffers but society as a whole.

Society needs the maximum number of productive years from as many people as possible. The ratio of earners and wealth generators to dependants—children, pensioners, the unemployed—should be as high as possible, because those not working depend on those who are. Fortunately, people are living longer and retirement age is becoming more elastic. Individuals can contribute to the labour force for longer, so long as they are sufficiently well, mentally and physically, to work. I therefore welcome the Secretary of State’s recent letter to me confirming that a Green Paper will be published before Christmas to consult on ways to ensure that government support meets the needs of people with health conditions in the workplace, and their employers.

It is shocking that the employment rate for adults with long-term conditions that affect their daily lives is only 46%, compared with 73% for the whole working-age population. The major long-term conditions include pain, musculoskeletal problems, stress and anxiety. Two major policy initiatives since 2008 have been the fit note and the Fit for Work service. Both are intended to enable sick individuals to return to work as soon as possible, with appropriate support. Early intervention is crucial to prevent a slide towards the benefits system. I know that the Minister is strongly committed to the Fit for Work service. I am giving him an opportunity to explain how it is developing and can be helped to succeed. Its effectiveness is something noble Lords will wish to probe.

Let me look briefly at the evolving history of sickness absence and its effect on society. In 2010, after 50 years of the sickness absence system, the Government replaced the sick note with a fit note. This was based on Dame Carol Black’s report, Working for a Healthier Tomorrow. This note enabled GPs to focus for the first time on a patient’s capacity to return to work, rather than their incapacity and the frequently repeated description “sick”.

In 2011 came the publication of another report, Health at Work—An Independent Review of Sickness Absence, by Dame Carol Black and Mr David Frost. In 2013, the Government accepted their main recommendations: to establish a health and work advisory assessment unit and to introduce a Fit for Work service—government funded and designed to help workers with ill health. It includes an occupational health work-focused assessment for employees who are off sick, or likely to be so, for four weeks or more and an advice service for employees, employers and GPs. It is now fully rolled out so that GPs and employers throughout Britain can refer patients or employees to it. This service has the potential to fill a massive gap in current provision.

I want to take this opportunity to highlight my belief that this early intervention scheme is needed. Its success could bring enormous benefit to society, and some statistics will illustrate the point. Overall, working-age ill health costs the economy more than £100 billion, including lost productivity, sickness absence and other costs. The latest figure available on chronic back pain, from 2000, shows that it cost the economy £10 billion; it will therefore be far higher now. We also know that 900,000 people are absent through sickness for four weeks or more each year and that more than 25% of the working population have a long-term condition or impairment, particularly in the 40 to 55 age group. We know that more people want to work past pension age, which will inevitably mean many more with long-term health conditions at work. Chairing recently two Westminster Employment Forum seminars on this subject, my attention has also been drawn to something called presenteeism, where a large number of employees are not working to full capacity due to their lack of health and well-being.

All this means that society suffers. Employers face a loss of productivity; the nation spends considerable sums of taxpayers’ money; and last but most important, the quality of life of many individuals is seriously undermined. Being out of work jeopardises any individual’s self-esteem and morale. So I ask the Minister: what is working well, and how can the service made more effective?

A number of questions arise. GPs and other health professionals seem to lack awareness of this service, so is it publicised enough? Do GPs realise that their workload will be reduced by referring more patients to the occupational health service? Is there enough face-to-face contact for employees, in addition to the initial telephone advisory service? Do employees know that they can get help after four weeks off work by asking their GP or employer for a referral?

There are some successful examples of large companies helping affected employees. BT has helped some 30,000 people in the last eight years. I have heard that Anglian Water has achieved a return of £3 for every £1 spent in helping an employee and the Royal Mail a return of £5 for every £1, cutting absence by 25% over three years. But the Fit for Work service was intended to make occupational health advice available nationwide. This is difficult when, as I am told, there are only some 4,000 occupational health professionals, compared to more than 45,000 GPs and physiotherapists. What number of specialists are needed to provide a nationwide Fit for Work service? It would be helpful if the Minister could say something about progress on these matters, especially how the service is currently supporting small and medium-sized enterprises, which are less likely to be able to employ their own health specialists.

A major question arises: how well equipped is the NHS to give adequate professional support for those with long-term illnesses? I can speak only about chronic pain and musculoskeletal issues, while other noble Lords can no doubt speak of other areas. Patients with chronic pain need to learn how to manage their pain and to know to what medical support they can turn—which may include physiotherapists, osteopaths, acupuncturists, psychologists and so on. A wide range of things can be done to keep us active and positive but many areas have inadequate or no multidisciplinary support for chronic pain. There is still a long way to go.

However, given an effective Fit for Work scheme, most suffering employees can be helped to stay in or return to work. Everyone stands to benefit: the individual, the employer and the nation. I congratulate the Minister on introducing this scheme. Would he be prepared for me to bring a small team from the Chronic Pain Policy Coalition and other interested Peers to discuss this scheme in more detail with him and, if possible, with Department of Health officials? I look forward to the Minister’s response.

Life Chances Strategy

Lord Young of Cookham Excerpts

Wednesday 11th May 2016 Lords Chamber

[Lord Young of Cookham (Con)]

My Lords, I join others in commending my noble friend Lord Farmer on the introductory speech he made at the beginning of the debate and for drawing attention to the Prime Minister’s 11 January speech on life chances. The speech would have got more attention at the time had it not coincided with the sad death of David Bowie. Re-reading it last night, it struck me as a significant speech, rich in content—and it reminded me of the David Cameron who campaigned more than 10 years ago to become the leader of my party and then to reposition it in its one nation tradition and champion social reform.

The speech showed that he wants to be remembered not as the Prime Minister who kept Scotland in the UK or indeed keeps the UK in the European Union, but as a Conservative Prime Minister as committed to lasting social reform as the Thatcher Government were committed to lasting economic reform. As my noble friend Lady Jenkin said, in summary the speech was about ensuring that children who are born into poorer and sometimes chaotic households have the same life chances as those who are born to more able and better-educated parents. They should be able to advance themselves despite the start they got in life. Parts of the speech echo some of the other speeches the Prime Minister made at the time about general well-being being more important than GDP.

I have no idea what is in the Queen’s Speech next week or what is in the Government’s future programme, but I suspect that the Prime Minister will want to follow up on that speech with measures to take forward the agenda it contains, including measures on prison reform and mental health care reform as well as some of the other subjects mentioned by noble Lords in this debate, including apprenticeships, which were mentioned by my noble friend Lord Hodgson. We also need measures to promote the soft skills that accelerate social mobility. Privately educated children do well not just because of better exam results or social connections but because they have the confidence and social skills that enable them to succeed at a top university or in a professional environment. Part of the agenda also needs to be a new mentoring scheme, better careers advice and a much more accessible programme of work experience.

I want to focus briefly on the housing section of the Prime Minister’s speech. The social divisions that are sometimes caused by tenants on local authority estates being in one part of a town and owner-occupiers on private estates in another part have been eroded to some extent by the right to buy and by Section 106 pepper-potting social housing in newly developed housing estates—but much more needs to be done. The speech refers to how housing estates, especially those built after the war, entrench poverty because they isolate and entrap so many families and communities. The speech says that they design crime in rather than out, leading to ghettos, gangs and anti-social behaviour, and thus to social segregation. The plan goes on to state that it wants to transform 100 housing estates across the country. It is a great idea, but a word of caution: we need to get the Treasury on side because transforming those estates is not cheap.

Some noble Lords may remember the housing action trusts of the 1990s, which provide a template for this transformation. There was a particularly successful one in Birmingham. So supportive of that trust was the local Labour MP that when he joined your Lordships’ House he gave himself the title of Lord Corbett of Castle Vale, which was the name of the housing action trust in his constituency. There were similar trusts in Liverpool, Hull, Waltham Forest, Brent and Tower Hamlets. They were preceded by a ballot of tenants to secure their assent to the transfer to a trust run by the local authority, the tenants association and the private sector. The tenants were key partners in the redesign of the estate, and training and employment were built into the transformation. At the end the estate could either go back to the local authority or it could set up a housing association to run itself. Guarantees were given on rents and obviously on rehousing, and there was mixed tenure.

Those trusts were a great success. Some of the people who ran them are still around and I hope they might be engaged. As I said, the only people who did not like it were in the Treasury. I hope that when my noble friend replies to the debate she can give us an assurance that the housing section of that speech will be taken forward by the Government with energy and with vision.

Welfare Reform and Work Bill

Lord Young of Cookham Excerpts

Monday 29th February 2016 Lords Chamber

[Baroness Manzoor (LD)]

I start by thanking the noble Lord, Lord Low, for his leadership and commitment to this issue, and other noble Lords who have also given their wholehearted commitment. This is a fundamental and important issue, not only to Members of this House, but to the most vulnerable in our society. I thank the Minister for the three concessions he has offered. These are real, substantive changes to the operation of ESA, and the wider system of support for disabled people, which will have a positive impact on the lives of some sick or disabled people. I am particularly pleased by the decision to end the 52-week rule, allowing those who are able to do so to stay close to the job market by working part-time. This is really important. This is a positive change to bring things in line with the system that will be in place under universal credit, and it is to be strongly welcomed.

I am also pleased by the decision to increase funding for the flexible support fund by £15 million to help those who are struggling to stay in work while managing a sickness or disability with whatever will make that task a little easier for them. However, I hope the Minister can look at ensuring that those who may benefit from the fund are aware of it. As we all know, with many of these kinds of funds the difference between availability and awareness can be significant in their success.

Finally, the commitment to ensure that those with degenerative conditions are able to move quickly into the support group if and when their condition worsens is important, although I hope the Minister will be able to give the House some details now of how this may operate. I also hope that he will commit to providing further updates to the House as details of this mechanism become clearer so that we may help to ensure that it operates in a way that is most beneficial to those who may need to call upon it.

It is to his credit that the Minister, despite not needing to do so, has fought for further concessions and I applaud him for it. These concessions will and could benefit many sick and disabled people, regardless of the cut to ESA being imposed by the Bill. But, as he well knows, no matter how hard fought, the concessions he has secured are merely tinkering around the edges. I do not believe for a minute that the Minister really thinks that the cut to ESA WRAG is a sensible measure or that it will somehow, as the Government have claimed, incentivise people to get better and into work more quickly. Some 50% of those likely to be affected by this cut suffer from mental health conditions. These are people living with depression and other conditions that make it hard for them to get through the day. The idea that pushing them closer to financial hardship, making it harder for them to afford their rent or feed their children, is going to help them in any way is, frankly, ridiculous. The fact is that for some, the risks of this added pressure could be severe.

If I could, I would seek to strike these measures out of the Bill again but, as we know, the Commons has spoken and the constraints of financial privilege have been put upon us. So we are left with the amendment to the Motion in the name of the noble Lord, Lord Low. This is a good amendment. It is not aiming to wreck the Bill, it is simply asking the Government to do one simple thing: to prove their case. The Government have said that this cut will help incentivise people to return to work. If that is the case, they should prove it. The Government say that this will have a limited impact on people’s physical and mental health. If they truly believe that, the noble Lord’s amendment gives them the chance to prove it. The Government say that sick and disabled people do not need that £30 extra a week. If that is the case, they should prove it.

When experts and NGOs from across the spectrum are saying the case is flawed, the least the Government can do is to present their evidence to prove their case before they implement the changes. That is what the noble Lord’s amendment does and that is why I and my Lib Dem colleagues strongly support it. Surely that is the bare minimum needed in the interests of good lawmaking.

The reason this cut has to happen is because of the need to meet an arbitrary spending target to completely abolish public sector borrowing set down by the Chancellor. The job of balancing the books can be done without this or other welfare cuts. These cuts are a choice, not an obligation. People deserve to know that they are happening because the Chancellor has made the calculation that it is better to look tough on spending and welfare by hitting those who are the most vulnerable than to accept, perhaps, that he has made a misjudgement about the economy.

I support the amendment of the noble Lord, Lord Low, not just because I believe that it is vital in ensuring that these cuts to ESA will proceed only if the claims by the Government about their impact can be proven but because those affected deserve some transparency—some honesty—from the Government. The Treasury must not hide behind good and honourable Ministers such as the noble Lord, Lord Freud, while doing immeasurable damage to some of the most vulnerable in our society.

[Lord Young of Cookham (Con)]

My Lords, perhaps I may respond briefly to the points that we have heard in the last three speeches, which I listened to with great interest and respect. The points fall into two categories: one is on the substantive issues about the benefit changes; the other is the argument about the procedural changes mentioned in the amendment.

On the substantive changes about whether ESA claimants in the WRAG should have their benefits realigned with those on JSA, with comparable changes to those on universal credit, the reality is that these changes have been debated extensively by both Houses. They were debated most recently last Tuesday in the other place, where after a three-hour debate the House of Commons insisted with a majority of 27—above the Government’s national majority—that the changes which we made should be resisted. The time has come to recognise, as I think the noble Baroness has just indicated, that we should respect the view of the Commons on this.

The noble Lord, Lord Low, said that the Government lost the argument but won the vote. Whether one has won the argument is a subjective decision and I happen to take a different view. Whether one won the vote is not a subjective decision, and that is the basis on which we should proceed. I hope that those who have expressed anxieties have been reassured by what my noble friend Lord Freud said in introducing this debate. There is the increase of £15 million for the flexible support fund, aimed at those with limited capabilities for work and enabling them to attend job interviews and training courses. I hope that that reassurance and the extra resources will allay some of the concerns that have been expressed.

Amendments 8B and 9B seem, briefly, to be going in exactly the opposite direction to that in which the House wanted to go in the context of the debate on my noble friend Lord Strathclyde’s report where, by and large, we wanted more done in primary legislation and less in statutory instruments. In that debate, I urged the Government to set the tone for constructive discussion by not using SIs where primary legislation is more appropriate. These amendments go in precisely the opposite direction to what I think the majority of the House wanted by putting the substantive change not in the primary legislation but in the statutory instrument. That would deny the opportunity for a conversation, which the House has always preferred, because the SI would not allow that. In effect, the amendment would give the House of Lords a veto over this part of the legislation, which the House of Commons has approved, and we would be back in the same territory as we were last October. I, for one, do not want to be back in that debate again and I hope, for those reasons, that the amendment will be resisted.

[Baroness Lister of Burtersett (Lab)]

My Lords, I strongly support the amendment in the name of the noble Lord, Lord Low of Dalston. He has made a strong case today, as he and other colleagues have made consistently, yet the Government continue simply to repeat that the original clauses will improve work incentives and somehow provide more support for disabled people moving into work, without any convincing evidence. Indeed, in the Commons the Minister fell back on the assertion that the Government strongly believe that this is the right thing to do. However, she did not even convince all her own Back-Benchers. As the noble Lord, Lord Low, said, a number of them had grave reservations about steaming ahead without the kind of evidence that is being sought, never mind the reservations and concerns of the wider constituency of disabled people and disability organisations.

However, the main point I want to make is the one that I and the noble Baronesses, Lady Grey-Thompson and Lady Thomas of Winchester, made on Report, which was brought to our attention by Sue Royston. Because the limited capacity for work element acts, in effect, as a gateway to the extra £30 in universal credit to cover the additional cost for disabled people in work, abolition means significant future losses for the very group the Government say they want to support. When the three of us made the point on Report, the Minister did not provide any substantive response. I did not receive the letter until just now, so it is possible that I have not read it properly. I have a horrible feeling that it might be languishing in my junk email folder, because a number of previous letters from the Minister finally turned up in that folder—I do not know what my email knows.