Pension Schemes Bill [ Lords ] (First sitting)

Nigel Mills Excerpts

Tuesday 7th February 2017 Public Bill Committees

[Alex Cunningham]

It is a pleasure to serve under your chairmanship, Mr Rosindell, and I am sure it will continue to be so throughout this Committee stage.

Before I get into detail of Labour’s first tabled amendments, 22 and 23, it might be helpful if I set out how we plan to approach Committee stage. As I said on Second Reading, we broadly support what the Bill seeks to do, but we have serious concerns about what the Bill does not seek to do, the issues in the pensions landscape that it fails to address, and the significant sections of policy detail pushed into secondary legislation.

I note that my new clause 5, which is designed to introduce pension credit for women born in the 1950s and whose retirement age has been accelerated, has not been selected. I say only that it is lamentable that the Bill is not broader. I am also concerned about the dependency on secondary legislation because the Government are not yet in a position to share the detail of their intentions. I know that not everything can be in the Bill, but the Constitution Committee wrote to the Government expressing strong concern about the lack of information provided in primary legislation. I hope that the Government will take the Select Committee’s caution seriously and that we can ensure that in this case the primary legislation properly sets out the Government’s intentions.

Amendment 22 raises the question why single-employer occupational schemes are excluded from the scope of the Bill and why connected employers are therefore effectively treated as a separate entity. As it stands, the Bill’s provisions regulate neither single nor connected employer arrangements. We appreciate that a line must be drawn somewhere in attempting to develop a suitable regulatory framework in the face of a wide array of occupational pension arrangements. The amendment offers the Government the opportunity to clarify the bounds of their new regulatory environment and to justify their decision to draw the boundaries where they lie in the Bill. We want the parameters of the regulatory framework to be clear.

We accept that the master trust regime is focused on schemes with particular risks, but does there not have to be consistency across the piece? The definition of a master trust covers an array of different arrangements and there is nothing simple about it—getting my head around it has taken me some time. It can cover schemes set up by unregulated businesses as well as those set up by regulated businesses, such as insurance companies or investment managers. It can also cover what are described as “white label” master trusts, which are set up by a pension providers, with commercial or non-commercial partners being allowed to brand their sections of the trust. Others may have partnering arrangements with large employers whereby each employer gets its own section of the master trust but does not make any profit from it. Schemes that are included can be industrywide, can include two or more unassociated companies, and can be in the university, charitable and religious sectors. Given the broad range of different situations, on what basis do the Government believe that it is appropriate to draw the line to exclude single unconnected employer arrangements?

The probing amendment would also delete from the definition of a master trust the exclusion of those schemes that are to be used only by connected employers. In the debate in the other place, I believe the Minister clarified that when a single group employer takes on a non-associated one and it is intended that all will participate in the scheme, the scheme will then fall under the regime. Will the Government confirm that that remains the case?

It would also be good to have further clarification of what the position would be when a joint venture has run its course and the scheme reverts to being used only by connected employers. In that instance, how do the Government justify the juxtaposition of a connected group of employers being outside the scope of the Bill whereas another connected group of similar size but with just one small associated employer would presumably be inside it? The distinguishing line is very thin.

Do the Government envisage circumstances in which clause 41 would be used to bring within the scope of the Bill a single employer occupational pension scheme? Clearly, the Bill provides that power to the Secretary of State. In fact, the power set out in the Bill is very broad, so I look forward to the Minister’s response on those issues.

I note that in amendment 32, the hon. Member for Amber Valley has sought to address the lack of access for self-employed people. I picked up that theme in new clause 4, which addresses both that and other groups currently excluded from master trust scheme membership. I look forward to the hon. Gentleman’s speech.

Amendment 23 is a probing amendment to elicit clarification regarding what happens to non-money purchase benefits in master trusts. Clause 1(1)(a), taken together with other clauses, means that the Bill applies only to money purchase benefits provided through a master trust and excludes non-money purchase benefits. As I am sure the Minister is aware, the exclusion of non-money purchase benefits would mean that members’ benefits provided by those schemes, including retirement products, are excluded from key protections in the Bill. That does not seem fair or sensible, given the Bill’s intention to provide stronger protection for scheme members.

Master trusts currently provide a range of services both to employers under auto-enrolment and to individuals exercising pension freedoms. Those can include annuities, guaranteed drawdown and investment products, which include some form of guaranteed rate of return. One example could be when annuity payments are paid to the member while the annuity supporting those payments may be held as an asset of the scheme, rather than in the name of the member. Pension freedoms are beginning to transform the market radically for guaranteed income products, but pension savers will still have an appetite for some form of guaranteed product. The Bill will not apply to non-money purchase benefits, so it is unclear what happens to those benefits and, importantly, the assets backing them when a master trust fails.

In the other place, my noble Friend Baroness Drake raised an example of a trust that allows members to add in other savings and assets such as ISAs and property used for funding retirement. Everybody I meet acknowledges Baroness Drake to be a pensions expert in every sense. She believes that of the approximately 100 master trusts, only 59 are being used for auto-enrolment, with others having developed out of the pension freedom reforms.

Regulation should anticipate that master trusts will expand further into the decumulation market of retirement products. With that in mind, the exclusion of non-money purchase benefits from the primary legislation raises a number of questions. It is not clear what happens to the treatment of all non-money purchase benefits and the assets backing them in the event of a wind-up or other triggering event occurring. Will those members’ benefits be protected against funding the costs of a triggering event? How and where will they be transferred on exit?

In the other place, the Minister suggested that there is already extensive regulation to ensure that members’ non-money purchase benefits are protected. He called further regulation in this regard “unnecessary and disproportionate”. It seems odd that in this instance the Minister seems intent on minimising duplication, yet the Government continue to require duplication of regulation in some cases around the separate legal entity. The boundary line of the legislation appears a little murkier.

We note that in Government amendment 20, Ministers have acknowledged the lack of clarity around money purchase benefits and non-money purchase benefits raised by my noble Friend Baroness Drake, but we are a little disappointed that the amendment does not seek to provide greater protection to non-money purchase benefits under mixed schemes. Instead, it merely clarifies that the Bill protects only money purchase benefits within a mixed scheme. That is deeply disappointing for us for the reasons I have just outlined. I therefore request that the Government confirm absolutely that members of master trusts providing them with non-money purchase benefits face no additional risk as a result of that gap.

Will all retirement products with an element of guarantee be covered by the Pension Protection Fund regime? Master trusts are not regulated by the Financial Conduct Authority, so where does the saver look for protection? Secondly, the continuity strategy required under clause 13 in the event of a wind-up will have to set out how the interests of members of a scheme in receipt of money purchase benefits are to be protected in a triggering event. Currently, it will not have to set out how members in receipt of non-money purchase benefits will be protected. Such a requirement would at least clarify what range of member benefits were in the master trust.

Will the master trust be required to set out how members with non-money purchase benefits will also be protected if a triggering event occurs? I am sure that the Minister will recognise these very genuine concerns and I look forward to his response.

[Nigel Mills (Amber Valley) (Con)]

It is a pleasure to serve under your chairmanship, Mr Rosindell, and to follow the shadow Minister. My remarks will be in a similar spirit to his, trying to probe the Government on how exactly they see master trusts being used, how they see the pensions landscape and how the two will mesh.

Amendment 32, which stands in my name, relates to how we deal with self-employed people who may end up in a master trust. That starts out as a technical question—as the Minister may know, I like to ask technical questions of legislation to see whether he has read it all and can trace it all through, because these things can be chased around. Under the definition in the Bill, a master trust must be an occupational pension scheme, which takes us back to the Pension Schemes Act 1993. An occupational pension scheme has to provide benefits in respect of earners with a qualifying service in an employment—such schemes do not provide benefits to earners who are self-employed in that situation. Therefore, on a high-level reading, if a scheme is providing benefits for people who are self-employed, technically it should not be an occupational pension scheme.

I assume that the answer to that particularly technical point will be that if in a master trust there are 5 million people who are employed and there are 10,000 who are self-employed, it does not get suddenly blasted out of being an occupational pension scheme and out of the regulations and drop back into the personal pension scheme regulations. I assume that the National Employment Savings Trust, which I think already markets itself to the self-employed, will not somehow have a change in its regulatory position by serving a few self-employed people.

It is not hard to foresee that the landscape might change, and it is pretty clear that we would quite like the landscape to change quite dramatically. We have a big problem with the lack of pension provision among people who are self-employed and, sadly, that problem is going the wrong way. Auto-enrolment has enrolled millions more employed people than ever before in a pension, but over the course of this century the number of people who are self-employed and actively in a pension scheme has decreased from about 1.2 million in 2002-03 to 380,000—and that is as the number of people who are self-employed has risen to more than 3.5 million. That is going completely the wrong way. Far more people are self-employed, yet far fewer of them are saving in a pension. That is not a healthy situation for them and their prospects in retirement, and it is not a particularly healthy position for us, considering how people will be able to look after themselves when they reach that age.

It is pretty clear that we need to find solutions that encourage more self-employed people to save into a pension and to take the various tax advantages that that provides. Hopefully, when the Government conduct their auto-enrolment review later in the year, one issue they will look at is whether we can extend, tweak or amend auto-enrolment to get to those many millions of people who are self-employed. Let us be honest: probably quite a large number of them would like to be employed or think they are employed—or perhaps we think they are legally, in substance, employed, yet their non-employer is somehow tweaking the rules to treat them as self-employed. How do we get those people to realise that pension savings is important to them? How do we get them into a simple scheme that is easy to administer?

It looks like auto-enrolment master trusts are the obvious vehicle that could cope with the scale of several million more people, who are probably generally on relatively low earnings, joining a pension scheme. They have the infrastructure and it is not hard to see how self-employed people could self-manage such schemes via online portals. It looks like, as a matter of policy, we would quite like to encourage all the big master trusts out there to start taking people who are self-employed. I suspect we would like to find a way.

[Ian Blackford (Ross, Skye and Lochaber) (SNP)]

The hon. Gentleman is making some important points that I fully subscribe to. As much as I welcome the Bill and its overall thrust, is this not perhaps a little bit of a missed opportunity? We could have made sure that the review of auto-enrolment came alongside it, which would have informed our present debate on how we deal with self-employed people, and indeed those under the earnings threshold. We want people to be investing in pensions for the long term.

[Nigel Mills]

I am grateful to the hon. Gentleman, and I can see the attraction of that. Given that we have effectively auto-enrolled millions of people into master trusts, I am not sure I would support a delay in the regulations coming into effect. We need the powers in the Bill available to ensure that the people we have strongly encouraged into the schemes have all the protections we think they ought to have. I suspect that the review of auto-enrolment will be long, and in some ways it will probably be difficult to work out the right balance to strike in increasing the level of savings without encouraging people to leave the schemes completely. I am not sure that waiting for a resolution of that issue would be a sensible idea.

May I raise another technical point about when a master trust scheme ends up with a large proportion of self-employed members, up to 10%, 20% or whatever percentage of the scheme? Will it have to change its regulatory position and move from being an occupational pension scheme to a personal pension scheme or some other sort? I accept that there is a lot of regulation of such schemes, which may not be the end of the world, but perhaps the Minister will set out how the Government are tackling the big self-employed pension gap, where many fewer people save much smaller amounts and end up with much smaller pension pots as they approach retirement. As our employment markets change, that will be a significant challenge for us as we try to make pensions effective for everyone in the country. I look forward to the Minister’s remarks.

[The Parliamentary Under-Secretary of State for Pensions (Richard Harrington)]

It is a pleasure to serve under your chairmanship, Mr Rosindell. I thank you for the clarification of the rules concerning hot beverages, with which I am happy to comply.

The attitude that the Opposition, the Scottish National party and all of us have taken towards the Bill is to discuss it widely among ourselves and to agree as much as we can, which is positive. Our disagreements are honourable, and no one is playing politics or at opposition for the sake of it. I wanted to make that clear, Mr Rosindell, because I have served on Bill Committees, as I am sure you have, where that has not been the case.

The Opposition amendments and those of my hon. Friend the Member for Amber Valley were tabled in the correct spirit. We had considered all the points in advance of the Bill being introduced and therefore in advance of the House of Lords proceedings and Second Reading in the Commons. Master trusts have been around for a long time, but they have grown exponentially in number over the past two years. The legislation is therefore a response not to a fundamental problem with master trusts, but to their exponential growth, pushed by auto-enrolment, and the industry seeing them as an area with a less stringent regulatory regime than other parts of the pension system. For example, insurance companies and personal pensions are regulated by the FCA under long-standing rules, and the non-master trust system is very different, because those trusts have one clear sponsoring employer and there are lots of rules and regulations under the Pensions Regulator.

The legislation is therefore meant to fill a gap. We are not filling the gap because of a disaster or problems that have arisen; we are trying to see what problems might arise. That has been the scope of discussions between the Government, Opposition and individuals, which has included some positive opposition in the other place. I hope that that will be true for most of our proceedings.

Opposition amendments 22 and 23 and the amendment of my hon. Friend the Member for Amber Valley seek to change the Bill’s definition of a master trust. Amendment 22 would extend the definition to all schemes that offer money purchase benefits, which would include schemes used only by a single employer or by employers connected to each other. The proposal would extend the scope of the definition significantly and, therefore, of the authorisation regime disproportionately.

As the debate in the other place indicated, there is general acknowledgment that further regulation of master trusts is desirable and necessary. As I explained in my opening remarks, master trusts have developed into structures that are often very different from traditional occupational pension schemes offered by single employers or the more traditional group of connected corporate employers. They offer compelling benefits to employers and members. They spur competition in the market and allow for economies of scale, providing value for money. They are also an efficient solution for smaller employers for whom setting up an individual pension scheme for employees would be difficult, onerous, impractical and expensive.

We accept, however, that those qualities also bring about new risks. As I explained, those risks are less likely to be present in single employer or connected corporate defined contribution schemes. The authorisation regime is intended to address those risks. For example, in a single employer scheme—a traditional trust scheme—the employer is usually closely involved in the running of the scheme and has an active relationship with the trustees. In a master trust, the employer’s participation is often largely limited to paying the employer contribution, which is probably the most important part. I do not take that lightly, but the responsibility for the running and administration of the trust is clearly different from a single trust for a single employer. Additionally, in a single employer scheme, the employers determine the terms of the scheme, whereas in a master trust it is done for them, with the person or organisation setting up the scheme doing it.

Those differences highlight why the purpose of the Bill is to require authorisation and provide member protection in respect of master trusts. The risks are specific to this kind of scheme and it is therefore important that the definition reflects such schemes and does not extend beyond them. The clause establishes the proper scope of the Bill and ensures that its regulation is proportionate to the issues arising.

Amendment 23 was clearly explained by the hon. Member for Stockton North. It would amend clause 1(2), which provides that the Bill’s provisions apply to a master trust scheme only in so far as it provides money purchase benefits. That would mean that the provisions of the Bill would apply in relation to the scheme as a whole, and not just in relation to the parts of it that apply to money purchase benefits. Most master trusts will only provide money purchase benefits—that is the purpose of the vast majority of them—but it is fair to say that a number will provide money purchase and non-money purchase benefits. I agree with him that master trusts can do that legally and properly. It is not the norm but some do.

As I have already set out, the authorisation regime is intended specifically to address certain risks that apply to members in master trusts that relate to the structure and funding of such schemes. In particular, the Bill is focused on the risk around money purchase benefits, and we have been open about that. In answer to the hon. Gentleman, the Bill is focused in that way because there is already extensive regulation in relation to occupational pension schemes providing non-money purchase benefits—regulation already exists. Applying the authorisation regime to them would create duplication of regulation. He warned us about duplication, but the amendment would create duplication of regulation and add unnecessary costs and burdens to the running of those schemes, with little purpose in terms of protecting members, so far as we can see.

In addition, authorisation requirements are intentionally targeted at the risks relating to money purchase benefits. Conflict and confusion might arise if those requirements are applied across the board. For example, the provisions requiring the transfer of member benefits and wind-up of a scheme might have a detrimental impact on members if applied in relation to non-money purchase benefits. It is important that the members of schemes with mixed benefits have the same standard of protection as members of schemes that only have money purchase benefits. That is why the authorisation regime applies to the money purchase aspect of such schemes. Extending authorisation to types of benefits for which it is not designed and where the risks do not arise in the same way would not be appropriate.

To answer a question asked by the hon. Member for Stockton North, I can confirm that the Government intend to include decumulation schemes—the decumulation products that he mentioned in his speech—in clause 41.

--- Later in debate ---

[Richard Harrington]

I smile, but not out of disrespect for the hon. Lady—quite the contrary. I knew that she would manage to bring in her favourite subject and I am grateful for the indulgence of the Chair in not declaring it out of scope, because she makes a relevant point. I nearly said “you”, Mr Rosindell. You would probably make it as well, if you were invited to speak on the subject.

The communication point that the hon. Lady raises has to do with the state pension. Generally, things have moved on dramatically—not just from a regulatory point of view, but with communication generally. We just have to look at the state pension side—before you rule us out of scope, Mr Rosindell. Millions of people look on the internet every year to see what the position is with their state pension. The same will apply—to bring us within scope—to private pensions. The younger generation of people do not just wait for something to come. They are aware the whole time; they see the information on their pay packet. My younger son started work after graduation in September. They sign up for the pension, it is explained and they are interested. They think it is years away, obviously, but they are interested. That is why I do not take the communication point lightly, and I will do my best now to talk in more detail about it.

We have mentioned the automatic enrolment review. That is critical—this is not just a way of sidetracking the point—because it will consider how individuals engage with their workplace pension scheme and how that can be developed so that members are better able to understand and maximise their savings. That is probably the most relevant change that we have to try to bring about—we as a Government are going to do this, but I am sure that any Government would—to get people really involved. We have appointed an external advisory board, including members that represent consumer interests as well as pension provider representation. We will lay a report before Parliament before the end of 2017. The relevant point, to bring us back to the Bill—you have been very patient, Mr Rosindell—is that it will take into account these findings. We will take them into account when considering the regulations under clause 12—that is the relevant clause—which I referred to a moment ago.

[Nigel Mills]

I did try to warn the Minister about this sort of question. The very first line of this clause says:

“The trustees of a Master Trust scheme may apply to the Pensions Regulator for authorisation.”

Will he explain why that does not say “must apply”? We do not envisage any master trusts that are not obliged to register. Is it because they can form themselves, and before they start operating they have to apply, or does he expect them to be formed only after they have been authorised?

[Richard Harrington]

Master trusts may apply. Exactly. My hon. Friend’s point is correct, but if they wish to be in a master trust in the market, they must apply. If they do not, they may say, “We’ve looked at this regulation, we call ourselves a master trust now, which we are, but the regulatory hurdles are not for us so we’ll leave the market.” We had to leave the flexibility in, and maybe many will. I do not know. Maybe entities will say, “It’s not for us, we are going to do it another way,” given the regulations, an extra burden of regulation or a different type of regulation, but if they are to be a master trust—if they are to continue as one—the “may” effectively becomes a “must”, because they have to apply and regulate. We had to leave the possibility in. It may not happen, but I think some of the smaller ones will find that it is not for them. I hope I have answered that question satisfactorily. I hope, too, that I have said enough to reassure the Committee. The Government sympathise with the intention of the amendment. We take member engagement seriously. There is no simple answer.

The Bill is about protecting those people saving in master trust schemes by addressing the key risks that arise in this type of scheme. While member engagement is important, I do not believe that the Opposition have made an effective case that these issues constitute a key risk that needs to be addressed through setting out explicit requirements in primary legislation. That is the critical point. We will consider the area further as we go through the AE review, and we will develop and consult on the regulations under clause 12. As I have explained generally on the regulations, there will be time for both Houses to go through them. On that basis, I kindly invite the hon. Member for Stockton North to withdraw his amendment.

--- Later in debate ---

[Richard Harrington]

No, I confirm that that was not the Minister’s intention at all. As we get through the regulations for this Bill, it is precisely that kind of case that we need to take into consideration, and there may be others. An IFA, of course, would be regulated and deemed to be a fit and proper person by the FCA. I am not very familiar with those rules, because they are outside my area of responsibility, but I think that they are pretty stringent and that they might be directly comparable to those under the Pensions Regulator. However, it is a fair point. In fact, most companies in the position to which my hon. Friend refers usually have to go to a professional adviser to be able to make that decision, because they have neither the time nor the experience to make the decision themselves, unless they are a very large company with suitable employees.

The regulation-making powers are needed to respond to developments in the market where the structures of master trusts might evolve to include other functions. There is a regulation-making power that enables regulations to specify matters that the regulator must take into account when assessing whether someone is a fit and proper person. As with other provisions in the Bill, we intend to work closely with industry, regulators and Her Majesty’s Revenue and Customs in developing these regulations, as well as conducting formal consultation.

The clause also gives the regulator a discretion to take into account other matters as it considers appropriate when carrying out the fit and proper person test, including matters related to a person connected to the person being assessed. That will give the regulator the flexibility to ensure that it can be fully satisfied that the criteria for a fit and proper person have been met and not avoided on technicalities.

The fit and proper person criteria are a key part of the new regime for master trusts. They relate to the competence and propriety of those responsible for the pension savings of thousands workers.

[Nigel Mills]

Will the Minister confirm that he expects this to be a high bar; that he wants people to be able to show that they are knowledgeable, competent and have the training to be a trustee and run a pension scheme, and not just that they can pass a check that they have no criminal convictions for fraud? They have to show positively that they can run these pension schemes well, not just that there is no historical evidence that they cannot.