Pension Schemes Bill [Lords]

Debate between Nigel Mills and Julian Knight

2nd reading: House of Commons
Monday 30th January 2017 Commons Chamber

[Nigel Mills (Amber Valley) (Con)]

It is a pleasure to follow the hon. Member for Oldham East and Saddleworth (Debbie Abrahams). It is probably a fair sum-up to say that we might have liked the Bill to address most of the things that she complained about and most of the things that I might not like, rather than the measures actually in it, which I think get a broad and generous welcome. None the less, this is a necessary Bill that contains the right measures, and we hope it will have a speedy passage through this House.

I want to start by saying that the master trusts, or the more extensive use of them, are a welcome development in the pension landscape. It is hard to see how auto-enrolment would have worked if we had not had the extensive use of master trusts, because what we would not have got is especially small employers setting up their own pension scheme and trying to manage and administer it, or at least act as trustees of it. What we had to see in this situation was much larger trusts in the market that employers could effectively sign up to but not incur the ongoing costs and complexity of trying to be involved in their day-to-day running. So these things are attractive, but it is right that we make sure they are well regulated and we do not create situations where savers are disadvantaged by them.

It is probably quite brave in the pension world to have tried voluntary regulation or self-regulation, but that is effectively what we have had since 2014 with the master trust assurance framework. I perhaps should declare a sort of interest. The framework was drawn up by the Pensions Regulator with the Institute of Chartered Accountants in England and Wales, of which I am a member. It is disappointing that, having had that assurance framework in place, so few of the master trusts in the market signed up to it and followed all the requirements. Indeed, very few of them went through the full audit process required. So it was clear that we had to move to full and proper regulation set out in statute for these master trusts.

This is particularly important in a situation where effectively we in Parliament and the Government are perhaps not quite forcing people to save into these trusts, but strongly encouraging that, and two thirds of those who have been auto-enrolled have ended up in one of these trusts. It is therefore key that we make sure they are in high-quality schemes that look after their interests and we do not let them either be ripped off or just be a victim of a poor-quality trust that delivers poor returns. While there has perhaps been no sign of that from the major master trusts, anyone who has experience of the pensions industry will know that if we do nothing they will eventually become a problem. So it is absolutely right that the measures in this Bill ensure that trusts are set up and operated by people who have the skills and expertise to do that, and that there is a process for managing trusts, checking their performance, and making sure no issues arise as the years go on. That is because it is not realistic to think that either the employers that have signed up their employees for these schemes or the members themselves will have the skills, the ability, the time or the inclination to be doing that ongoing monitoring. That needs to be done by qualified people. That again is an advantage that master trusts have over insurance-based products. There are some skilled people here whose job is to represent the members. The advantage of having a trust is that there is at least that protection: when decisions need to be taken, there are some people who should have the right skills to act in the savers’ interests.

It is timely to be moving forward with these proposals as we suspect that by the time we get them fully in place we will have completed the first phase of auto-enrolment. We might find in the industry that people have set them up but do not have the number of members they thought and therefore not the level of income they thought. Perhaps the charge cap means that they do not have the income to be sustainable, or perhaps the changes that give people choice when they retire mean that they will not hit retirement date and then move their money into an annuity—that they will just leave the pot and not draw it down for a while. That would still be a cost on those schemes which needs to be addressed.

[Julian Knight]

My hon. Friend is making the important point that we have to avoid zombie funds being created as a result of the master trusts, and one way of doing that is through the role of the Pensions Regulator. Does my hon. Friend agree that the fact that a master trust will have to prove that its business model is sustainable is key to that interaction with the Pensions Regulator?

[Nigel Mills]

Yes, that is the point I was trying to make. Even master trusts that have been set up entirely properly and with the best of intentions could find, by the end of auto-enrolment, that they were not going to be viable in the long run. We need to ensure that there is a clear, well managed route so that, rather than having zombie funds sitting around delivering a poor return, we can get them moved into the higher quality, better performing ones. We need to ensure that this market works for everyone.

One element that people might not have considered is that we have not yet found a solution for people who end up with multiple very small pots spread across the landscape. I suspect that that could present a cost to the system that we will want to manage our way out of in order to create a sustainable situation. Overall, master trusts are a good thing, but they will need to be well regulated if they are to create confidence in the system and ensure that savers do not get a bad deal.

There are a few other things that I think I can just about sneak in as being within the scope of the Bill. We have ended up with slightly different arrangements for master trusts and insurance-based products, and I wonder whether it is sensible to have so many different regulators in the industry trying to do the same thing. Should the Pensions Regulator really be responsible for regulating all pension schemes, however they are structured, rather than letting the Financial Conduct Authority do some? Should we try to get equivalence between schemes that are trying to do the same thing but end up having subtle differences? Perhaps it would be better to say to all savers and all members of pension schemes, “Your scheme is regulated by the Pensions Regulator. Yes, there will be a cut-off with the FCA at some point.” That would be better than having uncertainty about who is responsible for which scheme.

Looking at master trusts more generally, there is a need to think through the position in the decumulation phase. The market might already be seeing that master trusts can be used for decumulation as well as accumulation. Decumulation is a very different model, and it is perhaps harder to see the business case for that than for the accumulation phase, with its ever-growing pots and more income. With decumulation, we have ever-dwindling pots and seemingly less income from the fees. We need to think through whether master trusts are intentionally aimed at the decumulation phase where members treat them as a kind of bank account from which they can draw money when they want to. The secret will be to ensure that savers have access to the right advice, and it is a pity that the Bill does not address the future of the various advice schemes, but I am sure that we will get to that at some point. In summary, this is a welcome and necessary Bill, and I am sure that it will be very effective. I look forward to its making progress in the House.