House of Lords passes important Pension Schemes Bill changes to better protect people’s pensions - comments by Baroness (Ros) Altmann

Last night, important changes were introduced to the Pension Schemes Bill which has been going through the House of Lords, before passing to the Commons in coming weeks. 

Government should be congratulated for its work on this important Bill: The proposals cover many vital aspects of the future pensions landscape. Its wide-ranging measures aim to strengthen pensions and better protect consumers and members.

New type of pension scheme must ensure fairness between members: The Bill introduces a new type of pension fund called ‘Collective Money Purchase’ (also known as Collective Defined Contribution or CDC), which aims to offer better outcomes than pure Defined Contribution schemes, but is less onerous for employers than a traditional final salary-type arrangement. This will first be used by Royal Mail. 

Pensions Dashboard introduced: The Bill paves the way, at last, for a Pensions Dashboard, to help people see all their pensions in one place, including State Pensions. This can help consumers plan their retirement income with fuller information about the money they have saved so far. 

Pensions Regulator given stronger powers:  The Pensions Regulator’s powers will be enhanced, so it can better tackle rogue employers and reduce the risks of another BHS or Carillion scandal, by holding bosses more accountable for their actions. They could face criminal or financial penalties, thereby improving protection for members.

Lords scrutiny has already led to significant improvements: As the Bill has gone through Lords scrutiny, the Government has listened carefully to concerns from all sides of the House and introduced its own excellent amendments along the way, so the Bill was already much improved. 

Using pensions to address climate change, enhancing consumer protection against scam transfers: Changes already agreed by Ministers include explicit measures on climate change, to require pension funds to explain how their investments will protect the planet and support long-term carbon emission reductions. It also agreed regulations to ensure a publicly-run, not-for-profit Pensions Dashboard from the Money and Pensions Service (MaPS) will not be pre-empted by private operators who may want to capture customers’ pensions. The Government also agreed with Peers’ concerns about scam risks and will ensure anyone wishing to transfer their pension should be sent to MaPS for free, unbiased guidance, which can help them recognise scams and understand the risks and costs of leaving their existing scheme. 

These are all excellent changes and further improvements introduced: Last night, amendments were passed by Peers that will make further important improvements to the new pensions landscape. I certainly hope the Government does not try to take these changes out of the Bill when it reaches the Commons. So what happened last night?

CDC schemes must be operated fairly between members over time: Last night, the Lords introduced an amendment that is designed to ensure members of these new pension schemes must be treated fairly, for example with those who transfer out of the scheme being unable to unfairly select against remaining members, or older members being advantaged at the expense of younger workers.

Commercial Pension Dashboards must not come before MaPS Dashboard: Pension dashboards run by commercial operators will not be allowed to enter the market until the publicly-run, unbiased MaPS dashboard has been up and running for at least a year, and we can see how it works. This will allow consumers to become used to the concept of dashboards, find their way around their pensions and have some guidance as to their possible options for the future. Given the enormous amount of sensitive private information, it seems right that commercial operators are not competing with the public dashboard from day one. There are hundreds of billions of pounds of taxpayers’ money in these pension schemes too. With the rise in numbers of people who may be tempted to cash in their pensions, or buy other financial products that might not be right for them, it is more important than ever to ensure their pension funds are better safeguarded and the measures in the Pension Schemes Bill will help in this regard.

Private Dashboards cannot initially entice consumers into transactions: An amendment passed last night ensures any private commercially-run dashboards should not be allowed to carry out transactions without Parliament approving new regulations to determine how this should operate. The big fear expressed on all sides of the House was that a privately-run pensions dashboard, which would show a person all their pensions from all past schemes, could also offer them a ‘Consolidate Now’ button. This could potentially transfer all their past pensions to that commercial company, which may not be in their interests. The measures to require guidance from MaPS before transferring pensions should certainly help avoid the worst risks, but Peers decided this new amendment offers much more protection. It will also prevent private dashboards from selling other financial products to unsuspecting consumers. Given all the scandals we have seen in the past, it is only right that we are cautious when establishing dashboards. People’s pensions are often their most valuable asset, or second most valuable after their home, so great care is needed to ensure they get good value for money. 

Protecting members of open final salary-type schemes: The other important amendment passed last night relates to final salary-type (DB) pension schemes. The vast majority of DB schemes are now closed, but there remain over 1000 that are still open to new members and have hundreds of billions of pounds of assets. It is vital that those open schemes are not forced to close, by well-meaning but misguided regulations. The original Bill wording contained risks that the Regulator might require schemes to sell their higher-returning assets and switch to lower-return (and supposedly lower risk) bonds. This would drive a sharp rise in contributions required from members and employers. Such an overly-cautious approach would see pension contributions increase to unaffordable levels. For example, the Railways Pension Scheme (RPMI) or the Universities Scheme (USS) and many others rely on good long-term investment returns to help meet pension costs and grow their funds over time. Unlike schemes which have already closed, some of these largest schemes, with millions of members still paying contributions, have plenty of money coming in each year, which, together with the returns on their investments, do not pose the threat of insolvency or illiquidity which apply to closed schemes which are shrinking over time. If the open schemes can no longer harness their asset buying power to invest in projects that produce much better returns than just buying increasingly expensive gilts or other highly rated bonds, dramatic contribution increases will drive them to close. Just as an example, the Bank of England’s open pension scheme invests wholly in gilts and other top-rated bonds, and requires a contribution rate of 40-50% of pensionable salary.  Private sector open schemes currently contribute around 25-30% of salary, with members paying about one third of this with the rest coming from employers. If contributions had to increase to 40-50% of salary, because the trustees could no longer rely on better returns than top bonds, these remaining open schemes would become unviable. By expressly recognising, in this legislation, that the requirements for open schemes must be considered differently, the Regulator will have to take account of the benefits of broader diversification and upside potential from long-term investments.  Especially in the teeth of QE, it makes little sense for policy to drive down gilt yields while also driving pension schemes to buy ever higher priced gilts. A scheme which is closed and looking to wind-up may be better advised to steer clear of investment risks, but open schemes need to embrace the potential of higher returns that are associated with taking some risk. The Amendment passed last night will ensure open schemes are treated differently, recognising their ability to take a longer-term view and to invest in a range of assets that can deliver stronger returns, which can also better match their long-term liabilities. 

Pension Funds can help rebuild Britain using their assets for infrastructure and other investment: The amendment can help invest in infrastructure projects, which of course we will need much more of to build back after the current crisis. British pension schemes have the potential to expand investments into infrastructure, and by differentiating between open and closed schemes, the Bill will not deter further purchases of investments such as Wind Farms, Biomass Plants, housing, road-building and so on. Canadian, Australian and American pension funds having already taken significant stakes in attractive UK projects, that give them guaranteed inflation-linked returns and it is important to encourage UK funds to do the same. If there is an over-emphasis on supposed ‘de-risking’ the funding of UK pensions will become unaffordable.

Stronger, safer pensions: Overall, the changes to the Pension Schemes Bill will help to protect more people’s pensions, whatever type of pension they have put their money into. That is a significant step forward and I hope that the Government will not try to reverse any of these important measures.