Lords consideration of Commons amendments to the Pension Schemes Bill - April 5

Lord Henley 

That this House do agree with the Commons in their Amendment 1.

The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Henley) (Con) 

My Lords, if it is convenient to the House I shall speak also to Amendments 3, 4 and 20. The amendments largely respond to points raised in debates in this House. Amendments 1 and 20 address an unintended consequence of the Bill and enable a scheme funder to engage in activities in relation to any part of the scheme, not just the money purchase section. I am grateful to the noble Lord, Lord McKenzie, for drawing our attention to that issue. Amendments 3 and 4 address the original requirement in the Bill that the scheme funder must be a separate legal entity and must only carry out activities directly relating to the master trust scheme in question. Noble Lords and stakeholders raised concerns about the impact of this requirement on business.

First, the amendments enable scheme funders to operate more than one master trust. Secondly, a new regulation-making power will introduce some flexibility to the requirement that scheme funders’ activities be limited to the master trusts of which they are the scheme funder or prospective funder by allowing exceptions subject to certain requirements. For example, the regulations might require that a scheme funder who carries out activities other than those that relate to the master trust disclose information similar to the financial reports in its management accounts, so that the activities relating to the master trust are distinct from other lines of business. The regulations may also require, where a scheme funder is part of group of companies, that information be disclosed about the corporate structure of the group to the extent that it affects the financing of the master trust.

Lord McKenzie of Luton (Lab) 

My Lords, I thank the Minister for introducing this first group of Commons amendments—Amendments 1, 3, 4 and 20. By way of background, we should acknowledge a degree of consensus emerging on the Bill, which has indeed been helped by the amendments before us today, which deal directly with some of the concerns we raised earlier in the parliamentary process.

This does not mean that we consider, as should have been evident in the other place, that the Government are on top of the entirety of the pensions landscape. There is more to do on the level and transparency of charges; governance; extending the benefits of auto-enrolment; and addressing the lingering injustice felt by those women whose state pension age was raised quicker than expected. Of course, the Government will need to consider John Cridland’s analysis of the state pension age, emerging issues from the DB Green Paper, and the need to make progress on proposals for the Money Advice Service, not to mention the continuing combating of pension scams.

The Bill deals with a specific and technical issue and is important to protecting millions of savers and billions of pounds of savings, and we have sought to address it in these terms. One of the criticisms of the Bill is its heavy reliance on secondary legislation, although that has now been changed to affirmative on first use, as we have just heard. The aspiration, as we understand it—and the Minister may confirm—is for this process to be completed during 2018 to enable all the provisions to be commenced. Doubtless this timetable was contemplated without due regard to Brexit. What is clear now is that an enormous amount of legislation, mostly secondary, will be required to give effect across government to our exiting the EU. Can the Minister say what assessment has been made of the capacity of government—indeed, of Parliament—to cope with all of this? Will he undertake to publish a current timetable for implementation of the Pension Schemes Bill?

We support Amendments 1 and 20, which as we have heard deal with an unintended effect of the original drafting. It would have required the scheme funder’s activities to relate only to the money purchase benefits aspect of each scheme that is a mixed-benefit scheme.

As the Minister has outlined, Amendments 3 and 4 deal with Clause 11 and the scheme funder requirements. This clause generated considerable debate in your Lordships’ House and in the other place, as the Minister again acknowledged. This was not about challenging the policy, which quite properly seeks to ensure that the financial position of scheme funders and their financial arrangements with master trusts are transparent and clear to the regulator. The concern raised by a number of noble Lords as well as stakeholders was that the original requirement for separate legal entities and activities relating to just one master trust scheme were too restrictive, could force costly corporate restructuring and could detract from market opportunities to consolidate.

The remedy proposed is to allow the scheme funder to carry out activities that relate to more than one master trust and for the Secretary of State to have power to make regulations to except a scheme funder from the requirement that it must carry out only activities directly related to master trust schemes for which it is a scheme funder. The power can be used where a scheme funder meets additional requirements relating to its financial position, its arrangements with the master trust involved and its business activities. The regulations can also enable application by the relevant master trust scheme to seek to satisfy the regulator that the scheme is financially viable.

On the face of it, these amendments potentially enable concerns about shared services, FCA-regulated entities and consolidation opportunities to be addressed, but it would be helpful if the Minister put further flesh on the bones of how he sees these relaxations being used. As we expected, he has addressed the Delegated Powers and Regulatory Reform Committee’s requiring a more convincing explanation of why these regulations should be subject to the affirmative procedure on first use—bearing in mind that this is the case in a number of places in the Bill. Subject to any final matter the Minister may raise, we are inclined to support these amendments as they demonstrate that the Government have been listening to the genuine concerns about what the original Clause 11 would have generated.

Lord Henley 

My Lords, I am most grateful to the noble Lord, Lord McKenzie, for the constructive approach he has taken to this group of amendments. I hope that this will continue for the rest of this consideration of Commons amendments. He raised various points about Cridland and the state pension age, which go wider than the Bill at the moment. I will not respond to those points but he made an important point about the degree of secondary legislation that will come forward not purely from the Department for Work and Pensions but from across government—he meant later this year, I presume, and throughout next year. He wondered whether we hoped to get all of it completed by 2018. I believe that we do but it will obviously be quite a trying matter. We will want to continue to engage with the regulator, the pension industry and other stakeholders throughout the year. That will be followed by formal consultation on those draft regulations, which we currently hope to get early next year so that we can get them coming into force from 2018.

What pressure there will be on this House and another place from all the various primary and secondary legislation coming before us is probably beyond the noble Lord’s pay grade, and certainly beyond mine. However, I am sure that the usual channels will discuss that and ensure that we give appropriate coverage to all these matters.

As to the detailed timetable of all that consultation with the regulator and pension stakeholders, the noble Lord asked for a table, but it might be helpful it I write him a short letter setting that out, if there is anything that I can add to what I have said. We aim to have those regulations coming into force from 2018, and nothing that I have seen so far seems to suggest that we will not be able to meet that. I think we can go ahead and agree these amendments. I hope the noble Lord will accept that.

Lord Henley 

That this House do agree with the Commons in their Amendment 2.

Lord Henley 

My Lords, it will be convenient to take Amendments 5 to 19 at this stage. In the other place, Amendment 2 resulted in the removal of Clause 9, which had been inserted in this House after a vote on Report on an amendment tabled by the noble Baroness, Lady Drake. It provided for a scheme funder of last resort to meet costs where a master trust is being wound up without the necessary funds to transfer the accrued benefits. It remains the Government’s view that this provision is simply not required. I do not want to go through all the arguments put forward by my noble friends Lord Young and Lord Freud who took this Bill through the vast majority of its stages late last year. The Bill requires that in order to operate, a master trust must be authorised. The authorisation criteria include that the master trust must be financially sustainable and have sufficient systems and processes for the running of the scheme. To meet the financial sustainability requirement, the scheme will, among other things, need to provide evidence to the Pensions Regulator that it has sufficient funds to meet the costs of wind up. It will also have to provide evidence that it has sufficient systems and processes, which will include its arrangements for holding accurate records on its members and the rights and benefits to which they are entitled. The Pensions Regulator will carry out ongoing supervision of master trusts. The schemes will be required periodically to provide the Pensions Regulator with information on its financial resources and administration to enable the Pensions Regulator to be satisfied that the funding remains adequate and the systems and processes robust. A scheme funder of last resort would therefore be required only if this whole approach to regulation fails in some catastrophic way. I have no reason to believe that it is likely to do so.

Amendments 5 to 19 concern the provisions in the Bill for a master trust that is going to wind up; they are intended to address concerns that were raised in earlier debates in this House that finding another master trust to take members on may be difficult. The amendments allow regulations to provide that master trusts that are to be wound up under continuity option 1 can transfer their members’ accrued rights and benefits to a pension scheme other than a master trust. In addition, the same restrictions in the Bill on new or increased charges being applied to a master trust receiving scheme could be applied by regulations to that non-master trust receiving scheme.

In introducing these amendments in another place, my honourable friend the Minister for Pensions said:

“The non-master trust receiving scheme would be made subject to exactly the same restrictions on increasing or introducing new charges as those to which master trust receiving schemes are subject”.—[Official Report, Commons, Pension Schemes Bill Committee, 7/2/17; col. 65.]

The amendments allow for regulations to be made that would widen the potential destinations to which members of a master trust being wound up can be transferred, while ensuring that their savings cannot be used to fund the costs of that transfer. In another place, my honourable friend the Minister for Pensions explained:

“Allowing other types of pension schemes to receive transferred members, as long as they meet specified requirements, could increase the options available to trustees, introduce extra flexibility and widen the market for potential schemes. This might be useful if trustees found that they were struggling to find somewhere appropriate for their members’ rights, which might particularly benefit members using decumulation options. Being able to increase the options in future might help reduce the risk that trustees of failing master trusts might not be able to find another master trust to take their members on ”.—[Official Report, Commons, Pension Schemes Bill Committee, 7/2/17; col. 66.]

Amendments 5 to 19 are therefore primarily useful in future-proofing this aspect of the authorisation regime, and will be used as and when developments in the market give rise to a need for them. Not to include them in the Bill at this stage could unnecessarily restrict the market for members’ rights and benefits to their detriment. I beg to move.

Baroness Drake (Lab) 

My Lords, the Bill, in strengthening the regulation of master trusts, is indeed welcome. I noted that a recent release by the ONS on funded pensions and insurance in the UK national accounts referred to the significance of the establishment of DC master trusts, so in general there is increasing recognition of the importance of having fit-for-purpose regulation of master trusts. However, the government amendments in this group raise certain questions that I would like to put to the Minister.

Amendment 2 to Clause 9 simply deletes the provision for a funder of last resort. That is disappointing. Will the Minister update the House on what further action the Government have taken since the Bill was last considered by this House to address the protection of scheme member benefits in the event of a master trust winding up with insufficient resources to meet the cost of complying with and obligations under the Bill? The noble Lord, Lord Freud, implied that there was ongoing work and discussions with the industry, so it would be helpful to know what actions have been taken.

The other government amendments in this group, to Clauses 25 and 34, addressed the issue of allowing, in a wind-up on failure, the transfer of scheme members and their benefits to a receiving scheme that is not a master trust—for example, a group personal pension. While not wanting to disagree in principle with widening the pool of schemes to which transfers can be made, I think that that change to the Bill raises some questions. Given that the Pensions Regulator will be authorising a transfer to a scheme that has not been subject to the master trust authorisation regime, how will it satisfy itself that the receiving scheme on transfer is both sustainable and well governed?

The Bill provides under Clause 34 for a prohibition on increasing or imposing new charges on members by either the transferring or the receiving scheme in order to meet the cost of resolving failure. As a non-master trust receiving scheme will not have been subject to the authorisation regime and the continuity and implementation strategy requirements in the Bill, how will the Pensions Regulator apply the prohibition on increasing charges and police it after the transfer of members to a non-master trust, given that the receiving scheme will not be in its regulatory jurisdiction?

Government Amendment 13 provides for regulations to allow for transfers from a master trust to a contract-based scheme. Given that the transfer will be from a trust to a contract arrangement, do the Government consider that there are any special considerations that the regulations will need to address? If so, what are they?

Baroness Altmann (Con) 

My Lords, I welcome much of the thrust of the Bill. I am also delighted to see Amendments 3 and 4, which, I hope, ensure that insured master trusts will not be forced to separate from their insurance parent, which would have forced them to face higher costs and reduced the security of their members. I am very grateful to my noble friend for taking on board the comments made during the Bill’s passage through this House.

It strikes me that Amendment 2 should be considered separately from those to which it has been joined. I reiterate my strong concern—notwithstanding the reassurances from my noble friend—about leaving out Clause 9. I understand that there is a view that it is unnecessary and that the new regime will ensure that master trusts have sufficient resources, are financially sustainable and have capital adequacy in place. However, even with new schemes and the best will in the world, capital adequacy tests may prove inadequate. No provision in the Bill would cover members of a very large pension scheme that suffered a catastrophic computer failure and lost member records. The cost of restoring that could be well above the capital adequacy put in place, and nothing in the Bill explains where the cost of restoring those records would be covered. The only place might be the members’ pots themselves, which is not supposed to happen.

I vividly recall assurances given by Ministers on defined benefit schemes during the 1990s, when the minimum funding requirement was supposed to ensure that schemes would always have enough money to pay pensions. No one foresaw the problems evident in the early 2000s, when schemes that had met MFR legislation wound up and ended up without enough money to pay any money to some members on the pensions that they were owed.

Even more concerning than that is that the Bill is being introduced when 80 or so master trusts are already in existence in the market with a huge number of members across the country already saving in a pension. These trusts have not been subject to the capital adequacy test or other tests that the Bill will rightly introduce. What is the protection for members of existing schemes who are saving in good faith? They are not protected at all. That was why I was very pleased that we passed the amendment concerning the scheme funder of last resort. I echo the question of the noble Baroness, Lady Drake: what discussions have taken place with the industry to find a solution to cover the eventuality—we do not expect it and it is, I admit, a small probability—that an existing master trust winds up without enough funding to cover the costs of administration to sort out its records and transfer them over to another scheme? I should be grateful for some information from my noble friend about whether there are ongoing discussions and how the department sees that eventuality being covered: where would the money be found?

On Amendments 5 to 19, I share some of the reservations mentioned by the noble Baroness, Lady Drake, such as the regulatory disparity between a master trust, which would be regulated by the Pensions Regulator—and therefore under its control, if you like —and a master trust transferred under the amendments to a pension scheme regulated by the Financial Conduct Authority. How would the regulatory systems work together when they are under different legislation?

I have other concerns, but I may raise them under the next group.

Lord McKenzie of Luton 

My Lords, let me start by expressing our regret that the requirement for there to be a funder of last resort—successfully pressed by my noble friend Lady Drake on Report—has been deleted from the Bill. That concern was also expressed by the noble Baroness, Lady Altmann. We of course accept that the whole purpose of the Bill—its protections, including capital adequacy, financial sustainability, systems requirements, scheme funder and transfer regime—is to secure people’s pension pots, militate against scheme failure, and ensure good order when difficulties arise. But as my noble friend asserted on Report, notwithstanding this, it cannot be guaranteed that a master trust will not fail and when it does there will be an available master trust to step into the breach so that members’ funds are protected. The noble Baroness, Lady Altmann, has just expressed similar concerns with vivid potential examples.

In seeking to resist the funder of last resort proposition, the noble Lord, Lord Freud, claimed that it would be costly and a disproportional response to the issue and with moral hazard implications—arguments deployed by the Parliamentary Under-Secretary of State for Pensions in the other place. We remain unconvinced of these arguments when put in the balance against the importance of protecting people’s savings. Nevertheless, we need to examine how the Commons amendments to Clauses 25 and 34 contribute to ameliorating this risk, which at least potentially they do.

We acknowledge the amendments to Clauses 25 and 34 which potentially widen the scope of continuity option 1 and expand the prohibition on increasing administration charges or imposing new administration charges. In particular, they raise the prospect of the accrued rights and benefits under a master trust scheme being transferred to an alternative pension scheme which is not a master trust. No detail is offered in the amendment about the likely characteristics of an alternative pension, other than the fact that it must be a pension scheme under the 1993 Act. This of course will include both personal and occupational pension schemes. Regulations will spell out the circumstances when the alternative might be available, and the characteristics of an alternative scheme. Regulations will also spell out how such an option is to be pursued.

While we can see the benefits of a potentially wider pool of pension schemes which could be available in the event of a master trust failure, it begs a number of questions about how any alternative scheme would be regulated and what protection it would offer members. My noble friend Lady Drake, in particular, as ever has produced some forensic questions to seek at least some clarity on key issues: further actions and discussions that have taken place; whether a receiving alternative scheme is sustainable and well governed; how such a scheme can operate a prohibition on increasing charges and preventing members’ funds from being accessed; and consideration of how bulk transfers would work. The noble Baroness, Lady Altmann, joined in the same sort of inquiry.

It remains to be seen how much these amendments provide a real opportunity to add a layer of protection and whether the market will offer up alternative schemes which can assist. We look forward to the Minister’s reply, but we are not minded to oppose these amendments.

Lord Henley 

I start by offering my thanks to the noble Lord for making it clear that he is not minded to oppose these amendments. I understand that noble Lords felt quite strongly about their amendments and for that reason wanted them in the Bill to be considered by another place. The other place has considered those amendments and we now have this opportunity for further debate. We can then get on with seeing the Bill on to the statute book.

Before dealing with the questions, I shall respond to the brief point made by my noble friend Lady Altmann about not being happy with the groupings. The groupings are a largely informal matter, sorted out by the usual channels. To my knowledge—and I think that it was probably done in discussion with the Opposition—they have changed a number of times, but that is not unusual. Very often we get it wrong in how things are grouped. But as is made clear on the bit of paper that comes to the House every day, groupings are an informal matter, and it is always open to all noble Lords to intervene on any appropriate amendment at the appropriate stage.

Lord McKenzie of Luton 

I can confirm that it was me who suggested that Amendment 2 should be added to the list.

Lord Henley 

I am grateful to the noble Lord. It is a matter that is possibly more in the hands of the Opposition than those of anyone else—but it is also a matter for all other Members of the House to put in their views, if they wish. The groupings are designed purely to assist the House and, as the mantra makes clear, they are informal and can be broken by any noble Lord.

A number of questions were put forward by the noble Baroness, Lady Drake. Again, I commend her for all the work on this Bill; I am grateful that it was largely my noble friends Lord Young and Lord Freud who had to deal with her expertise at those earlier stages, rather than myself. I come to it late, and have learned a certain amount in the course of proceedings—and, no doubt, I shall learn more in due course, particularly when we get to the regulations referred to earlier.

I come to the first of the noble Baroness’s questions, when she asked what further plans the department had for how things would be taken forward. My honourable friend the Minister for Pensions, who takes this Bill and all within it very seriously, referred in Committee to conversations that he had with representatives of certain pension funds who were then contemplating a system for allocation among themselves of any master trust that was going to wind up, if the market did not provide a proper destination. Those discussions will continue and, no doubt, my honourable friend, if he has any further points, will be able to speak to my noble friend Lady Altmann and others who have concerns.

My noble friend Lady Altmann was also worried about the confidence that we had that the risk of a master trust failing in a catastrophic manner is very low. I would still maintain that, and I think so would my honourable friend. The Pensions Regulator has been working very closely with the master trusts, and the work certainly gives us all in the department the comfort that the risk is low. The regulator continues to proactively assess the level of risk in the master trust market, and so will be alert to any changes. We hope that the regulator will publish information, including on confidence in the levels available in due course.

The noble Baroness, Lady Drake, also raised the question of how the Government will be satisfied that the receiving scheme is sustainable and well governed. Any receiving scheme would have to be regulated by the appropriate regulator; all the occupational schemes will be overseen by the Pensions Regulator and all the contract schemes will be regulated by the FCA. We hope that that will provide the appropriate coverage.

Finally, the noble Baroness asked about the Pensions Regulator and how it would apply the prohibition. The Bill provides the power to legislate on restrictions on charges in non-master trust receiving schemes. How those restrictions on charges would operate where the receiving scheme was not regulated by the Pensions Regulator would form part of future discussions if these regulations were considered to be necessary. For instance, if the scheme was regulated by the FCA, there would be discussions with the FCA about how to achieve this.

As the regulator of the exiting scheme, the Pensions Regulator would have responsibility and oversight over this scheme’s actions. The master trust pursuing continuity option 1 will have to set out in its implementation strategy which scheme it intends to use as its receiving scheme. The exiting master trust will have its implementation strategy approved by the Pensions Regulator, which also has the power to direct the trustees of the exiting master trust where they are failing to comply with their duties under the Bill. While the Pensions Regulator may not be the regulator of the receiving scheme, it will have oversight and powers it can use in that situation.

I hope that that deals largely with most of the questions. If there is anything I have failed to address, obviously, I will write. However, there will be further opportunities as we consult on those regulations over the coming year and next year to deal with these matters. Again, I give the assurance that my honourable friend the Minister for Pensions, as well as my right honourable friend the Secretary of State, will keep all this in mind and will be open to all comments that noble Lords wish to make.

Lord Henley 

That this House do agree with the Commons in their Amendments 3 to 20.

Lord Henley 

That this House do agree with the Commons in their Amendment 21.

Baroness Altmann 

My Lords, before the Bill passes through, I will make a couple of observations. Perhaps the Minister, who will not have the answers now, might write to me to allay some of my concerns that I will put on the record about the Bill.

The first regards net pay schemes being used for auto-enrolment as master trusts for low earners, who cannot get tax relief so they end up paying 25% more for their pensions. These low earners, who are probably mostly women, are the ones who surely most need extra money yet are unable to receive it. There is nothing in the master trust framework that will require employers to ensure that low earners are not enrolled into such schemes. Indeed, one pension scheme—NOW: Pensions—is reimbursing members for the tax relief they have lost, which is fine; they are not out of pocket.

The second issue on which my noble friend might be able to write to me is that I remain concerned that during a pause order, members may in fact lose entirely their entitlement to an auto-enrolment pension building up for them—for an indefinite period, because we do not know how long the pause order can last.

Lord Henley 

My Lords, I am not sure that I have ever spoken on a privilege amendment before, but I have noted what my noble friend had to say and I promise to write to her. I beg to move.