That the Bill be read a second time.
My Lords, over the past 10 years the Government have delivered a number of radical changes to the pensions system that have transformed the way that people can save and access their pension savings.
Among the changes that we have made, we have removed the default retirement age, facilitating fuller working lives, we have made it easier for people to understand their state pension by introducing the new state pension, and by setting the full level at £155.65 and raising the state pension age we have lifted more pensioners out of means testing and put the state pension on a sustainable footing. We have increased private long-term savings by introducing automatic enrolment, and 6.7 million people have already been automatically enrolled into a workplace pension by 257,000 employers. By 2018, we estimate that 10 million workers will be newly saving or saving more into a workplace pension as a result of this change, generating around £17 billion in additional pension saving by 2020. In the summary of its report on automatic enrolment, published in May of this year, the Work and Pensions Select Committee said that so far, automatic enrolment had been a great success and that it had,
“been declared a success by pension providers, employers, trade unions and Government”.
We have also given people greater flexibility in relation to their pensions. The pension freedoms, which came into effect in April 2015, allow over-55 year-olds to access their pension savings more flexibly. HMRC reports that in the first year of pension freedoms, 232,000 individuals accessed a flexible payment. Since April 2016, it has been compulsory for providers to report this information. In the first six months since compulsory reporting was introduced, 243,000 individuals received a flexible payment, with 619,000 payments made in total. The total value of all flexible payments since the introduction of the freedoms is £7.65 billion.
The Bill builds on these changes. Automatic enrolment means that more people are saving into a private pension. The new freedoms mean they have more choice about what they do with their savings than ever before. We need to ensure that the legislative framework is appropriate in the light of these developments. The measures in the Bill will help to protect savers and maintain their confidence in pension savings.
The majority of the Bill focuses on master trust occupational pension schemes, which have become a most popular vehicle into which workers are automatically enrolled, particularly among small and micro-employers. Although these schemes can offer great value for members and employers, we need to act now to make sure they are regulated in the right way.
The schemes are regulated by the Pensions Regulator and occupational pension legislation. However, that legislation was developed mainly with single-employer pension schemes in mind. Master trust schemes have different structures and dynamics, so the Bill introduces a new authorisation regime for them and new powers for the Pensions Regulator to intervene where schemes are at risk of failing.
Master trusts will now have to satisfy the regulator that they meet certain criteria before operating, and schemes must continue to meet the criteria to remain authorised. The criteria respond to specific key risks identified in master trust schemes. They were developed in discussion with the industry and include the kinds of risks that the Financial Conduct Authority regulation addresses in group personal pensions, with which master trust schemes have some similarities.
Trusts will now be required to demonstrate that the persons involved in the scheme are fit and proper, that the scheme is financially sustainable, that the scheme funder meets certain requirements, that the systems and processes relating to the governance and administration of the scheme are sufficient to ensure its effective running, and that the scheme has an adequate continuity strategy.
The Bill covers more detail on each of these criteria, and additional details will be set out in regulations following further consultation with the industry. The authorisation and supervision regime is likely to be commenced in full in 2018. However, the Bill also contains provisions which, on enactment, will have effect back to the day on which this Bill was published, 20 October 2016.
These provisions relate to requirements to notify key events to the Pensions Regulator and constraints on charges levied on, or in respect of, members in circumstances related to key risk events or scheme failure. This is vital for protecting members in the short term and will ensure a backstop is in place until the full regime commences.
We have worked closely with the Pensions Regulator and engaged with the pension industry to see what essential protections are needed, and we believe that the measures in the Bill will provide those protections. The Pensions Regulator, along with many pension providers, has welcomed the introduction of the Bill and these measures, saying that it,
“will drive up standards and give us tough new supervisory powers … ensuring members are better protected and ultimately receive the benefits they expect”.
The Bill will also make a necessary change in relation to the existing legislation on charges. Information gathered by the Financial Conduct Authority and the Pensions Regulator indicates that a significant number of people have pensions in respect of which an early exit charge is applied. Clause 40 will give us the power to override contractual terms which conflict with the regulations. For example, the Government intend to use this, alongside existing powers, to make regulations to introduce a cap that will prevent early exit charges creating a barrier for members of occupational pension schemes wanting to access their pension savings. The FCA is introducing a corresponding cap on early exit charges in personal and stakeholder pension schemes.
The Government also intend to use this power, together with existing legislation, to make regulations preventing commission charges being imposed on members of certain occupational pension schemes where these arise under existing contracts entered into before 6 April 2016. We have already made regulations that prohibit such charges under new contracts agreed after that date. This will fulfil our commitment to ensure that certain pension schemes used for automatic enrolment do not contain member-borne commission payments to advisers. The Government intend to consult on both sets of regulations in the new year.
We are introducing the Bill now because it will, from the day it becomes law, protect consumers by preventing providers winding up an existing master trust while raising charges to cover the costs of doing so.
We are very conscious of the views expressed by this House that the delegated powers in previous Bills have been too wide or there has been a lack of clarity about how the policy will work. I therefore want to explain the approach we have taken to the use of delegated powers in this Bill.
The Bill sets out the key criteria for a master trust to become authorised. It requires that a master trust must satisfy the regulator that it meets these criteria and that it continues to do so on an ongoing basis. It also sets out how the regime itself will operate. However, there are matters more appropriate for secondary legislation that will address the detail of these requirements. We want to make sure that this level of detail caters for different structures and arrangements within existing master trusts, so that the burden of the regime has no disproportionate or unintended effect.
A one-size-fits-all set of requirements could have a disproportionate effect on the market. We believe that the level of detail needed to implement the main requirements, together with the need to make different provision for different cases, is more suitable for secondary legislation. It may be necessary for these detailed requirements to be adapted over time in response to market developments. To that end, we are not seeking a few broad powers; rather, we have woven specific powers into the Bill, targeted on the matters for which they are appropriate, so that it is clear where and for what they will be used.
We have not prepared draft regulations because we intend to consult the industry before making them. The Bill provides sufficient detail to allow your Lordships to scrutinise how the new authorisation and supervision regime will work and for the market to anticipate what the new regime will mean for it. The market has already proved dynamic and we expect that to continue. Therefore, having the appropriate detail in secondary legislation will enable us to adapt to changes and respond to market developments within the constraints of specific regulation-making powers.
The Bill is focused on areas where we believe we need to take immediate action to protect savers, but I know that there is considerable interest and concern about wider pension issues, so I shall touch briefly on why they are not included in the Bill.
I know that some noble Lords had expected to see in the Bill measures relating to guidance bodies. I reassure them that the Government remain committed to ensuring that consumers can access the help they need to make effective financial decisions. The recent consultation on a new delivery model for government-sponsored financial guidance proposed a two-model body, replacing the Money Advice Service with a new, streamlined money guidance body, and bringing together the Pensions Advisory Service and Pension Wise into a new, single pension guidance body. However, several stakeholders questioned, both in formal responses to the consultation and in the wider public debate that the review has provoked, how the two bodies might work together effectively and whether a single delivery body might be more cost effective and provide an improved offer to consumers. After careful consideration, we have agreed to create a single financial guidance body, but we need to do further work to ensure that the right model is delivered, that it works for consumers, and that it has the full support of the financial services, pensions and charity sectors. Reform in this area has not been shelved and we remain committed to restructuring and improving the offer on government-sponsored financial guidance.
A lot of understandable concern has been expressed in many quarters about the impact on employers of defined benefit pension schemes, and the sustainability and security of the defined benefit system. Noble Lords will be aware of high-profile cases in the news, and the ongoing Work and Pensions Select Committee inquiry into the powers of the Pensions Regulator and the Pension Protection Fund to act in cases where schemes are facing difficulty. In addition, the Pensions and Lifetime Savings Association, one of the main industry bodies for pension schemes, has set up its own taskforce looking into the sustainability of the defined benefit pensions system.
While we are aware of the many options for change that are being discussed and debated, there is no simple solution on which we are ready to legislate. Despite what noble Lords may read in certain papers, our pensions system is not in imminent danger. None the less, some employers and some schemes are in difficulty, and there are a number of issues on which we want to gather data and consider further. We intend to present a Green Paper on the challenges facing defined benefit pensions in the winter. We should not seek to address those issues ahead of that vital consultation.
Finally, I touch briefly on the changes to the state pension age. While all state pension issues will be outside of the Bill, I know that there is considerable interest and concern about this issue. We have to acknowledge that people are living longer and if we want to carry on having an affordable and sustainable pensions system, it is right that we continue to look at the state pension age. But I reassure noble Lords that we have put arrangements in place. We committed £1 billion to lessen the impact of the state pension changes on those who were affected, so that no one would experience a change of more than 18 months. In fact, 81% of women’s state pension ages will increase by no more than 12 months compared with the previous timetable. Many will benefit from an increase in the new state pension. But let me be quite clear on the Government’s position. Unwinding past decisions would involve younger people having to bear an even greater share of the burden of getting this country back to living within its means. That is not a burden we are prepared to place on them.
The Bill is an important legislative step in ensuring that we provide essential protections for people saving in master trust pension schemes, and in maintaining confidence in pension savings. The market has grown quickly and it is important that we now respond to ensure that this part of the pension market evolves in the right way. We are committed to ensuring that members are protected equally, whatever type of scheme they are in, and the measures proposed in this Bill will provide that protection. I beg to move.
My Lords, I thank the Minister for introducing this Bill. It is a necessary measure, if too long in the coming. As we have heard, Part 1 introduces an authorisation framework and supervision regime for master trusts; that is, multi-employer DC pension schemes which operate on a trust basis. As trust-based schemes they have hitherto been subject to laws that have traditionally been designed and applied to a single employer model, as the Minister explained, although in some respects they share characteristics with group personal pension plans. As the impact assessment reminds us, some of the fundamental dynamics of occupational pensions are not present in the case of master trusts, which would typically involve the employer having an ongoing interest in the scheme and its alignment to the future of the employer.
We know that some master trusts operate on a scale that is unprecedented in occupational pensions and most are run on a profit basis. However, they are not subject to the same regulation that is placed on contract-based workplace pensions. There is no requirement for a licence to operate and limited barriers to entry. There is also no requirement for specialised trustees and no infrastructure in place to support the wind-up of a failed trust. Given that the savings and pensions of millions of employees and their employer contributions are at risk, this position cannot be allowed to continue. So we are strongly supportive of the thrust of this Bill and concur with its rationale and the need to protect members from suffering financial detriment, the imperative of promoting good governance and a level playing-field for those in the sector and, crucially, the promotion of sustainability and confidence in pensions more generally.
We welcome the new powers for the Pensions Regulator to intervene where a master trust is at risk of failing. Unfortunately, despite what the Minister has said, too much has been happening in the pensions arena in recent times that has served to damage confidence in savings and pensions. Just two weeks ago we heard of the mis-selling of what should have been enhanced annuities. We have had the U-turn on the secondary annuities market after savers were encouraged to contemplate the sale of their annuities and then to have it denied—a crass piece of policy-making. There are the lingering problems of the BHS pension scheme and the adequacy of the powers of the regulator and the willingness to use them. There is a continuing sense of grievance among women in the Women Against State Pension Inequality campaign, despite what the Minister has said, who believe that they were given inadequate notice of their state pension entitlement changes. There was the acknowledged poor communication surrounding the introduction of the single state pension, the unforeseen barriers to exercising the new “freedoms”, which in part will be fixed by this Bill, and suggestions that not enough people are reaching the guidance service which as we know is now to be recast.
However, we are encouraged to be optimistic by the new Minister, Richard Harrington, who is apparently fostering a more collaborative approach between the DWP and the Treasury. In a recent speech he mused that he would do better than his two predecessors because key Ministers in the Treasury happen to be his good friends. I do not know whether the noble Lord, Lord Freud, is a chum as well, and perhaps he might let us know. So we look forward to the forthcoming Green Paper and ask the Minister how forthcoming he expects it to be. I think the answer will be “the winter”, whenever that is.
All of this emphasises the need to make progress on the regulation of master trusts, especially given the growth in their membership. We are told that by January of this year there were expected to be more than 4 million members of master trusts with auto-enrolment assets under management of some £8.5 billion in 84 schemes. Some of these have achieved accreditation under the master trust assurance regime developed with the Institute of Chartered Accountants in England and Wales but these are in the minority. Zurich has told us that accreditation is rapidly becoming a commercial reality to demonstrate a well-run scheme and it points out that there is an overlap with some of the provisions in the Bill. How do the Government plan to resolve this? Of course, the growth of such schemes is directly linked to the success of auto-enrolment, with some 6.5 million—I think the Minister said that the figure is now 6.7 million—employees currently enrolled
I am bound to say that an example of good pension policy-making started under a Labour Government, being evidenced based, with independent analysis and political consensus—an approach that would have stood more recent policy pronouncements in good stead. However, although the numbers to be auto-enrolled look set to grow, in July this year some 5.9 million employees were considered ineligible for auto-enrolment—an exclusion attributable in part to the coalition’s raising of the income threshold. The review in 2017 is an opportunity to address these matters, particularly issues with mini-jobs, income thresholds and the self-employed.
The Bill outlines a strong framework for the regime, but there is still much left to secondary legislation. Most of these regulations are to proceed by way of the negative parliamentary procedure. We will use the Committee stage to probe the detailed intent of some of these regulation-making powers and we ask the Minister, acknowledging that some depend on further consultation, to provide us with a note of when we might see the drafts, or at least policy statements, to outline their intention. I fear from what the Minister said earlier that we could wait some time for that.
Responsibility for the regulation of master trusts will be placed with the Pensions Regulator, not the FCA. As the ABI pointed out, this involves a significant change in the role of the regulator, with extensive powers and obligations being made available, including dealing with authorisation, determining fit and proper persons, judging financial sustainability and capital adequacy, deciding on adequacy of systems, having the power to initiate triggering events, and more. We will examine these powers and responsibilities in terms of what is provided, as well as where there may be gaps, to see whether they need be strengthened.
Will the Minister say what assessment has been made of the capacity and resources of the Pension Regulator to cope with all of this, particularly at the point of introduction, where all existing schemes need to seek authorisation? What fee structure is envisaged?
The Bill provides that scheme funders must be constituted as a separate legal entity—seemingly not necessarily resident in the UK; Panama, perhaps—if fit and proper persons and only carrying on activities related to the master trust scheme. The Minister may be aware of the point raised by Zurich about scheme funders having established other workplace pensions and the benefits of using shared systems. How does he respond to this? Will such shared arrangements have to be unpicked to gain authorisation? What would the position be if the scheme funder were to become insolvent? Can a restriction be placed on the level of dividends or profits of the scheme funder?
Under Schedule 1 to the Bill, the regulator can make a pause order such that during a triggering event period no new members can be admitted to the scheme and no further contributions or payments made. Will the Minister say what the consequences of this pause are for employers and workers who have current obligations under auto-enrolment? Is there a pause in their respective obligations?
A master trust scheme is defined in the Bill to apply where “two or more employers” are involved in a scheme, but it effectively counts employers that are connected as one. Perhaps the Minister would expand on the rationale for this and confirm which regulatory regime applies in these circumstances. Will such connected arrangements be run on a profit basis?
While the Bill contains a lot about the role of the Pensions Regulator, it says little about the position of members. ShareAction points out that there is a significant gap around member communication—for example, relating to the notification of triggering events—silence on the trustees providing transparency on where savers’ money is invested, no right to be given standard information on charges, where money is being invested and how ownership rights are being exercised. Will the Minister say what has happened to their consultation—closed, I believe, nearly a year ago—looking at transparency from a member’s perspective where investment has been undertaken? Will the Government encourage employer and member panels along the lines of the NEST arrangements?
We should expect some consolidation in the marketplace both before and after the Bill comes into effect. This is no bad thing. It is expected that some will seek to pre-empt the requirements in the Bill, and we need to be assured that this is not achieved to the detriment of members. On the face of it, as the Minister has explained, giving the Bill retrospective effect to 20 October appears to provide the necessary protection to ensure that member pots cannot be accessed to fund the wind-up. Can the Minister confirm that?
It is suggested that smaller master trusts in particular, faced with extra capital requirements and/or increased governance, will likely depart. Does, or should, the regulator have the power to intervene to direct a consolidation of schemes to assist such smaller schemes?
As we have heard, this Bill is not just about master trust regulation. Clause 40 purports to enable a cap on early exit charges in occupational pension schemes and to ban member-borne commission charges. The cap on early exit charges has already been implemented for contract-based schemes given the clear evidence that exit charges were preventing consumers accessing their pension savings flexibly. A fair and consistent approach is now proposed across all defined contribution pensions, and I understand that the noble Baroness, Lady Altmann, launched a consultation to that effect in May. We support the intent. Perhaps the Minister will update us on how the Government propose to proceed. We similarly support the banning of member-borne commissions and ask for an update on transaction costs. Both these issues serve to highlight the need to be vigilant in ensuring that members’ funds are protected in an environment where for the most part there is an imbalance of economic power and advantage.
The authorisation and supervision regime for master trusts will help protect the savings and pensions of millions of individuals. It will contribute to building confidence for people to save, to deny the scammers and to help sustain our pension system. Although we have to look at the detail, the regime should provide the basis of a consensus and we look forward to working with the Minister and his predecessor to see it delivered.
My Lords, I apologise to the Minister and to the House for being a few minutes late for the opening remarks in this debate and thank the authorities for allowing me none the less to speak. I want to make three initial, general points before looking at the details of the Bill.
The very fact that we are discussing this Bill shows the good progress that has been made on auto-enrolment. More than 6 million are now involved in it, with the proportion of people active in pensions going up all the time. This is good news. However, the House needs to realise that the really big task lies ahead as we move to a phase where higher contributions will be required and start to address the fact that people in the country as a whole are hugely undersaving for their pensions and retirement. The situation is not made any easier as young people find it increasingly difficult to move into a home of their own. We have a high level of consumer credit and no longer have the old paternalistic systems of final salary pension schemes. All the risk in pensions is now with the employee and the saver.
However, one reason why we have made good progress during the past 10 years is that we have had good, cross-party support for ongoing pension reforms. Therefore, on this side of the House, we agree that the growth of master trusts now needs some adjustment in terms of regulation and monitoring. I re-emphasise the point made by the noble Lord, Lord McKenzie: that the last thing we need is any undermining of confidence in the pension savings, however inadequate they may be, that people are trying to make in the current circumstances. Anything that undermines that confidence will undermine everything that we are seeking to do here.
The third point I would like to make is an immediately political point and concerns the economic uncertainty that surrounds the country at the moment. I do not think we should underestimate the damage that is being done by low interest rates for pensions and pension saving and, particularly, to the valuation of annuities. I think it was recorded only the other day that 0.1% off interest rates contributes to an increase in the deficit of the Tesco pension fund of £300 million. That just shows the damage that is being done in the current circumstances. Let us not forget the high proportion of our pensioners living in Europe who have experienced a 20% reduction in their retirement income as a result of the exchange rate. We have to realise that, in the pension field, return on investment and economic growth is vital for pension growth in the future. I do not think that anybody will have voted for the current uncertainty if this uncertainty continues and undermines those three tenets of our economy.
Looking at the issues of the master trust, I make the overall point that regulation is necessary, but have we missed an opportunity in the Bill of opening things up so that these arrangements and proposals are much more proactive for the consumer and saver, actually encouraging their investment in the saving process? I am a bit surprised that the Government are not doing in parallel and together the proposed regulation of the master trust in the Bill and what they are doing to enhance and improve the advice that is available to pensioners and people saving for their pensions.
Everybody supports making the master trusts subject to good transparency. Those who are saving in them should know how they are performing, that they are being safeguarded because there is good regulation. People should also know what the investment strategy is and what the risk assessment is of the trusts that they are involved in. That should be absolutely clear. Those should be requirements of the regulation, and charges should be transparent. It is also important that accountability should not simply be to the regulator; it should be to those who are actually investing in their pension savings directly. I am not sure that the Bill goes far enough in trying to advance that and improve on it.
Given the Prime Minister’s ideas of putting people from the consumer and employee interests on boards, are there any thoughts about their being involved in these master trusts? Why is that not included in the Bill, or is it to be the subject of late amendments? That is one direct possibility that the Government could consider. Does the annual report simply have to go to the regulator? Why is an annual report not going to the individual contributors and savers in these trusts, so that they can see exactly how their money is being stewarded and looked after? What do we regard as “a fit and proper person”? I take the trivial example of my local football club, where I have had huge disillusionment in various authorities trying to define who are fit and proper people to run a club. What is required for people to be fit and proper to run pension trusts? It is not just qualifications; it is actually an analysis and keeping to account how they operate those trusts, how they operate as managers. How will that be done? That seems to me to be the most important thing.
Another opportunity missed in the Bill concerns the whole concept of the digital age. We have moved on in the last 10 years; we can now very easily communicate with people, providing we have their email addresses. Any excuse that it is more expensive to communicate regularly with individual savers is for the birds, frankly, because bodies can now do it quite easily. This would be a good time, when we are trying to get these bodies regulated for the first time, to put in a requirement that they should have those facilities. For them to be approved, they should have those facilities so that they can easily and cheaply communicate, not just with the regulator and the employers but with the individual savers and employees.
In addition, the Bill should have said a little more about the trigger mechanisms and the pause provisions, because those both talk about informing the employers, but there is very little about telling the employees. What happens to the employees or the individual savers when the pause provision is brought in? What will they be told? What will they be advised about the contributions that they might want to continue to make but will not be allowed to? Some consideration should have been given to that.
Another important aspect of this regulation is that there has been a huge growth in master trusts, but there may be a need or an opportunity for the encouragement of consolidation going forward. Is the regulator going to keep an account of the cost per saver indices for these various trusts so that there is some indication to people how efficient they are and an indication to their management of where they can get improvements in costs and efficiency so that they operate effectively?
My final point is related, and I have not heard much about it recently. When I last asked this question, I got an answer that took it straight into the long grass. Portable pensions were always seen as an important aspect of auto-enrolment. I return to the issue of pension pots. We have now been in this for a number of years. The type of people who are investing in these pensions are moving jobs all the time. We are probably already in a situation where people have more than one pot. I do not know what the average is; it would be interesting to know. What are the Government doing on the policy that we originally looked at under the previous Government with regard to encouraging people to consolidate their pension pots? It was originally proposed that the pots would follow the employee in whatever new job or saving arrangement they went into. What is the Government’s purpose in delaying regulating on that and what are their plans to address this issue? As time goes on, this problem will grow and it will become even more difficult for the industry to find a rational solution.
I welcome the Bill’s aspirations. It could do a lot more, particularly in widening the power and knowledge of individual savers who need to put more into their pensions. I look forward to following up some of these issues in Committee and on Report.
My Lords, I declare an interest as a trustee of the Parliamentary Contributory Pension Fund, which is in sound condition. I welcome the Bill immensely. I pay tribute to my noble friend on the Front Bench for all he has done in this field over the years, and what it seems he still has to do in the future.
More important than my welcome is that I read that last week a panel of master trust providers at the conference of the Pensions and Lifetime Savings Association also welcomed the Bill. That seems to be a good start. The providers also said at that conference that it should ensure that those schemes that are not sufficiently robust will have to leave the market—quite rightly so—but they even volunteered that maybe the industry should be the catalyst to look after those members who find themselves belonging to such a trust. I hope very much that by mentioning this here publicly they will do what they said they were thinking about doing.
I was also pleased to see that the Pension and Lifetime Savings Association has set up a committee solely for master trusts to help them have strategies, to move them forward and to support them in more difficult times. That can only be in the interests of the pensioners themselves, for they are the people we are most concerned about.
Looking at the Bill, of course one looks at the role of the Pensions Regulator—TPR. Will he be given real powers under the Bill to authorise and to de-authorise? Authorisation will, as I understand it, examine every aspect of a master trust, because those master trusts will become the key providers for the development of a defined contribution pension market. There is a question of whether TPR will have adequate resources for the work that is defined for it in the Bill. I hope that there will be a thorough assessment. One recognises that it is the pensioner who will pay the bill. Nevertheless, let us at least start with an analysis of whether those who are charged with these important responsibilities are to be given sufficient resources to meet them.
I have a number of questions to ask of my noble friend. First, why is there no de minimis capital requirement for any master trust entering the market? Secondly, why under the licensing scheme is it not compulsory to use the master trust assurance framework? Thirdly, your Lordships will know of my deep interest in and support for the mutuals sector. There are many schemes out there today for groups of employers in the not-for-profit sector—for churches, charities, unions, universities, credit unions and a number of others. They usually have a defined benefit scheme and as far as I can see, having been involved with the movement for many years now, almost all those are in reasonable shape. Surely it is questionable whether it is really sensible, or indeed necessary, to include them in the master trust legislation, for they are pretty safe schemes. It seems to me that the regulations will be unnecessarily onerous, complex and really quite expensive for some of these small operations. If we demand that they have to comply with them, it will create great difficulty for a sector that, as I understand it, society wants to see promoted.
My fourth question will not find much favour with my noble friend. It is on that section of Part 2 of the Bill regarding which my noble friend reiterated the Government’s intention to introduce a cap on early exit charges. As far as the media are concerned, that is a highly emotive area. However, for the poor people who are running a pension fund and doing their calculations based on the income of that fund over 20, 25 or 30 years, or whatever it may be, making it easy for the individual member to exit the fund will make it even more difficult to plan in relation to yields in the market. Are the Government absolutely sure that they want to dig away here? We certainly cannot have a situation where the early exit charge is what one might call de minimis. There has to be a disincentive against people going in and then pulling out; otherwise—as someone who has been involved with pension fund management for 25 years—my judgment is that it will be quite a challenge, and not one that I would personally wish to take on.
So much for the questioning. I think the House will know and need to recognise that we have a long way to go in the pensions market in this nation. Today, it is estimated that just one in seven of the members of DC schemes are saving enough to maintain in retirement the lifestyle that they have got used to. There is a huge challenge for all of us—for the Government of the day, the media and the industry—to explain and convince pensioners that they must do more saving for their future life as pensioners. In my judgment, that has considerable implications for Her Majesty’s Treasury in providing some incentives to make this happen.
As this is the Second Reading of a pensions Bill I would like to comment on a couple of wider aspects. First, as I understand it, there are currently 5,945 defined benefit schemes. Your Lordships will have read, as have I, that most of those defined benefit schemes are in a negative situation. The deficits amount to billions of pounds. To make it even worse, or more lurid, the Pensions Institute at the London Cass Business School has forecast that 1,000 more pension funds will enter the Pension Protection Fund. Your Lordships will know that the level of the deficit is calculated using traditional gilts plus or corporate bond yields to calculate the discount rate. As we all know, those yields are at a very depressed level and have been for a while now.
I was interested to read something that I believe reflects the situation. First Actuarial has just done an analysis of the expected returns from underlying assets held by schemes as opposed to the theoretical system using traditional gilts plus and corporate bond yields. The net result was completely different. There turns out to be a surplus of £358 billion. We need to think long and hard about whether we will stick in the longer term with the totally unrealistic discount rate that we have had over the last decades.
My second and more general point is about when schemes face a wind-up situation. The time has come to look at changing the law. Today, it is not in the best interests of members. If they cannot afford to meet their pension promises, the only option left to the trustees and the company is to go bankrupt. The net result is that the poor pensioners get a very meagre—certainly a substantially reduced—pension from the PPF, so they lose out, and the equity shareholders in the company lose out because they lose all their equity. Why cannot trustees be allowed to renegotiate? It would result in a reduction in benefits to the members, but not as big a reduction as they get when they have to be put in the last chance saloon of the PPF. Perhaps some combination of cutting benefits and a modified new DC scheme on top of that would be a better way forward for a number of those companies—possibly not all of them, but certainly a significant element of the thousands that the Cass Business School forecasts will be in really deep trouble. A significant element of them would be saved, and that would help pensioners.
I greatly welcome the Bill. We face many new challenges in this market. I am sure the Bill will be given a Second Reading, and I look forward to playing some role in the Committee stage as we move it forward.
My Lords, the Bill is focused on master trusts, to which I will not speak. However, the Explanatory Notes open with the statement:
“The Bill’s focus is on protecting savers and maintaining confidence in pension savings”,
to which I will speak, as did the noble Lord, Lord Naseby.
Much recent government policy has been misguided. The bit we got right, after our campaigning, was the single state pension. However, those on, say, three zero-hour contracts, each of 10 hours, making 30 hours in total, still cannot aggregate their hours to come into NI and build a state pension, while someone on JSA does. There are 1 million people on ZHCs, working in the flexible labour market without access to NI and thus, potentially, to a state pension. It is wrong but, with RTI, easy to rectify.
The Government then cut projected new state pension costs by suddenly raising retirement ages faster. Steve Webb claims he did not fully understand the implications of that. Really? Equality, yes—but as our worker-pensioner ratio in 2025 will be more favourable than that of any other EU country, from Germany to Greece, apart from some smaller countries such as Ireland, the Czech Republic and Luxembourg, we argued that we could afford a slower timetable, but were refused. We argued for transitional arrangements for those WASPI women, but were denied. Women are especially dependent on a state pension, as most lack a decent OP, and caring for children and elderly parents, their pay and their hours all hobble them. The WASPI women continue to fight on, and I hope that, despite the remarks of the noble Lord, Lord Freud, today, the Government will respond.
The Government are capping costs by tying SPA to longevity. A third of your life will be spent in retirement, hence those healthy elite pale males, breezily contemplating an SPA of 68, 69 or 70. Life expectancy is rising, but not evenly. The gender gap has narrowed, while the socioeconomic gap widens. Within Norwich—a tight city with common services and standards—two city wards are one mile but some 11 years of life expectancy apart. In the council estates, most people started work six or seven years younger than in the owner-occupier ward. They start work young and they die young, but without receiving much of the pension that they paid for and we enjoy.
However, it is worse than that. Although we are living longer, healthy life expectancy has not risen pro rata. More of those extra years are spent in poor health, especially for those in manual work, who have double the rate of poor health than those who are better off. Women, for example, live longer than men but proportionately spend much more of their later life in poor health. A woman reaching 65 in Richmond can expect 16.7 years of good health; in Tower Hamlets she can expect just 3.3 years. The second woman faces fewer years of retirement and then even fewer of those years disability-free—she is doubly disadvantaged.
We have to change this, and I look to Cridland. A single SPA is profoundly and increasingly unfair. It needs to be tailored but not means tested—only half of those entitled to pension credit ever claimed it. Like NI, it should be a universal and contributory entitlement, easy to understand and administer, fair to men and women alike, and affordable. The Pensions Policy Institute reckons that 38% could draw their SPA earlier if they qualified with 45 years of NI contributions, costing around just £200 million a year. Passporting from ESA or from caring responsibilities within five years of retirement might double that. Refuse collectors in Norwich often die within two years of retirement—two years. Is it right that their lifetime NI, which barely benefits them, should pay for 20-plus years of all our state pensions? I think not.
I turn now to occupational pensions, especially as they affect the worse-off. Auto-enrolment was for those too low-paid to build a private pension, but instead of the entry point being pegged at an LEL of £5,800, it became a rising tax threshold which over the years excluded 1 million people, mainly women. The industry complained noisily about managing small sums, but even a £5,000 pot may be transformational for a woman who has never had any capital in her life. It has been frozen this year at £10,000, which is very welcome, but will the Government be reviewing this issue in 2017?
However, the biggest worry for me in recent government policy is pension liberation at 55. Spend it on a Lamborghini, government Ministers suggested; it is your money. Except it is not. Two-thirds of “your” pot actually came from others, employers and taxpayers, privileged with billions of pounds of tax relief precisely— as the Explanatory Notes state—to build pension savings, not to provide a honeypot for some to blow in middle age, perhaps leaving taxpayers to fund their later-life care for the second time round.
What is needed for a decent private pension? We all know that you must: save early, but with student debt or saving for a deposit you cannot; save regularly, but mothers in and out of waged labour mostly cannot; save enough, but with employers now contributing a meagre 44% on average through DC pots, you cannot; leave it untouched until retirement, but that is gone, so many will not; and then be rewarded proportionately, live to enjoy it, but if you are poorer you will not, so do not. Government policies in this respect are contradictory and regressive.
What might we do? ISAs attract more money than personal pensions. Why? Easy access. Only the better- off can afford to fund both ISAs for working-life access and pensions for retirement. Low-paid women, part-time workers, the self-employed and those on ZHCs, with average earnings of £11,000, can barely afford one, certainly not both financial instruments.
If, through auto-enrolment inertia, most pay into a pension they cannot access until 55, that is too late to help with divorce, disability or disaster before then, but they may have no other resources. ONS statistics show that a third of all men and women, and about half of those separated or divorced, have less than £500 in accessible savings. Many turn to debt and are trapped.
We should instead combine aspects of ISAs and pensions in one simple product. You save, and perhaps save more, into a pension if you know that you can access emergency savings from it, borrowing cheaply from yourself rather than expensively from others—which may have caused you to stop contributing to your pension entirely. FCA figures show that, of pensions accessed between October and December 2015, more than half—mainly, of course, the small pots—were fully cashed out. The PLSA shows that in the first six months of pension freedom, of those taking cash, 14% were paying off loans or debts, perhaps after years of carrying charges. Modest savers in Norwich Credit Union use its loans for holidays, Christmas, cars, household improvements and goods, yes, but also significantly for the consolidation of debts.
How to combine pension and savings in one simple product for those who, I fear, may otherwise not build either? Here are two of many possibilities. You pay into your pension account. Effectively, 75% remains ring-fenced for retirement, but 25%, the tax-free lump sum, is your easy-access savings slice floating on top. Build your pot to, say, £5,000, and you can take a quarter of it; to take more, you must rebuild. Cap it, so that there is no recycling by the wealthy.
Alternatively, StepChange, the debt charity, to which I am grateful for its help, proposes embedding a £1,000 accessible savings slice within your pension pot, which it says would remove 500,000 families from problem debt—debt that helps to lock people into poverty for years on end. Could this be part of the 2017 review, perhaps?
To conclude, we should be offering transitional arrangements for WASPI women, given that we have one of the strongest worker-pensioner ratios in the OECD, and certainly in Europe. We should allow aggregation of hours for those with multiple jobs. We should tailor state pension age to reflect morbidity. All that may help to secure fairer state pensions, which I am sure we all want. Overlay that with a fairer and more attractive private pension. How? Reduce the auto-enrolment threshold back to LEL. Consider a default de-accumulation strategy. Allow access to a savings slice embedded in a pension, and thereby encourage what the Explanatory Notes state is the purpose of the Bill—both a savings culture and a pensions culture—and do so in one product. And, of course, support capping charges and regulating master trusts.
My Lords, I welcome this Bill. It is absolutely vital that the Government ensure that people’s pensions are properly protected. The policy of auto-enrolment has been a significant success story in broadening coverage of private pensions and I am delighted that millions more people are saving for retirement with the help of their employer. Improving retirement provision across the population is vital in our ageing society and the Government’s excellent freedom and choice reforms, allowing people to use their pension savings as suits them best, have paved the way for a better appreciation of the merits of pension saving. If we are truly to make policy in the interests of the many, not just the few, then having an attractive and safe private pension system for everyone is a vital element of future planning.
I confess that I was taken aback last summer when, as Pensions Minister, I discovered that proper protections for people’s trust-based defined contribution pension savings had not been put in place before auto-enrolment began. Under the FCA rules, contract-based pension money is protected and those setting up and selling pensions are subject to strict criteria. However, this is not the case for trust-based defined contribution pensions. Currently, members of DC pension trusts could lose their entire pension, and all their employer contributions and tax relief too, if the scheme they have been contributing to winds up. Even if the actual investments are protected, members could lose their whole pension because all the costs of winding up the scheme—if they cannot be paid for by anyone else—might have to be met by the funds in the trust. It is, therefore, most welcome that the Government are finally taking action to address this. However, while we are putting the legislation in place, the House must ensure it achieves its main objectives. Therefore, there are important areas on which noble Lords will no doubt seek assurances from the Minister in Committee.
The House must be confident that the proposed protections will actually work in practice. When I first started working with government on pensions policy in 2000, it was on the issue of lack of protection for defined benefit pension trusts. Post-Maxwell, the Government of the day assured members that their pensions would in future be protected by legislation that introduced minimum funding standards. This MFR regime was supposed to mean that their DB scheme would always have enough money to pay the promised pensions, whatever happened to their employer. In practice, however, well-intentioned standards were inadequate and members ended up losing their entire pension. It took years of misery and campaigning before the Government acknowledged this lack of protection and introduced a proper insurance scheme for the future with regulatory powers to back it up. The Pension Protection Fund has worked well and the Government must ensure that any new regime to protect trust-based DC members will also provide proper protection.
Some of the issues which noble Lords will wish to explore include careful consideration of how adequate the capital adequacy safeguards will really be. We will certainly need to drill down into this more in Committee. I welcome the extension of the Pensions Regulator’s powers and the requirement for master trusts to pay for authorisation and an ongoing levy. However, it is not clear how any new regulations will dovetail with the existing master trust assurance framework that has been used by the regulator to assess master trust scheme quality. That framework does not include coverage of wind-up costs, nor adequately cover employer or member communications to ensure that proper, clear warnings are in place about the impact of such things as using a net pay scheme for workers who earn below £11,000 a year and could be required to pay a 20% penalty on their pension savings, for example.
Millions of people are already saving in master trusts, so noble Lords will be interested to hear from the Minister how existing scheme members will be protected. If their DC trust fails between now and when the new rules are enacted, what provision is the Government making to cover wind-up costs or ensure a smooth takeover of members’ pensions? Will there be a default scheme that can take over while the past records are clarified? Will there be new rules to ensure that bulk transfers between DC schemes can legally occur promptly and efficiently, with immunity for the receiving scheme against providers’ past mistakes to ensure continuity of pension coverage for members of failed trusts? As regards the definition of “master trusts”, there may be some confusion. Currently, the definitions in Clause 1 differ from the definition of “relevant multiemployer schemes” in the charges and governance regulations that were introduced in Parliament only last year. Noble Lords may be interested to understand why this is the case, and whether the Bill should look to align the definitions.
I hope my noble friend the Minister will be able to reassure the House that all relevant schemes will be covered by the Bill, and that all pension trust members will be protected on wind-up. It is not currently clear whether the definitions in the Bill are adequate. For example, a single employer trust could potentially take in DC savings from other employers, but would then not be covered by these protections for master trust members. Will the Bill ensure that the new measures cover all relevant pension saving trusts, whether for pension accumulation or decumulation, so that we do not find ourselves in need of further legislation in coming years because some schemes fell through the cracks left by the current measures?
Currently, the FCA protection regime for contract-based schemes is far tougher than that run by the Pensions Regulator for trust-based DC, and there has clearly been some regulatory arbitrage. It seems strange, however, that an insurance company with a diversified business fully regulated by the FCA would not be permitted to back a master trust. This Bill would force the existing large insurers to set up separate entities to run their master trust, which may weaken the protection for members rather than strengthen it. Will my noble friend the Minister explain why an existing large regulated insurer is not considered suitable to run a master trust, but a much smaller company whose only business is the master trust itself would be considered more suitable?
I believe noble Lords may also wish to understand what consideration has been given to an insurance arrangement along the lines of the PPF itself to cover wind-up costs if no other means exist. If the scheme funder is a limited liability company, and this company becomes insolvent, where could wind-up costs be covered from? It is a little-known fact that the Pension Protection Fund already has a provision to insure all trust-based pension schemes against fraud, including master trusts, I believe. Could this fraud compensation scheme perhaps be extended to ensure that existing master trust members were protected in the event of scheme wind-up in the near term? Imposing regulatory operational capital requirements for DC schemes is, of course, a valid policy but this is no guarantee of member security—think of the banking system, for example. Insuring against a catastrophe would usually be more efficient than every fund setting aside money just in case the worst happens. An insurance option, however, has not been included in the impact assessment accompanying the Bill, even though it was considered at industry round tables and consultations. Will regulators know in advance what amount of capital is needed to ensure adequacy? The actual costs of wind-up will not be known, or knowable, in advance. Therefore, it is important for the House to be reassured that the Government’s new proposals will work in practice, or that there is an alternative contingency plan in place for the failure of a DC pension trust whose records are in disarray.
I also support and welcome this Bill’s proposed ban on early exit charges and member-borne commission, which will enhance pension outcomes for customers. I hope that the 1% cap proposed by the FCA will be introduced as quickly as possible. In all good conscience I admit support for the concerns raised by the noble Baroness, Lady Hollis, in relation to women’s state pensions, where the failure to communicate state pension age rises and failure to allow thousands of mostly female low-paid part-time workers to accrue either state or workplace pensions has caused, and will cause, retirement hardship. But that is not the issue for today.
In summary, I welcome the Government’s legislation that aims to protect members of master trusts. Members’ interests are so important. It is imperative, however, to ensure that the planned protections will have the best possible chance of working in practice and, of course, if any measures can be introduced in this Bill to reduce the scourge of pension losses resulting from scams and frauds, that too will be most welcome.
My Lords, I start by declaring an interest. I am a trustee of NOW: Pensions, a master trust with 20,000 clients and 1 million members, which have built up in the last four years. Like many noble Lords who have taken part in this debate, I welcome in general the thrust of the Bill and its aim to provide essential protections for people in master trusts. We have advocated for a long while that a more robust regulatory regime for these trusts is necessary to ensure that all savers in them enjoy protection. It is certainly now time, as other noble Lords have said, to tighten the rules for master trusts, including on charges and commissions.
Many questions will be debated in Committee, I am sure, and this Bill is a modest measure compared with the many pensions challenges already mentioned that affect this country—whether in relation to the state pension, the declining scope of defined benefit schemes or the apparently increasing risk of the more unscrupulous or perhaps most desperate employers joining BHS and others in dumping their liabilities as best they can into the Pension Protection Fund. More specifically, there is the big question—the stark fact—that, despite the initial success of auto-enrolment, it comes nowhere near providing contribution levels of around 15% of earnings, which most people regard as the basic level of a decent pension in retirement.
There are many people still outside the scope of pensions, not least because of the qualifying earnings limit, which cuts out a lot of low-paid workers at present. A good start has been made but we still have some big challenges to face. Women have been the losers in the main, not just in relation to the state pension age, but given their preponderance in low-paid occupations and part-time work in particular.
How rapidly the pensions outlook has changed in the last few decades. I remember that as late as the 1990s, many employers with healthy defined benefit schemes were taking contribution holidays. Many of us were very worried, but they promised solemnly that they would honour their pension promises and some have done so. I notice that Rolls-Royce, which is not in the papers for reasons it would like at present, a week or two ago put new resources into its pension scheme to keep it healthy. Far too many companies have broken those promises but I note somewhat sardonically that, where senior executives remain in the general pension scheme, there is a greater tendency to keep it going than where directors are in their own separate, hived-off, top-hat scheme.
Maybe the decline of DB schemes was unavoidable because of demographic factors such as the welcome increase in life expectancy but, as the noble Baroness, Lady Hollis, said, that relates only to certain parts of the country—to certain wards in many cities where there is a big difference between the rich and the poor, the comfortable and those in need. That is a major factor. Other factors, such as the accounting and taxation changes and rather sudden actuarial reviews, had a big effect on DB schemes. The coverage of DB schemes was partial; they favoured full-time, mainly male workers in large companies. However, they were a British success story, and I am sorry to see our current position.
This increases the pressure on us to make a success of auto-enrolment. That was a rare thing in British politics: the product of a genuine consensus based on the report of the chair, Adair Turner, my noble friend Lady Drake, who will speak shortly, and Professor Hills. The major political parties did not turn it into a political football match and worked, for the most part—certainly until recently; some of the recent changes are exceptions to this—in a non-partisan way to build up the auto-enrolment system. I hope we can do that with both the Bill and next year’s review of auto-enrolment. Indeed, this kind of approach could usefully be expanded into other labour market issues, but that is a speech for another day.
There will be a major review of auto-enrolment in 2017, and I hope we will manage to make some progress together on that. I hope too that we will address the tough issues. For example, should we start to plan for a higher contribution rate, above the 8% of earnings currently envisaged? This question will of course entail some fine judgments of how both employers and workers would react to the higher contribution rate. Would employers under current pressures, which have been enhanced by the uncertainty caused by the EU referendum result, be in a position to up their contributions? Would such a move perhaps encourage them to go further towards self-employment, and not just those in the gig economy? Self-employment has accounted for half the jobs created since the crash of 2008, and we on this side are certainly aware that that could increase still further if we got some of these things wrong.
Would workers be prepared to pay substantially more into their pension, especially against the background of the very low, real pay increases which have characterised recent years? Would the opt-out rate go through the roof in such circumstances? Should we even continue with the right to opt out, or should membership of a scheme be compulsory? That would certainly simplify administration. Could it perhaps be made widely acceptable as the right thing to do, given the many pressures associated with facing old age without adequate resources? One thing is clear: any changes certainly need to build up fairly slowly, giving people time to adjust to major changes and to maintain the spirit that the Turner commission developed. But the objective must be clear: we need to move towards prompting and helping people to save more for their old age.
The Bill rightly aims to correct some weaknesses in the current system. There has been no licence to operate and virtually no barriers to entry in the master trust world. This has spawned the big increase in master trusts that has been mentioned, and there is a danger that many will fail to achieve the scale necessary to survive. The result could be disorderly exits from the market, with all the uncertainties and possible losses that the noble Baroness, Lady Altmann, referred to. To an extent this is being addressed—certainly in the Bill, through the enhanced role of the regulator, which will become an authorising body, a new market entry test and a fit and proper person test for the trustee. Schemes will have to have these continuation strategies with adequate resources to wind up in an orderly fashion.
We will need to look at the details in Committee but, for the moment, I am unclear as to why master trust assurance would not be made compulsory. It is an existing framework that could be used as part of the licensing regime. It is also desirable that the requirement to hold capital against running costs should be set at a solid rate—one that can cover the emergencies which can arise. In the case of NOW: Pensions, we think around six months would suit us. At the moment, that would mean around £8 million for the organisation.
Although it is perhaps a bit premature to move into the review of auto-enrolment, could we place on the agenda a wish to remove qualifying earnings, particularly the lower limit and, instead, base contributions on every pound of earnings? At the moment, the lower-paid are losing out big time because of the way the system works. Such a change would improve the outcomes for all, but especially for low-paid and part-time workers, many of whom are women. Other outstanding issues include the net pay anomaly—settling once and for all the point at which tax has to be paid, on the money paid in or on the money drawn out.
Finally, will the position of NEST be reconsidered in the 2017 review? Here, I recognise I may differ a little from some colleagues on this side of the House. NEST was set up as a default option, to take care of low-paid workers no other providers would accept. In fact, there has been no market failure and NEST is now looking to expand its range of activities to provide new retirement products, as well as providing pensions for the higher paid. Is this a device that could lead to market dominance funded by the taxpayer? After all, NEST is a publicly funded body. I quite accept that we want our money back from NEST in due course, but I would certainly be interested to hear the Minister’s views on this.
All in all there is much to support in this modest Bill, but it is only scratching the surface of the much bigger issues in the world of pensions that I think will occupy this House a lot in the next few years.
My Lords, I welcome the Bill and declare my interest as the director of a savings business. Pensions are the main savings for millions of people in this country, but the savings level is still woefully low. People are looking towards a retirement that will leave them impoverished, and many are unaware of just what lies ahead. A private pension pot would need to contain around £181,000 now to provide an income of £10,000 in retirement for someone who is currently 30. That is beyond the dreams of most people. However, this is why auto-enrolment is so positive.
Young people need to save and they need to start saving as early as possible, but pensions are not often high on their list of priorities, so auto-enrolment is a real force for good. However, if those schemes in auto-enrolment should hit problems—just as when any pension fund hits disaster—it will destroy confidence in the entire industry. Therefore, I welcome the Bill as a necessary step to safeguard the master trust. I also share with others the concern that we have reached this stage without putting in place some of the protections that are now included in this very worthwhile Bill.
There is much still to be discussed, however. It is obviously right to have various hurdles that master trusts must now jump to get through the authorisation process. I share the interest of the noble Lord, Lord Stoneham, in what will constitute a fit and proper person to be a trustee of one of these organisations. Is it to be left to the Pensions Regulator to determine case by case or will guidelines be laid down, covering, for instance, experience and track record? Being a trustee of a pension fund or a master trust is a hugely responsible job, and we need to be sure that people are not just stereotypical but fit and proper for the task that they will be taking on.
There are other things that the regulator could—and, I believe, should—take account of. It is all very well that one of the authorisation criteria is that the master trust should be financially viable but the idea of having a minimum capital requirement seems perfectly sensible. My noble friends Lord Naseby and Lady Altmann both referred to that. As I said, it seems very sensible and could easily be done.
Many believe that the Pensions Regulator is already overemployed and understaffed. If it is to cope with the raft of new work coming its way, it is imperative that it has the people to do that job, and I hope we can ensure that that is the case. I also hope that the regulator will be able to push some of these master trusts towards consolidation, because it is important that the people who put their savings into master trust schemes have access to the widest possible range of investments. Only by coming together in consolidated organisations will the trusts be able to take advantage of the big infrastructure opportunities. For many years now we have talked about pension funds investing in infrastructure but it has not happened. However, I believe we are on the cusp of a real change, where pension funds will put their money into housing schemes and other infrastructure projects—schemes the country needs now more than ever—and investors will benefit from the sensible, long-term match between liabilities and income, which infrastructure can develop. However, a small master trust will be unable to access those sorts of opportunities.
I warm to the calls that we have heard from some lobbyists and other quarters for master trusts to have obligations that go beyond the five stipulated criteria. I think they should have to make much more information available to those who invest in a pension scheme. It is imperative that we get a newly invigorated investment climate in this country. Traditional institutional investors have, on the whole, shown themselves to be pitifully uninterested in where their money goes and in the long term. If pension fund investors were told more about the investment policies of the fund that they were putting their money into—about the stocks and the other investments that the fund was investing in—I think we could encourage a much more positive attitude towards long-term investment, which we undoubtedly need in this country.
At the very least, I should like to see annual meetings at which those pension fund investors can, if they wish, feel involved. The noble Lord, Lord Stoneham, talked about new technology and how digital can enable everybody, wherever they live, to take part in webinars and attend annual meetings, even if they are there only virtually and not in person. I would like to see master trusts obliged to open up their proceedings in that way. Transparency is the watchword for us all now, and the more transparent they can become, the better.
I welcome the cap on exit charges. Clearly, people have been grateful for the pension freedoms they have been given and they have been relatively sensible in how they have used them. We have not seen pension raiders driving around in Lamborghinis, as we were told would happen. People are taking out the money to do sensible things—often to pay down a mortgage—and we should make sure that the charges for doing so are kept to a reasonable level.
However, there are a couple of other things to which the Minister referred but which are not in the Bill and which I would like to see. One is the central advice system. Another bout of consultation is all very well but people need advice on pensions and savings—they are not clear where to go for it—and we should make that single source of advice available as quickly as possible.
I would also hope that a Bill called the Pension Schemes Bill could move a little further into defined benefit schemes. I know the Minister told us that the Government were looking further and that more would be forthcoming, but given what has happened in defined benefit schemes recently, would it not be possible to look at the role of the pension fund trustee, not just in master trusts but in defined benefit schemes? They got more power in 2013 to ask for information in the case of takeovers, but could we not impose on pension fund trustees whose underlying business is subject to a takeover an obligation to get independent legal and financial advice before agreeing to let that deal go through?
My Lords, I begin by drawing attention to certain of my interests. I am a trustee of the Santander and Telefónica pension schemes. I am on the board of the Pensions Advisory Service, on the board of Pension Quality Mark, a trustee of Byhiras and a member of the Delegated Powers Committee.
Like everyone else, I welcome this Bill. The Explanatory Notes are excellent and the impact assessment helpful, albeit unfinished given the substantive policy decisions still to be made. My focus is whether the authorisation, supervision and wind-up regime is sufficiently robust to deliver the Bill’s focus to protect savers.
The master trust model is an important part of a sustainable workplace pension system. If regulated well, it should allow trustees with a fiduciary duty to look after members’ interests, create scale and provide access to pension savings and products at low cost. But master trusts have grown rapidly while inadequately regulated, from 0.2 million members in 2010 to well over 4 million in 2016 and rising to 6.6 million by 2030—billions of pounds from millions of workers. I doubt that anyone anticipated just how quickly the structure of master trusts would evolve.
Low barriers meant that market entrants set up trusts on minimal requirements, into which people were auto-enrolled before an optimal DC proposition and market structure were put in place. The NOW: Pensions master trust CEO, Morten Nilsson, was shocked at how easy it was to set up a master trust—it involved only sending a form to HMRC and to the Pensions Regulator.
Debate on competition focuses on freedom for providers to enter a market created by harnessing inertia. But that competition cannot deliver an effective market because the demand side—the saver—is too weak. The worker does not choose the product, and complexity and conflicts of interest weaken their position.
As the impact assessment acknowledged, master trusts expose members to specific areas of risk. Master trusts can introduce a profit motive into a trust arrangement, but they fall outside FCA regulation. A master trust is set up by a provider raising concerns about the independence of trustees. In a traditional trust, trustees can replace their administrators or investment managers, but in a master trust they may not have that power. Currently, if a master trust fails, as the noble Baroness, Lady Altmann, spelled out, the costs are crystallised and met from members’ savings. There is no Pension Protection Fund for defined contribution savings.
Their multi-employer nature means lower individual employer engagement. They are growing in part because employers want to outsource pensions or discharge legacy DC trusts. They can increase complexity, exacerbate the principal-agent problem and when operating at scale mean a greater shock on failure—all compelling reasons for why the Government are right to introduce the Bill.
But I have concerns about the robustness of this regime. Many of those will be pursued in Committee, but I shall make some overview comments. Pension pots are a 30 to 40-year project for the individual, so ongoing supervision has to be robust. Yet paragraph 59 of the impact assessment concedes that,
“substantive policy decisions will not be taken until the secondary legislation stage”,
the timetable for which is unknown. So the House is blindsided on how robust certain key provisions will be.
In his opening speech, the Minister referred to the Government’s approach to the use of delegated powers, stressing that the detail needs to accommodate different structures, not one size fits all. That argument has merit, but only in part. Why is the negative procedure needed so often? There are major policy issues to be determined. We are not sufficiently clear about the Government’s thinking on: the robustness of capital adequacy and what happens if it fails; how profit motive and fiduciary duty are resolved; the sufficiency of the systems; member engagement; and how those charges which it will be prohibited to exceed will be set in the first instance.
The last 10 years have revealed that once highly regarded institutions tumbled from their esteemed positions as a result of weak governance and inadequate scrutiny. The most highly respected names on a master trust list need ongoing assessment for long-term quality of governance. Recent debates prompted by corporate behaviour at BHS raised concerns about the adequacy of the Pensions Regulator’s powers and its willingness to deploy them. We await the Government’s response to those debates to understand how the lessons learned may inform master trust regulation.
Master trusts can introduce a profit motive and the scheme founder can limit the powers of the trustees, yet there is no explicit requirement on those trustees to put in place processes for identifying and listing conflicts of interest and how they are to be resolved.
In the Bill, the capital buffer is the last line of defence to protect members’ money from being drained when a master trust exits the market, but no system of regulation can remove all risk, and that raises a series of questions. How robust is the definition of “self-sufficiency” underpinning the capital adequacy requirement? What happens if it proves not to be adequate in a given trust? How ring-fenced or guaranteed is that capital buffer? What if the scheme funder becomes insolvent? How frequently will the Pensions Regulator monitor a scheme’s capital adequacy? Who will meet the wind-up costs in extremis? How solid is the protection that members’ funds will not be run down? As no protection fund is being proposed, should there be a pay-as-you-go levy system? Will there be a provider of last resort to take over the processes and costs of winding up and to accept bulk transfers? What action will the Government take, and how quickly, to simplify the bulk transfer process? Members in master trusts deserve to be given clear answers to all of these questions.
On Royal Assent, transition to the new authorisation regime will be demanding. For example, some master trusts will not apply for authorisation and will pre-emptively leave the market. The retrospective provision in the Bill to prohibit increasing member charges on wind-up is welcome, as it is commonplace for master trust deeds to allow for such costs to be borne by the members. But some of these trusts have set up business with little capital at risk if things do not work out. What are the member protections in this situation? These trusts do not support only automatic enrolment; they provide in-retirement products too—they have quite a wide remit.
The Bill allows for regulations on the sufficiency of master trust systems and processes, but how robust will they be? We are referred to them in the Bill, but we are only referred to matters that will be taken into account. We are unclear as to where the line will be on the minimum prescriptive obligations that will be applied. The Bill is undemanding about governance on investment decisions and there is no mention of this in the impact assessment.
As my noble friend Lord McKenzie and the noble Lord, Lord Stoneham, have detailed, the Bill is insufficient in what it says about member communication and member engagement. These trusts have the potential for huge scale, but there is no explicit requirement for transparency on how workers’ money is invested and stewarded. The Government seem to be reluctant about this, so I join my noble friend Lord McKenzie in asking the Minister, in terms of the consultation exercise run by the Government on requiring transparency on the part of pension schemes about investments, when we will get a response because it closed in December 2015. We could be heading towards two years before we know what the answer is.
Many private pension policy issues are outstanding—several noble Lords have referred to them in the debate, and all of them are compelling and worthy of attention—but auto-enrolment has been transformational. Millions of people are saving, but not because they made an active decision; it is because they had to do nothing. The DWP and the Pensions Regulator have done a good job, but we should recognise that thousands of employers have undertaken their new duty and auto-enrolled their workers in a manner that has kept the opt-out rates low. Employers are a powerful influence on people saving because employees trust their employers, but the thrust of recent government policy seems to invite or exacerbate employer disengagement from pensions.
The complexity in private pensions now, and indeed in any long-term investment product available to the ordinary saver, fed in part by the detailed regulation needed to protect weak consumers, means that it is heading to near impossible for people to understand all the detail. Together with the noble Baroness, Lady Wheatcroft, I hope that it will not be long before the revised proposals for financial and pensions guidance are revealed. For pensions guidance to be meaningful, it needs to be independent and impartial. If it is, it can go much further than guidance from a product provider fettered by its product suite.
The guidance also needs to be specialist, as savers’ low level of knowledge means that guidance needs to diagnose the issues as the consumer’s presenting question is often not the underlying matter that needs to be addressed. It also needs to mitigate market failures which cannot and should not be resolved by making people pay for expensive advice. Our private pension system harnesses inertia on the way in and maximises individual responsibility on the way out. Savers remain insufficiently protected in the first instance and are lacking in empowerment in the latter.
As so many noble Lords have said, there is much to be done. I am very keen to drill down into the robust regime for master trusts being proposed in this Bill because these organisations are going to grow in scale. They will have under their management billions and billions of pounds of ordinary workers’ money, so it is important that at the least we should get the Bill right.
My Lords, I am sure there is general support across the House for the Bill, and I congratulate my noble friend Lady Altmann on being very much its instigator. I take a slightly more positive view, in that it seems to be a case of the market actually responding rather successfully to a need. For auto-enrolment there needed to be relatively low-cost arrangements for managing money and for administration, along with an arrangement that would be suitable for a large number of small firms, and that is what has come up.
I wonder how many people even know what master trusts are. I suspect that if a survey was made of your Lordships’ House, we might find that only 20% of Members would know. They have arisen to meet a demand and in the main, they have done so rather successfully. I have seen different figures, but already between 4 million and 6 million members have £8 billion of funds under management, and about half of all employers are choosing master trusts for their auto-enrolment needs. As your Lordships are probably aware, there are four major players among a total of 84 master trusts, and it is clear that many of those will need to merge because they are of insufficient size to be viable in the long term.
There has been constructive dialogue between the Government, the Pensions Regulator and the emerged master trust industry on putting in regulation. I believe that, in the main, the regulation we are discussing today will address most of what is needed, although some areas still require work. However, I would have strongly opposed any form of levy to finance master trusts which get into trouble, because that is an unnecessary and hazardous path that should not be taken.
It is wise to leave the important territory of capital base to the Pensions Regulator to determine what sort of level of capital is adequate, but it is important that it be done on an ongoing basis. It is no good if it is done just initially when the master trust is setting up. It needs to be reviewed, probably annually. The concept of having minimal capital as six months’ operating costs is not suitable. When a master trust is small and setting up, those operating costs will be fairly small, but quite quickly they will be a lot larger. The capital base of just six months of initial costs would prove inadequate.
Importantly, in practice, when a master trust is failing it will not be difficult to sort it out because larger master trusts will be very keen to acquire the funds under management, for which they will charge their fees. It is also quite sensible to allow the regulator to act as some form of honest broker in putting together failing master trusts and suitable larger partners to absorb them.
There are some quite big issues. The first is whether the regulator should be the FCA or TPR. Group personal pension schemes, which are relatively similar—a lot of the larger providers provide both master trusts and group personal pension schemes—are regulated by the FCA. In general, the FCA is viewed as taking a tougher line than the Pensions Regulator. There certainly needs to be a level playing field between the two. While right now it is clearly more suitable for the Pensions Regulator to regulate master trusts, there are some slightly sensitive differences between the regulation of group personal pension schemes and master trusts.
There is also an issue with master trusts that attract members not connected to an employer. That may well increase in due course with self-employed individuals. They are regulated by the FCA, so there is another anomaly. The insurance industry has also made the point that where providers have both group personal pension schemes and master trusts, their capital adequacy is already determined under Solvency II, which requires them to hold sufficient capital for their master trusts. We have slight duplication, depending on the structure of the provider.
Historically, master trusts’ approval came from HMRC. It is now to be from the Pensions Regulator, but I repeat that there are some issues to be sorted out where insurance companies offer both. It is important that the regulator should not grant exemptions, as it has in the past, to NEST. Indeed, there is the argument that so to do is a breach of EU state aid rules. Also, to date there has been a voluntary process of accreditation for master trusts, the master trust assurance framework. That will need to be rolled into and absorbed into TPR regulation; but at present the larger master trusts meet the voluntary accreditation requirements and will now have to meet TPR’s requirements. Overall, there needs to be a full review of duplication areas, which can probably be dealt with after the legislation is enacted.
There is a second issue relevant to both master trusts and group personal pension schemes. If a member wants to leave a master trust and move to a new one, that master trust can require that whatever accumulated assets he has must move to his new master trust, but the new master trust cannot require it the other way around—that the assets the individual has with his old master trust are moved to them. I take the view that it is undesirable for people to have tiny amounts in different pension pots about the place, and that it is not an infringement of human liberty to require that amounts follow the individual into their new pension trust.
There is a similar situation with group personal pension schemes. Most people in such schemes—some 95% or more on average—opt for the default funds, I believe quite sensibly, as it happens. However, if a group personal pension scheme changes its managerial administrator, it cannot require that member similarly to move their money across from the old default fund to the new one, which would make life easier for everybody.
I came across a larger anomaly that rather surprised me. Generally, group personal pension schemes do not have trustees. That seems rather strange. It means that only the sponsor company can monitor how the pension is being managed—whether the administration is efficient and so forth. Master trusts have to have trustees, but the issue of group personal pension schemes and trustees needs to be thought about. At present it is left to someone called an independent governance officer to monitor and keep an eye on all group personal pension schemes managed by a particular manager. I take the view that there is insufficient time for one person, in many cases, to monitor all the schemes being managed.
I turn to two pension funds issues that are related but not in the Bill. The first is an income tax issue. Pension contributions are taxed in two ways. There is net PAYE, whereby the pension contribution is deducted from someone’s pay before PAYE is applied to it. The second route is pension trust relief at source—PTRAS—whereby PAYE is applied to gross income without deduction of pension contributions, but the pension scheme then recovers a 20% tax credit from HMRC.
The problem arises for individuals who do not pay tax, such as those employed part-time and earning less than £11,000. Under PTRAS they still get their 20% tax credit but under PAYE they do not. I believe this is worth somewhere between £5 and £10 per annum. Perhaps the easiest way to solve it would be to credit members under PAYE with that amount per annum to put them on to a level playing field. This is particularly relevant to those in part-time work. Also, I do not accept the logic of deducting £5,824 from all individuals’ pay for the purposes of calculating the amount to which employer, employee and government pension contributions should apply.
I strongly support the argument that a central advice scheme needs to be set up as soon as possible. It is a pity that the FCA has not admitted that RDR has been a disaster and resulted in no financial advice at all being available to the great majority of the population.
My final point was raised also by the noble Lord, Lord Naseby, and I very much agree with him. As a result of what was FRS 17, now FRS 102 or IAS 19, no one has any idea of the real scale of defined benefit scheme deficits. For the pension fund of which I am a trustee, my company’s old scheme, I worked out that the required FRS discount rate for discounting the value of future liabilities—the rate of interest applied—is roughly half what the pension fund has achieved in returns going back 10 or 15 years, and in good years and bad. Under the FRS rules, we are approximately in balance; the reality is that we have a huge surplus. We live in a world where some large established companies are putting off investment decisions because they allegedly have huge pension fund deficits to make good. The truth is that the FRS formula is completely out of date as a result of QE, which in turn has led to artificially low gilt yields.
When this issue has been raised with the Government, the answer has been, “Oh, we can’t interfere with accounting rules”. Well, my response to that is that Governments act in the interest of the nation. A serious issue is not being addressed. The US Congress had no trouble whatever in dealing with it. If the accounting industry is unwilling to see the sense of the argument that the FRS is now inappropriate, government should intervene. One reads of potential defined benefit deficits of £700 billion, £800 billion or more. I suspect that the reality in net terms is that there is hardly any deficit. We are starving the British economy of investment because of a piece of accounting/discounting which is wrong. I urge the Government to do something about this increasingly important issue.
My Lords, I shall speak briefly in the gap. Your Lordships will be spared the longer speech that I had intended to make, as I failed to put my name down before the cut-off time.
Broadly, I welcome the changes that the Government wish to make to master trusts, building on the success of the auto-enrolment scheme. If the Bill is successful in improving standards and in building confidence in pension savings, perhaps fewer people will take advantage of the pension freedoms introduced in the March 2014 Budget than have done during the past two years.
In her column in the Financial Times on Saturday, Merryn Somerset Webb expressed concern at the rate of withdrawal of savings from pension pots. It is to be hoped that those withdrawing their pensions under the new freedoms do not underestimate the extent of their future lifespan and need for income, or overestimate their ability to manage the withdrawn funds more profitably and efficiently than the schemes from which they have withdrawn their assets. It is worrying that one in three of those withdrawing funds are placing them in low-interest bank accounts with no tax advantages.
The improvements in regulation of master trusts are in principle welcome, but I worry that the requirements and obligations are in danger of becoming too burdensome and therefore expensive. Should master trusts not be required to publish annually their administration charges in the form of total expense ratios, similar to those provided by investment funds? Can the Minister explain why the structure requires separate legal entities called scheme funders? Is it not unduly burdensome for small employers to have to set them up? Similarly, why does a master trust need a separate scheme strategist when a trustee or committee of trustees might perform this role, perhaps delegated to a discretionary fund manager?
I agree with my noble friends Lord Flight and Lord Naseby that in a very low-interest rate environment the valuation method that schemes are required to adopt produces an absurdly high deficit figure which can negatively affect companies’ share prices and strategies, including mergers and acquisition plans. I look forward to the Minister’s winding-up speech and to answers to the questions raised.
My Lords, I thank the Minister for setting out so clearly the arguments for and direction of this Bill. Like all the other speakers, I welcome the regulation of master trusts, their trustees and the way in which their businesses are run. It is vital that we protect those investing their money in master trusts so that they feel secure in the knowledge that their savings are safe. The majority of master trusts are run extremely efficiently and effectively. However, with smaller master trusts beginning to enter the marketplace, it is essential that the Government seek to protect those working for smaller employers and offer them the same protection as those covered by larger providers, such as the People’s Pension, Legal & General and others. Master trusts are the scheme of choice for the auto-enrolment market and it must be fit for purpose for the small as well as the large trust.
As we have heard from the noble Lord, Lord McKenzie of Luton, and my noble friend Lord Stoneham of Droxford, some 6.7 million people are now enrolled in some 84 schemes, with £8.5 billion-worth of assets. It is time that there is protection for members of a scheme where a master trust fails and has to be wound up. This Bill helps to provide that protection.
The People’s Pension represents a market innovation which was not anticipated by previous Governments or by the Turner commission, but they do have concerns. It is important to increase and maintain the success of auto-enrolment. The DWP forecasts that auto-enrolment will cost government £3 billion a year in lower tax revenues by 2050, but it will increase aggregate private pension incomes by £5 billion to £8 billion a year in 2011-12 earning terms and reduce government spending on income-related benefits in retirement by £0.9 billion by 2050.
There is also the risk of cross-cutting policies undermining auto-enrolment. There are concerns that policies from other departments may clash with the motivators found in auto-enrolment. Developing policy confusion could be damaging to consumer saving. Clarity and transparency are essential.
It is important that employees continue to save for their pension and increase their contributions. NEST, referred to by the noble Lord, Lord Monks, is countrywide and has some 3 million customers, each with a small pot. The fund has been running since 2012. The average pot is £300. This is unlikely to fund a pension for its members and a degree of realism is needed. People will not be able to afford to retire with so little in their pots. They will be disappointed, and employers will not welcome keeping on employees beyond their expected retirement age. When are the Government going to do something about this?
I welcome the criteria which the new authorisation regime institutes for master trusts and the new powers for the Pensions Regulator. The five essential criteria are: that persons involved in the scheme are fit and proper; that the scheme has financial sustainability; that the funder meets certain requirements; that systems and processes relating to the governance and administration of the scheme are sufficient; and, last but by no means least, that the scheme has an adequate continuity strategy. All the criteria are extremely important, as we have heard, but we will need to ensure that they are enshrined in the legislation as we move through the Bill stages.
Clauses 20 to 35 deal with triggering events around the responsibilities of trustees and the licensing of master trusts and the possible withdrawal of authority. However, I could not find any reference to what would happen to the pot of money in a master trust which had its authority withdrawn. Would this be returned to the employees or used for some other purpose? I am sure the House will want to probe this in Committee and I would be grateful if the Minister could provide some clarification at this stage.
Part 2 deals with exit penalties. Exit fees were not anticipated in the original legislation. These are set by the providers and have been as much as 5% of the pot which investors are wishing to transfer. The Government have introduced a cap of 1% on exit fees, which is to be welcomed. I am not as sanguine as the Minister about Clause 40, which is very vague. I remain concerned about Clause 40(2). Should the Government grant themselves the right to break contracts? This sets a very dangerous precedent. Are we opening up the way for Secretaries of State to override contracts? People may have legally prepared, signed and executed these in good faith, only to find that they are to be overridden at a later stage without any real justification. Again, this is a subject we will be returning to in Committee.
The Bill contains a great deal which is to be welcomed, but there are some serious omissions. A central advice scheme has already been mentioned by the noble Baronesses, Lady Altmann and Lady Wheatcroft, and others. Also, as part of pension freedoms the Government planned a secondary annuities market, where original purchasers who had a poor or inferior quality product would be able to sell it and buy a better one with the cash. I believe that this was included in the Conservative manifesto for 2015. There was heavy lobbying against this by the pensions industry which claimed it would be hard to set up a secondary market and difficult to provide consumer protection. As we now know, the Government have changed their minds and this has left people with poor annuities which they now cannot get rid of. Consumer protection could be problematic but it is not rocket science. We are disappointed that the Government have reneged on their promises and left people in the lurch. This could be corrected in the Bill and is a big omission.
This is also an excellent opportunity to mention concerns that we have about cold calling and pension scams. I know that my colleague Steve Webb, the previous Pensions Minister, was also worried about this development. When we get to Committee we will probe the Government on their latest thinking on pension scams. In the meantime, I would welcome the Minister’s views at this stage.
In summary, this is a piece of legislation which is largely to be welcomed, as it will provide the safeguards needed for small to medium-sized businesses and their employees. The Bill is very technical in nature. I and my colleagues look forward to debating the issues across the Chamber in more detail at a later date.
My Lords, it is a great pleasure to wind up for the Opposition on this important Bill. Although I may be regarded as a newcomer to pension policy I remind the House that I was a Minister at the Department for Work and Pensions from 2005 to 2007, which was a very interesting time because we had the second report of the Pensions Commission and the Government’s White Paper in response. I start by paying tribute to the commission, to the noble Lord, Lord Turner, to Mr Hills and, of course, to my noble friend Lady Drake for the outstanding work that the commission did.
I made a Statement to the House on 25 May 2006 announcing the then Government’s acceptance of the commission’s core proposals for auto-enrolment. This was welcomed by the then Opposition spokesman, the noble Lord, Lord Skelmersdale, by the Liberal Democrat spokesman, the noble Lord, Lord Oakeshott, and by my noble friends Lady Hollis, Lady Turner and Lord Lea. Earlier, my noble friend Lord Monks emphasised the importance of political consensus over auto-enrolment. I very much endorse that. It was, I believe, a major step forward and I am proud of what we did and that so many people are now enrolled in auto-enrolled schemes. Reading Hansard of that day, I think it is interesting how many noble Lords expressed concerns about the loss of public trust in pensions. Listening to our debate tonight it is clear that much more still needs to be done to regain that trust.
My noble friend Lord McKenzie suggested in his opening remarks that too much has happened in the pensions arena in recent times to damage confidence in savings and pensions, including the mis-selling of what should have been enhanced annuities and the U-turn on the secondary annuities market. As the noble Baroness, Lady Bakewell, pointed out, we have just had the call from the head of the Pensions Advisory Service for companies to be banned from cold calling pensioners because of the activities of scammers. Of course, more general underlying concerns continue about the low level of savings and the poor returns for so many savers. Added to this we have the state pension age extension.
The Minister talked about mitigation measures in his opening remarks but, as my noble friend Lady Hollis pointed out, the issue is severe, particularly for women without an occupational pension. My noble friend went on to raise the huge disparity in longevity and morbidity by socioeconomic status. My concerns have been more on the health side than the pensions side, but she is absolutely right: we cannot consider health in isolation. The plight of women, in particular, who are doubly disadvantaged—in health and wealth—deserves recognition and action. I thought that my noble friend’s critique of government policy on occupational pensions was telling and I look forward to the Minister’s response. I look forward to the Minister’s response, also, to the point made in the gap by the noble Viscount, Lord Trenchard, on the perils of early withdrawal from pension funds, and to his response to the very interesting comments of the noble Lord, Lord Flight, about valuation policy and the impact that that is having on general investment by many companies.
The continuing unease and lack of confidence in pensions and savings has, of course, been exacerbated by the events surrounding the sale of BHS and the deficit in its DB pension scheme, which has highlighted, at the least, the problem of poor corporate behaviour. This helps to identify the more general issue of the performance of the Pension Regulator, its current powers and its willingness to deploy these. Much needs to be done to ensure that savers feel safe and confident in their pensions. As millions of people are enrolled in auto-pension schemes, clearly the regulation of master trust pension schemes is essential. In this context, the Opposition welcome the Bill—we support the need to protect members from suffering financial detriment and we support the imperative of promoting good governance and a level playing field for those in the sector—but it is clear from the debate that there are concerns as to whether the statutory and regulatory provisions in the Bill are sufficient. A number of very important questions have been put to the Government tonight which I have no doubt that the Minister will respond to.
Clearly, the number one issue is whether the scheme member protection proposed in the Bill is robust. In Committee we will seek to examine this in more detail. I thought that my noble friend Lady Drake raised some very important questions that we need to tackle, including the ongoing supervision of pension pots, where we lack sight of proposed regulations, the robustness of capital adequacy and questions on restrictions being placed on the level of dividends or profits, to name but three. My noble friend Lord McKenzie and the noble Baroness, Lady Altmann, also raised the question of master trusts which have already achieved accreditation under the MT assurance scheme developed with the Institute of Chartered Accountants. Clearly, what these master trusts have achieved under accreditation overlaps with some of the provisions in the Bill. It is important to know how any potential conflicts between the accreditation scheme and the proposed regulatory scheme will be resolved.
Turning to the ability of the Pensions Regulator to do the task that is being placed upon it, my noble friend Lord McKenzie made the point that the regulation of master trusts involves extensive powers and obligations, including: dealing with authorisation; determining fit and proper persons; judging financial sustainability; deciding on the adequacy of systems; and having the power to initiate triggering events. There is considerable work for the regulator, especially at the start of the scheme, when existing trusts will have to go through the authorisation process. The noble Baroness, Lady Wheatcroft, described the regulator as overemployed and understaffed and there is a real question about whether it is going to be in a position to carry out the duties the Bill lays on it. For example, Clause 7—the fit and proper person test—is a long clause but is actually very short on what is a fit and proper person. I hope the Minister might be able to help us on this when he winds up. By implication, I think the noble Lord, Lord Stoneham, probably agrees with me when I suggest that he does not look to the football league for advice on that point.
A common theme of the debate has been the silence in the Bill—and, indeed, in the Minister’s opening remarks—on the position of members. I am indebted to ShareAction for its work on this. Clause 11, on systems and processes, is silent on the need for the members’ voice to be heard or represented in master trusts. Why is that? I echo the suggestion made by the noble Lord, Lord Stoneham, that member representation is entirely consistent with the Prime Minister’s remarks about plc board membership. There are also significant gaps on members’ communications, as my noble friend Lady Drake emphasised. Why is there no requirement for trustees to notify members unless and until a decision is made to transfer out members’ rights on wind-up schemes? Why are savers not given the right to obtain on request standardised information about what they are being charged, where their money is invested and how ownership rights are exercised? Why are pension schemes not required to hold an annual meeting for their scheme members, even if it is a virtual meeting, as suggested by the noble Lord, Lord Stoneham? Why is Clause 31 so weak on protection of members following a pause order?
The Minister spoke helpfully and extensively about the use of delegated powers and explained the rationale for the extensive use of regulations. Like my noble friend Lady Drake, I understand the need for some flexibility here but the problem is that your Lordships’ powers in relation to secondary legislation are circumscribed. It is a great pity that draft regulations are not to be published because the Government want to consult with industry first. Surely there is no reason this could not be done in parallel between Second Reading and Committee. I note also that the Minister used the word “industry”. Can he assure me that that actually means stakeholders and that pension members and their representatives will also be consulted over the draft regulations? I am sure we will want to come back to this in Committee.
My noble friend Lord Monks referred to the forthcoming review of auto-enrolment and made some very interesting observations. I know it is early days yet but it would be helpful to have from the Minister some idea of what is in the Government’s mind in relation to that review. It is absolutely essential that consensus on auto-enrolment continues.
Finally, the Opposition welcome the Bill but there remain concerns about the regulatory regime proposed. Clearly, there are gaps in the detailed provisions of the Bill, with an unacceptable use of negative regulations. There seems to be a complete absence of any reference to the role and representation of members. Having said that, we look forward to a challenging and constructive Committee.
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.
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.
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.