Monday 24 February 2020
Pension Schemes Bill [HL]
Committee (1st Day)
Relevant documents: 4th Report from the Delegated Powers Committee and 2nd Report from the Constitution Committee
My Lords, I remind the Grand Committee that if there is a Division in the Chamber while we are sitting—and I am told that may possibly happen later in the afternoon—this Committee will adjourn as soon as the Division Bells are rung and resume 10 minutes thereafter.
Clauses 1 to 6 agreed.
Schedule 1 agreed.
Clauses 52 to 57 agreed.
Schedule 4 agreed.
Clause 7 agreed.
Clause 8: Application for authorisation
1: Clause 8, page 5, line 19, at end insert—
“(c) the impact of a collective money purchase scheme on private and public sector defined benefit schemes.”
My Lords, in moving Amendment 1 I will speak also to Amendment 34. The latter seeks to insert into the regulations’ objectives the promotion of DB schemes. Amendment 1 adds as one of the things that TPR may take into account when considering an application for a collective money purchase scheme the potential impact of such a scheme on the DB landscape. Together, the amendments are a peg on which to hang a discussion about the position of DB schemes and their future, especially outside the private sector, and to see what more might be done to sustain them for future accrual.
As the White Paper reminds us, DB schemes currently have 10.5 million members, with £1.5 trillion under management—a not insignificant component of the pensions landscape. Notwithstanding this, DB schemes continue to close to future accrual or membership. Hitherto, the alternative has been some DC scheme, and now there is the prospect of CDC schemes in the future.
In times past, DB schemes were the stalwarts of the occupational pension system. Things looked good, with seeming scope for regular improvements in benefits and with surpluses and contribution holidays available. Indeed, were there not concerns at the Treasury about the system being used for tax shelters? These halcyon days have diminished through a combination of factors: more realistic actuarial assumptions; increasing longevity of members; impacts of inflation; falling asset prices; and, probably, less effective collective bargaining.
Much of the content of the Bill is about maintaining and building confidence in the DB system, but with a stronger regulator, and improving scheme funding rules. We support this approach. It is a pity that the Bill did not include a framework for consolidation but we note that this is to come. Perhaps the Minister will give us a timeline on that.
Although DC schemes remove longevity risks from employers, they are generally characterised as having lower contribution rates, doing nothing for our chronic undersaving. The Minister in the other place has declared that he does not want to see the advent of CDC as being a channel to further closures of DB schemes. In particular, he clarified that the Bill’s proposals do not provide a back door to converting DB rights into CDC rights and are not intended to encourage public service and/or DB schemes to convert their accrued benefits.
Can the Minister say how this intention is manifesting itself in the Bill? The data that have been presented to us show that CDC schemes can generate a pension income significantly above that of a DC arrangement, but of course this is not guaranteed. The question arises as to whether the lure of higher returns could be a catalyst to more DB schemes closing to future accrual. There are restrictions that make this difficult, at least at the moment—single or associated company arrangements being but one. Can the Minister say what mechanisms might be contemplated to deflect such moves, if it is the business of government to do so?
The briefing makes it clear that an employer remains within its rights to close an existing DB scheme to new accruals and to offer pensions on a different basis going forward. We know that it has become common for employers to close DB schemes and to open DC schemes in their place, but the briefing note says that CDC schemes should be seen in this context, as a new option for employers looking to develop their pension offering. Closing DB schemes could indeed be such a channel. I beg to move.
I thank the noble Lord, Lord McKenzie, and the noble Baroness, Lady Sherlock, for tabling these amendments. Taken together, they seem to explore the Government’s response to the continuing decline of defined benefit pension provision in the UK. I will address the specifics of these amendments but, first, it may help if I talk about the Government’s approach to workplace pensions in general.
The Government’s priority is to promote pension savings for later life through workplace pensions. However, it is for employers to decide what form of provision to make. This is part of their remuneration strategy to recruit and retain quality employees. The Government’s role is not to tell employers what sort of pension to provide, but to promote workplace pensions and to set some minimum standards. That is why we require employers to automatically enrol all eligible employees into a qualifying workplace pension scheme and to make a minimum contribution to that scheme.
The majority of defined benefit schemes are now closed and, as a result, the defined benefit landscape is changing. Most schemes are maturing with fewer contributing members and more receiving pension benefits. The Government’s 2017 Green Paper and 2018 White Paper did not seek to prevent changes to the pension landscape, but to protect the interests of the large number of members who will still rely on defined benefit schemes for their retirement income. That is what the scheme funding measures in this Bill do.
Before the introduction of automatic enrolment in 2012, the decline in defined benefit pensions was not matched by increases in other types of pension. Overall, therefore, pension participation was in decline. Automatic enrolment has been hugely successful: over 10 million people have been automatically enrolled into a workplace pension and the decline in participation has reversed. The number of eligible employees participating in a workplace pension increased from 10.7 million in 2012 to 18.7 million in 2018.
Amendment 1 seeks to put a duty on the Pensions Regulator to take into account the impact on defined benefit schemes when considering an application for authorisation of collective money purchase schemes, also known as collective defined contribution—CDC—schemes. Given the term CDC is widely understood, I shall use it throughout these debates. While the Government do not think they should tell employers what sort of pension they should provide, beyond setting some minimum standards, they want to foster innovation, so that employers have real choices in the type of pension they offer.
I know that concern has been raised that CDC schemes will replace defined benefit schemes. The noble Lord, Lord McKenzie, raised this at Second Reading. I want to be clear that the Government do not see CDC schemes as a replacement for defined benefit schemes.
Royal Mail, the employer actively looking to set up a CDC scheme, does not believe that either. Indeed, it has always seen its CDC scheme as an alternative to its individual defined contribution schemes. To manage cost and risk, employers are moving away from defined benefit schemes towards individual defined contribution schemes. CDC schemes should be seen in this context. For example, Royal Mail has been working on a CDC scheme in partnership with the Communication Workers Union because both sides felt that it served Royal Mail employees better than an individual defined contribution scheme. I am sure that noble Lords will recognise what a positive message this sends about CDC schemes.
Royal Mail is not alone. There is growing evidence that many employers with defined contribution schemes want to provide their employees with a pension scheme that provides an income in retirement. CDC schemes are a new opportunity for employers and employees to choose a pension scheme that works for both. I point out that the Bill includes clear safeguards for existing defined benefit pensions: Clause 3 prohibits public service pension schemes being CDC schemes, and Clause 24 prohibits accrued defined benefits being converted into CDC benefits. Therefore, accrued defined benefit pensions cannot be put at risk by the existence of CDC pensions.
I understand the desire to ensure that members in good-quality defined benefit schemes continue to have access to guarantees from their employer, but the amendment could have unintended consequences for members. If the amendment meant that a CDC scheme could not be authorised, it seems likely that the employer would close its defined benefit scheme and offer an individual defined contribution scheme instead. It is important that the decision on whether to authorise a CDC scheme is based on the criteria and information relating to that scheme. It would not be fair on employers or employees to cloud the issue by linking the authorisation to consideration of other types of schemes. Requiring the regulator to make judgments about different types of schemes would also have implications for its role.
Amendment 34 provides for a new objective for the Pensions Regulator: to promote the membership of defined benefit schemes. The regulator exists to protect workplace pensions in the UK. It makes sure that employers put staff into a pension scheme and pay money into that scheme, and that workplace pension schemes are run properly. It does not matter whether members are in a defined benefit scheme, a defined contribution scheme or a CDC scheme—the regulator’s role is to protect their scheme.
As I said in my introduction, the Government’s priority is to promote pension savings for later life and set minimum standards for employer-provided workplace pensions. The Pensions Regulator is required to ensure that those minimum standards are met. The Government do not consider it appropriate to task the regulator with promoting particular types of pension schemes. This could undermine its role as the regulator of workplace pensions in the UK generally. It is for employers to decide what type of pension they provide; employers who provide defined benefit pensions need to be genuinely able to afford the costs and bear the risk. Promoting defined benefit pensions to employers which may be unable to do this would conflict with the regulator’s other objectives, such as protecting members’ accrued benefits and minimising the risk of calls on the Pension Protection Fund.
The noble Lord, Lord McKenzie, asked why superfunds are not in the Bill. Developing a new regulatory framework for them is a complex task. We are working hard across government and with relevant stakeholders to build consensus on the right approach. We aim to publish our response to the consultation shortly; it will set out in more detail our proposals for a future legislative framework. Once that it is complete, we will look to legislate as soon as we can.
I hope that the noble Lord, Lord McKenzie, and the noble Baroness, Lady Sherlock, recognise that the Government’s approach is sensible and proportionate. I urge the noble Lord to withdraw the amendment.
I thank the Minister for that full reply. We never intended to press the amendments anyway. As I said at the start, it is an opportunity to have a discussion about where the Government are going, particularly on DB schemes.
I am still a little unclear. I quoted one of the briefing papers which the Government provided in preparing for this debate. It referred to a new option for employers looking to develop their pension offering going forward, which seems inconsistent with what we had understood to be the commitment made earlier by the Minister: that the Government do not want CDCs to undermine the existing DB regime. There seems a risk of doing that, and that in many ways was the tenor of the reply she gave: it is not up to the Government, it is up to employers. Of course we accept that there is a role for employers, but is there not an obligation to work with employers to ensure that the best type of arrangement is available? Historically, that has been DB schemes.
Is not a test for this the extent to which we are saving enough as a nation? We do not save only through pensions but saving through pensions is clearly a very important part, particularly as the Minister instanced the auto-enrolment provisions, which we agree have been a huge success. One might just reflect for future policy that they were conceived under a Labour Government, with the legislation prepared under a coalition Government and introduced under a Tory Government. Perhaps there is an example in pensions policy of how we might better work together on other matters.
I will summarise my concerns. It is good that CDC schemes are available to provide, generally, a better return than can come from a straight DC scheme. It is not all upside, as we shall discuss in other amendments, but it is important that we do not lose sight of the benefits available under a DB regime which, apart from other things, had contribution levels way above pretty much anything that arises under a DC scheme. That should concern us all: the level of saving that is taking place.
Having said that, I do not know whether the Minister wants to come back.
I thank the noble Lord for the observations he has made. I am thrilled that noble Lords agree that auto-enrolment has been a great success and a great way for people to save for their retirement. The role of government in all this is to encourage saving through automatic enrolment, pensions and other savings vehicles. The noble Lord has raised some valid points. I will take them back to officials and, if we need to write to him or meet him to talk about them further, that is what we will do.
I thank the Minister for that. I stress, in agreeing about the success of auto-enrolment, that it was started off by a raw junior Minister in the DWP getting that early legislation through.
Amendment 1 withdrawn.
Clause 8 agreed.
Clause 9: Decision on application
2: Clause 9, page 5, line 37, at end insert—
“( ) that the scheme provides for intergenerational fairness among its members, specifically in connection with the amount of benefits paid to pensioners, proposed adjustments to annual benefits and cash equivalent values provided to members wishing to transfer out of the scheme.”
My Lords, this is a probing amendment to allow discussion of the intergenerational fairness of CDC schemes. The Government’s excellent policy brief notes say on page 9 that concern about intergenerational fairness was raised by many respondents to their consultation on collective money purchase schemes. They then say explicitly that they recognise that younger members in CDC schemes
“may get less value from flat-rate contributions … if they decide to”
leave the scheme and transform their credits into a cash equivalent. The Royal Mail CDC scheme proposed here is such a flat-rate contribution scheme.
The Government clearly accept the possibility of less favourable treatment of the young, but both the likely scale of this or proposals for its mitigation are not an obvious feature of the Bill or its associated documents. The Government say that they will ensure that
“both benefits in accrual and pensions in payment”
must be adjusted
“to preserve the collective nature”
of the scheme. They go on to talk about sharing the current effects of investment being out and under-performance. This seems a little vague in a vital area. The details will presumably surface in an unamendable SI generated by Clause 18(4), to which we will return later. It also seems not to address the question directly. The question really resolves into this: “What protection or protective mechanism is there for young members against older members expensively cashing in?” An alternative way of putting this is to say what detriment younger members could suffer, or what limit will be put on such suffering, under the scheme. This is surely vital information for anyone trying to understand the likely risks and returns.
The situation here is that many of those consulted raised concerns about intergenerational fairness and the Government admit that it is a possibility. The Government have chosen to press ahead without either quantification of the possible disbenefits to younger members or a clear mechanism for reducing or limiting any disbenefits. This is not only unsatisfactory in its own right; it runs counter to the Government’s repeated acknowledgement that communicating the key elements of the scheme clearly and understandably is vital to its success.
There is a connection, of course, between intergenerational fairness and capital buffers. We will debate capital buffers later but it is worth noting the actual connection here. In an analysis in late 2018 of the DWP’s proposal for the CDC scheme, AJ Bell noted:
“It’s clear from the DWP’s preference not to allow so-called ‘capital buffers’—where funds are built up in reserve to make payouts more predictable—and the proposed removal of any trustee discretion in adjusting benefit levels that concerns about intergenerational fairness in CDC are front-and-centre of ministerial minds.”
It went on:
“And by suggesting any outperformance or underperformance should be reflected in the benefits paid to all members—including those already receiving their pensions—the DWP leaves us in little doubt it will not allow schemes to be skewed in favour of one cohort of members over another. This fairness will, however, potentially make outcomes in CDC less predictable and raises the spectre of pension cuts should investments consistently underperform over … time. The DWP itself notes any reductions in benefits will not be well received, and so clear communication of this—not just upfront but on an ongoing basis —will be absolutely essential.”
We will turn to that later in our discussions. AJ Bell concluded:
“Simply referring disgruntled members to a complex set of scheme rules they signed up to blindly years ago won’t be good enough. Getting these communications right will arguably be the biggest challenger for employers who choose to go down the CDC route.”
The Government, in their Royal Mail CDC proposals, choose mechanisms for intergenerational fairness over benefit stability. This may well be entirely the right choice but it is very hard to tell, since the mechanism for bringing about this fairness is not explicit and no quantification is yet possible. Equally, it is not clear what benefit variations are likely without the smoothing potential of a capital buffer. More clarity is surely needed before employees are asked to sign up to buffers, or no buffers, and on the optimum position. Is the choice really between intergenerational fairness and stability? Is that not a false dichotomy and is there not a middle position combining elements of both, which is likely to be more appealing than the Government’s decision in this Bill not to allow capital buffers as an aid to benefit stability?
Our amendment tries to push the Government a little into being more explicit and much clearer. It adds one further condition to the list of authorisation criteria in Clause 9(3): that
“the scheme provides for intergenerational fairness among its members”
in specified areas.
The objective of the amendment is, of course, to allow discussion of the whole issue of intergenerational fairness, but also to suggest a non-prescriptive way of ensuring that the issue is properly and explicitly addressed in scheme design and to allow discussion of the right balance between intergenerational fairness and benefit stability.
I very much look forward to Members’ contributions and the Minister’s reply. I beg to move.
My Lords, I rise to support Amendments 2 and 7 and speak to my Amendment 6.
Intergenerational fairness is probably the single biggest issue that is generally raised about CDC schemes. The noble Lord, Lord Sharkey, has set the case out well. As an extreme example, if returns were zero or negative but the trustees wished to continue paying the target level of benefits to existing pensioners, the scheme would become in effect a Ponzi scheme, with payments to existing pensioners wholly dependent on a steady stream of new joiners. That is an extreme example, and to call CDCs Ponzi schemes, as some commentators have done, is overstating the situation. However, at a less extreme level, if we look at what is currently happening in the Netherlands, schemes have recently been able to avoid, temporarily, making cuts in benefits by the Government temporarily lowering the minimum funding requirement. While this has avoided immediate pension cuts, primarily for political reasons, it quite clearly pushes the risk on to the younger generation as benefits are paid out at a higher rate than they should be. That is a real and live example of how intergenerational unfairness can and does arise in CDC schemes. It is therefore essential that this enabling Bill deals explicitly with this issue. CDC schemes will fail if such unfairness is allowed to occur or is seen to be a risk.
I support Amendment 2, which requires schemes to provide for intergenerational fairness among members as a prerequisite for gaining authorisation. I also support Amendment 7, which introduces the concept of intergenerational fairness when transfer values are calculated.
Amendment 6 is very simple. It requires that the scheme must have rules to ensure fairness among all members when setting benefits. I have deliberately left that quite wide. I have not referred only to intergenerational fairness because I would like also to cover fairness within generations. For example, in the event that someone makes a transfer out of the scheme, it could impact intergenerationally and also intragenerationally if the transfer valuation is too high.
Royal Mail kindly contacted me before this debate to explain that its proposed scheme has intergenerational safeguards in place, which is good to hear. However, this Bill relates not just to the Royal Mail scheme, but to other schemes in future. Just because Royal Mail may comply does not remove the need to ensure that fairness is very clearly built into the legislation. It is a critical issue.
It is probably arguable whether Amendment 6 is required if Amendment 2 is accepted, although I see no downside, and considerable merit, in making explicit that a scheme must have rules to ensure fairness when the rate or amount of benefits is determined, along with the other rules already set out in Clause 18.
As an aside, any changes made in this part will need to be reflected in the Northern Ireland part.
The Government have recognised the concerns around intergenerational fairness inherent in CDC schemes, so I hope that the Minister will consider these amendments seriously. This is too important a risk not to be dealt with in the Bill.
My Lords, I support all three amendments. I have added my name to Amendment 2 —so excellently moved by the noble Lord, Lord Sharkey —which intends that any CDC scheme that is applying for authorisation must have a considered strategy for the long-term intergenerational fairness considerations that we have just discussed. The scheme would need not just buffers—we will talk about buffers in the next group—these would also be required against scheme failure and scheme wind-up. In this case I would prefer to think of these as risk margins, to recognise the long-term risks to remaining members, most particularly if scheme members transfer out. That is the particular aim of my Amendment 7, which would also impose on the scheme, when calculating benefits, a requirement to consider how it will recognise the risks in future years if somebody cashes in the pension today.
The cash equivalent transfer value is not really a benefit under the scheme. If the member is in poor health, for example, they will be selecting against the scheme, because the scheme will assume a certain life expectancy. Some will have less and some more, but if all those who have lower life expectancy transfer out at full value, then clearly the pensions in payment are too high. If they take money when markets are performing well, they may receive more than if they had waited longer and there was a market correction, so the remaining members, again, will bear the cost.
Given that a CDC scheme is designed specifically to pay a pension rather than a lump sum as an alternative, without the same draconian guarantee requirements on employers, to the defined benefit system that we have had traditionally in this country—which as the noble Lord, Lord McKenzie, rightly says, is the gold standard—we would not want this to be at the detriment of defined benefit but rather as an alternative to defined contribution. However, those members who transfer out are not placing their trust in the scheme; they are not saying, “I want my pension to come from the scheme,” and they are leaving the remaining members to bear an extra risk. I remind noble Lords that we have seen this in defined benefit schemes with the minimum funding requirement, and also with the rules around scheme surpluses. In the short term it was judged that an amount in the scheme was sufficient to pay a specific level of pension over the long term and it turned out that that was not the case, because assumptions were incorrect, markets changed or demography changed. Therefore, it is wholly inadequate to assume that whatever is happening today should be reflected, for example, in cash equivalent transfer values.
As the noble Lord, Lord Vaux, said, it is not just intergenerational fairness; it will select against today’s pensioners, potentially, because if over the next couple of years markets are weak, pensions will need to be reduced more to reflect people who transferred out at what seemed to be fair value two years previously. I hope my noble friend will consider the thrust of these amendments and perhaps look at whether we can introduce some requirements for schemes when members transfer out or when market values are judged to be at a certain level. Can we insert some risk margins that will protect members who rely on this scheme for their lifetime pension in the future?
My Lords, like others, I speak in favour of all three amendments. In fact, I signed Amendments 6 and 7 but too late for it to show on the Marshalled List in respect of Amendment 7. I was one of the many noble Lords who mentioned intergenerational fairness, and fairness more generally, at Second Reading because, as has been explained, a significant number of members, particularly older members but not necessarily just them, transfer out after some good times for investments in the investment cycle. That leaves others bearing the brunt of later down cycles, hence the Ponzi analogy. I am actually not quite sure what “fairness among all members” actually means—it is difficult because of, for example, the different longevities between men and women—but I signed Amendment 6 because that was the closest thing to saying, “You’ve got to look widely at everything.”
I have come to the conclusion that the only way in which you can have fairness is to have some kind of buffer, which we will come to later on, or some kind of risk margin as proposed by the noble Baroness, Lady Altmann, or maybe both. In the interests of fairness, those who are transferring out should have to take their share of the risk; otherwise, if you are a good market-watcher you could perhaps spot your moment to make your move, and then that is perhaps unfair on the rest.
I, along with others, think that something must be enabled for these measures to be required. It is nice to know that something is already envisaged for the scheme, but there needs to be something for every scheme. There should at least be a requirement for that, and actually I think there should be a permission for things such as buffers and risk margins, rather than a prohibition.
My Lords, I too signed Amendment 2, which my noble friend Lord Sharkey so ably introduced. I will be brief because I think all the arguments have been very well covered. The only thing that I would add is that the importance of transparency in a scheme such as this seems fundamental. I know we are talking about communications and ensuring that members are fully aware of what they are signing up to, both the benefits and the disbenefits later on, but, as part of the arguments that have been put forward in favour of this group of amendments, there is the whole issue of explanation and ensuring that members are fully aware of their position under this type of scheme. I particularly support the idea that in order for a scheme to be registered, the explicit prerequisite is to show what the strategy is to address the whole issue of intergenerational fairness. I know we will be talking about capital buffers later on, but the amendments address the interests of transparency and fairness and the welfare of all members of the scheme, and I support them.
My Lords, it will be very important to address these issues because I suspect that CDCs will become very popular among the younger generation as they have considerable attractions. I add only that the principle of building up of reserve seems to be one way of evening out fairness.
This has been a good debate. I think we are minded to support this measure. I am not very clear in my mind as to precisely how Royal Mail is tackling this issue at the moment, and if the Minister were able to deal with that in her response that would be a help. One thing that has come through from the Government’s own thinking about this is that wherever we end up on it, there must be specific rules. This should not be just a matter of trustees’ discretion; it should be clearly set out in the rules. I shall wait to hear what the Minister has to say.
I thank noble Lords for tabling these amendments linked to fairness. Concerns about fairness often arise in respect of CDC. I fully understand noble Lords’ interest in this important matter. I share their commitment to ensuring that members of CDC schemes are treated fairly. However, I do not agree that the amendments proposed are necessary to protect members.
Ensuring that members are treated fairly has been a central part of our work on CDC since we began. We have been mindful of the problems that other countries have experienced—for example, in their approach to adjusting benefits—and we have learned from them. Envisaged regulations under Clause 18 will mean that scheme rules will require that there is no difference in treatment between different cohorts or age groups of scheme members when calculating benefits and applying benefit adjustments. If they are not compliant, the scheme will not be authorised.
Noble Lords have previously expressed concern that a significant number of older members might choose to leave a CDC scheme shortly before retirement and that this may pose a risk to younger members. Noble Lords will note that one of the authorisation criteria in Clause 12 relates to the soundness of the scheme design. It is intended to protect members from being enrolled in ill-considered and poorly designed schemes which are unlikely to remain viable over the long term.
It is important that due consideration is given by employers to a scheme’s viability at the design stage, including to how the benefits aspired to will be affected by significant potential events, whether this is a reduction in investment returns or in membership. Envisaged regulations to support the design requirement will aim to ensure that sufficient evidence is provided to satisfy the regulator that appropriate stress testing of the scheme’s design has been undertaken and that a suitable strategy is in place for monitoring and reacting to threats to a scheme’s viability. These are complex matters, so we will consult thoroughly on what the regulations should require in this respect and more widely. We want to ensure that the scheme design is subject to appropriate scrutiny by the regulator at the initial application stage and on an ongoing basis. I am happy to discuss the scheme design requirements in more detail when we reach the relevant clauses.
My noble friend Lady Altmann mentioned cash equivalent transfer values. We propose that a member’s transfer value will be calculated by reference to the present value of the assets currently held that are needed to pay the anticipated pension whenever that is due. That means that, if every member chose to leave at the same time, they would get the present value of their anticipated pension. Nobody would receive anything that was due to anyone else, as the valuation process means that the assets and the cost of all the anticipated pensions should always be in balance. It also means that a member transferring and a member staying always keep the present value of their rights in the scheme and nobody receives anything more than is due to them from the scheme, whether they stay or go.
The noble Lord, Lord Sharkey, asked about the impact of cross-subsidisation on younger members in CDC schemes. Such members may get less value from flat-rate contributions if they decide to transfer out of the scheme before retirement. It is important to remember that pension schemes are long-term saving vehicles, designed to deliver an income in retirement. Our focus is on the long-term benefit of a CDC pension scheme for the scheme members. While CDC benefits are money purchase benefits, a CDC scheme’s purpose is to provide a variable income for life in retirement for its members and not a transferable cash sum.
The value of members’ rights in a CDC scheme is derived from reference to the cost of providing a variable income when the member retires. The more distant the date the member is due to draw an income, the smaller the share of the current assets attributable to that member’s pension. We envisage that regulations will require this to be communicated to the membership, so that they understand the implications of a decision to transfer out of the scheme.
The noble Lord, Lord Sharkey, also asked if this would mean benefit cuts for members. Fluctuations in benefit levels are fundamental to CDC scheme design. It is possible that members will see cuts in their pension values in some years, but they should also see increases in others. The Pensions Regulator will look at the way the scheme communicates with members, as part of its authorisation and ongoing supervision. The scheme will need to demonstrate that it clearly communicates the fluctuating nature of benefits to members.
The noble Lord, Lord Vaux, asked how the Pensions Regulator will determine whether the design of the CDC scheme is sound. As I have said, we intend to consult further on these matters when we bring forward secondary legislation for CDC schemes. However, it is intended for the criterion to focus primarily on providing sufficient evidence for the Pensions Regulator to be satisfied that the core foundations of the scheme are sound. For example, are the scheme’s design and rules compliant with legislative requirements? Are the actuarial, investment and other assumptions used in determining its design and proposed benefits comparable to industry norms and existing data; for example, on longevity? How have the assumptions about investment returns been reached and tested against risks, such as a reduction in investment returns or the number of members, or employers’ insolvency?
The noble Baroness, Lady Altmann, asked about the ongoing viability of the scheme and how it will be monitored. Clause 13 provides added protection by requiring that the viability report must be reviewed by trustees and certificated by the scheme actuary at least once a year, with revisions made to the report if appropriate. Furthermore, if the most recent viability report becomes inaccurate or incomplete to any significant extent, the trustees must revise the report and submit a newly certified report to the regulator to consider. This will help ensure that, should it become evident that the scheme’s viability is under threat and intergenerational fairness is at risk, the regulator is alerted and can engage with trustees on the action to be taken.
The noble Baroness, Lady Bowles, asked about ensuring that members are properly informed about the risks of CDC schemes. The possibility of fluctuations of benefits will be made clear and transparent in the key member communications at points throughout their pension scheme’s journey. Regulations under the Bill and powers in the Pension Schemes Act 1993 will require CDC schemes, for instance, to: publish a clear statement on this and on the scheme website, as well as publishing the scheme rules; provide details of fluctuation risks at the point of joining; emphasise benefit changes in the annual benefit statement for active and deferred members; be clear in the retirement information packs that benefits can change during retirement; and notify members, in advance, of any change to their rate of benefit during retirement. Members and other interested parties will also have access to scheme documentation that must be published on the scheme’s website; for example, the scheme’s annual actuarial valuation.
Finally, how is RMG’s proposed headroom mechanism fairer than a capital buffer? The Royal Mail scheme features an alternative headroom mechanism, designed to reduce the volatility of pension increases and the risk of cuts. It is envisaged that, when the scheme is opened, the level of contributions will include a material amount of headroom funding for future increases. If some headroom remains and the assets are not well behind track, there would not be a pension cut. This is different from a typical capital buffer because the headroom funding is gradually spent on providing increases across all generations who have accumulated benefits under the plan, rather than being an amount that one generation is required to contribute to but which is held back from that generation’s increases to mitigate a later generation’s risk of potential future cuts.
I recognise noble Lords’ concerns—
I would like to intervene at this point because a lot has been spoken about. When there is a calculation of the percentage of the value of the assets for an individual transferring out, which is done on various actuarial calculations, will those actuarial calculations be able to take into account long-term market risk so that there is an element of the fact that if you are withdrawing at a time of high markets, you may be getting more, as I said, than would have been your long-term due? If there is no such mechanism, have we learned nothing from mutual funds running on net-asset value, where there are runs and the people who are slowest to move and get their money out are the ones who are trapped with low value? We have invented things such as gating mechanisms to cope with that. There is potentially such a thing as a run on a pension fund, so how will we guard against that?
The noble Baroness is renowned for her forensic abilities. I am advised that we will need to write to her on that particular question. In fact, we are meeting this week, and I hope we can get her an answer that is accurate and share it with other noble Lords, if that is acceptable.
I recognise and share noble Lords’ concerns. I assure your Lordships that the Government are not oblivious to the potential risk in CDC schemes. I hope my explanation has reassured your Lordships that our proposed legislative framework is designed to ensure that both employers and trustees are alive to these threats when designing their CDC schemes, and that the Pensions Regulator is able to undertake appropriate scrutiny both before and after granting authorisation. With that, I urge the noble Lord to withdraw his amendment.
My Lords, I am grateful for the Minister’s explanation and for her invitation to discuss the issue further. I will definitely take her up on that.
At Second Reading, I talked a lot about the huge reliance in the Bill on secondary legislation and the difficulty that it presents for Parliament to assess such things as intergenerational fairness provisions, as we simply do not know the detail of the mechanism. The Minister explained that it is envisaged that legislation under Clause 18, which means secondary legislation, will set out how intergenerational fairness will be built into the schemes. I am sure that that is everyone’s intention but it will be by secondary legislation and, realistically speaking, Parliament itself will not have an opportunity to make changes to secondary legislation. It would be much better in the case of intergenerational fairness, and when it comes to buffers, to have this in the Bill, given that I think all of us in this Room acknowledge the tremendous importance of getting this matter right. Getting it right via secondary legislation is entirely possible, of course, but it rather excludes us and Parliament from a detailed examination of what this vital mechanism is. I urge the Minister to think about trying to accelerate the process of defining the mechanism so that we get a chance to look at it before we have finished our proceedings on the Bill. Having said all that, I beg leave to withdraw the amendment.
Amendment 2 withdrawn.
Clause 9 agreed.
Clauses 10 to 13 agreed.
Clause 14: Financial sustainability requirement
3: Clause 14, page 9, line 8, after “scheme”, insert “or by an employer”
My Lords, I move Amendment 3 on behalf of my noble friend Lady Drake, whose expertise noble Lords will see shining through this presentation. Collective money purchase schemes will be a new model of pension provision in the UK landscape. A key function of the legislation and the associated regulation that authorises and supports these new schemes is to understand the risks that members of the schemes may face, and put in place measures that seek to mitigate those risks. We just heard a strong example of that. One risk is that, for some reason, a collective money purchase scheme becomes financially unsustainable. One can speculate on the possible reasons: the main employer might become insolvent, decline in size or withdraw from the scheme, thereby cutting off the future supply of contributing members. That could undermine the shared-risk approach in a CMP scheme. Alternatively, some catastrophic administrative or governance failure could lead the regulator to rescind the scheme’s authorisation. The resolution of such failures will incur significant costs.
The Bill as drafted follows in significant part the authorisation and supervision regime put in place for master trusts. Clause 31 identifies such risks to the sustainability of a money purchase scheme, as I referenced; these are referred to as triggering events. Clause 34 refers to the continuity options that must be taken should a triggering event occur, such as the wind-up and transfer of assets to another scheme, resolution of the event or converting to a closed scheme. It is arguable that the resolution of such triggering events is more complex for a collective money purchase scheme than a master trust because of the existence of pensioners and pooling arrangements in CMP schemes, which are potentially more costly to resolve.
Where such a triggering event occurs, a provision replicates what exists in the master trust legislation: a ban on increasing members’ charges, thus protecting the member from bearing the cost of sorting out that triggering event. None the less, the cost of resolving a triggering event and pursuing one of the continuity options must be met. The Bill is unclear on the source of funding to meet those costs. My noble friend’s concern, which I share, is that the Bill as drafted means that the only source of funding within a CMP scheme to resolve a triggering event will come from the members’ themselves, albeit that these funds are built up in advance from their savings. None the less, the members are funding the risk of scheme failure.
The Pension Schemes Act 2017 was a response to the exponential growth in the minimally regulated master trust market. A key risk, which was a matter of considerable debate in the House during the Act’s passage, was that in the event that a master trust failed and costs crystallised, they should not be met from members’ savings. The 2017 Act introduced a financial sustainability requirement: that a buffer of financial resources had to be in place as the line of defence to protect members’ money from being drained when a triggering event occurred and had to be resolve; and that in the event of a triggering, such resources should be sufficient to meet the costs of continuing to run the scheme for a period of between six months and two years. Those responsible for setting up the master trust had, in some way, to share in the responsibility of providing for the financial buffer, which would be available in the event of a scheme failing.
The Bill currently restricts qualifying CMP schemes to those set up by an employer or connected employers. Clause 14 sets out a financial sustainability requirement for CMP schemes to have a buffer of financial resources to meet
“the costs of continuing to run the scheme for such period”—
between six months and two years—when a triggering event occurs. However, there is no provision in Clause 14 for the regulator to have the ability to specify requirements that the employer or connected employers must meet in respect of contributing to the buffer of financial resources that has to be in place to meet the costs of resolving the triggering event. Without such a provision, there is the potential for members of CMP schemes to risk bearing more of the costs of resolving the scheme failure than is borne by members of a master trust.
The effect of the amendment is to place the members in the CMP scheme in a comparable position to those in a master trust, by adding the employer to those parties to which the regulator can specify requirements to provide funding to meet the financial sustainability requirement. It is my understanding that Royal Mail, on its own discretion, intends to make a contribution to some form of financial sustainability, which is welcome if correct. The Bill, however, provides the enabling legislation for all future CMP schemes and, as such, the Pensions Regulator should be given the power to specify the requirements that an employer should meet in respect of the financial sustainability requirement. The amendment would explicitly give the regulator that power. I beg to move.
I thank noble Lords for tabling the amendments. I turn first to the proposed amendments to Clause 14. The fundamental aims of the financial sustainability requirement are to avoid disruption to members through CDC schemes failing because of inadequate financial planning or resources and to ensure that, if a scheme experiences a triggering event, the costs of dealing with that and continuing to run on the scheme for an appropriate time can be dealt with. These costs may include costs of transfer and wind-up, if that arises.
As these will be new schemes, it is possible that the up-front costs of establishing and running a CDC scheme may not be covered in full by the charges paid by members. Similarly, if a scheme experiences a triggering event, it might also find that it has insufficient resources to meet the cost of resolving that event without further recourse to members’ funds. The financial sustainability requirement is intended to protect against these risks.
It is envisaged that there will be a variety of mechanisms for financing these costs. As the noble Lord, Lord McKenzie, identified, those are likely to involve support from establishing and connected employers. We will consult on this matter before bringing forward regulations, but a range of options is likely to be available—for example, an amount held in escrow or contingent assets.
Envisaged regulations made under Clause 14(3) will ensure that the regulator has sufficient evidence to satisfy itself that the financial sustainability criterion is met and that members are protected. We intend that these regulations will require evidence of any financial commitment by the establishing employer or connected employers and that the scheme has access to the financial resources it needs, including in the event of employer insolvency. If the regulator is not satisfied that the scheme is financially sustainable, the scheme will not be authorised to operate by the regulator, so it is in an employer’s interest to ensure that its scheme meets the envisaged requirements. We do not intend to require CDC schemes to hold a minimum level of capital to meet relevant cost. If authorisation is to work effectively, the Pensions Regulator must be able to consider the risks posed by each scheme to determine whether adequate mitigations are in place. I believe that that is a fairer and more effective approach.
I turn to my noble friend Lady Altmann’s amendment. It would add to the illustrative list of what regulations may require the regulator to consider when deciding whether the processes used to run the scheme are sufficient to ensure it is run effectively. I appreciate the importance of good systems—
I thank my noble friend. Before we finish on this topic, I hear what is being said but what I was trying to achieve with Amendment 5 was to avoid repeating the mistakes already extant in automatic enrolment schemes. We are setting up a brand-new system, and there seems to be nothing in the current processes which would require checks on data accuracy. The processes mentioned in Clause 16 include records management, in subsection (4)(d), while subsection (4)(b) recommends standards for IT systems’ “quality”. However, there are no processes to verify on an ongoing basis a regular audit of whether the data are correct. We know that data are currently incorrect in a large number of auto-enrolment schemes. Even the modern ones are full of errors.
I am trying to introduce something that would help us learn from experience and avoid repeating the kind of mistakes that we know have arisen. They are not intentional mistakes, but if we put in place right from the start processes which require data audits and, potentially, capital buffers as well, against mistakes that have not been foreseen, we will set up a more robust system for the longer term.
I thank my noble friend for her intervention. My understanding is that CDC schemes are obviously new and will not carry any legacy data issues, which should lower the initial risk. The focus will be on not cleaning old data but establishing strong processes for loading, managing and maintaining data, with regular checks to ensure that quality is maintained. If that does not answer my noble friend’s point in the way she would like we can deal with it when we meet later in the week, if that is acceptable.
I appreciate the importance of good systems and processes. However, the proposed addition to the illustrative list is unnecessary, as we already envisage that appropriate requirements relating to the accuracy of member data and record keeping will be included in regulations. Schedule 5 of the illustrative CDC regulations provides an early indication of our thinking in respect of member records. However, we will consult to ensure that what is included in the regulations is appropriate and that sufficient scrutiny is applied. We also want to ensure that any requirements are proportionate.
In conclusion, I hope that my statements today and the illustrative regulations deliver sufficient reassurance of our commitment to ensuring that CDC schemes are financially sustainable and that systems and processes for member data are sufficient and effective. With that, I ask the noble Lord to withdraw his amendment.
I should like to ask one or two questions about the buffer concept. It seemed to me that a lot of what was being described was the equivalent of a buffer in some ways, but it was not entirely clear how it would be produced, brought forward and exercised. It was not entirely clear to me whether the members of any proposed CDC scheme would be given a choice or say in whether the scheme should go ahead without buffers, as the RM scheme will, or whether it should include buffers. It seems to me that there is merit in consulting the workforce about which they prefer.
In paragraph 1.3 of the consultation response the Government said:
“We do not want to preclude or legislate against buffers in CDC schemes—there are perfectly good reasons why employers and workforces may wish to provide for a scheme that mitigates volatility in this way, and we agree that a buffered scheme could be appropriate in some circumstances.”
Those circumstances might very well include avoiding frequent and disconcerting changes in benefits but also the provision of wind-up or restructuring costs, even if that does somewhat impact intergenerational fairness. My request is for clarity about this cloud of assets or obligations that might substitute in some way for capital. I am not clear about how that will happen. It would be good idea to make sure that in any future schemes the workforce is consulted about whether or not they prefer a buffer.
May I, too, seek clarification? I was not entirely sure what the Minister was saying about where the money could come from for a buffer. I think I understood her to say that the regulator would not approve a scheme unless the sustainability criteria had been met and that they could be met only if an adequate amount of money was placed in, for example, escrow. Is she saying that a scheme would be approved only if the regulator was satisfied that enough money had been provided up front by the sponsoring employer to fund the continuity options in the event of a triggering event? If so, why does she not simply accept this amendment? That is all it says.
I shall turn first to the point raised by the noble Lord, Lord Sharkey. The funding of future inflation increases provides the headroom funding that is required. The answer to the question asked by the noble Baroness, Lady Sherlock, is yes, the money would be in an escrow account if needed.
So could it never be the case that in the event of a triggering event, such as a wind-up, an employer pulling out or an employer downsizing, money would have to come from members’ contributions to fund the continuity option? I am sorry to push this, but this kind of clarity is important.
Noble Lords must forgive me for turning to my friends. This is my first Bill. The answer to that question is no, it should not be.
Now I am confused. In the previous group, when we were talking in anticipation about buffers and intergenerational fairness, the Minister said that there would be headroom funding. I understood that to be up front, getting the scheme up and running, but the Minister then said that that was going to be spent. I do not think she said what it was going to be spent on, or have I got the wrong end of the stick?
I think this is a language question. The problem that my noble friend Lady Drake raised at Second Reading and which we are trying to raise here is not about a capital buffer to deal with the intergenerational questions of benefits and payments at a time. It was the equivalent in master trust regulations where the sponsoring employer has to put money up front in a safe place so that if things go wrong and the scheme collapses the fallout can be funded without raiding members’ benefits. I think the noble Baroness, Lady Bowles, is describing something slightly different.
I hope I can intervene helpfully. This is allied to the issue of data. If a scheme has to wind up, the biggest cost is the administration, and the likelihood of a scheme with poor data records needing to take money from members’ pensions to meet the very high costs of administration when a scheme is failing is much greater. That goes back to the original reason for suggesting that we need a buffer that can cater for the disaster scenario. It is like an insurance policy so that if things have gone horribly wrong with that scheme, members do not potentially end up with no pension because there is something that we have set up from the beginning that can help fund the costs involved and there are systems and processes to check regularly that data are correct along the way which would mitigate the costs of going back over many years and trying to resurrect records.
Let me try to be helpful and to placate noble Lords on this: money needed to wind up should come from the employer. A scheme would not be authorised if it did not have this financial sustainability from the employer. Is that helpful?
But the scheme does not include a buffer and I am still not clear about the money. If it is going to come from the employer, where does it say that they have to do that? All we are talking about is a notion of fairness, but people may disagree about what that means.
I think the original question was around the consultation we are going to do on this. This will be resolved in the consultation.
I think this shows that it is important that we understand what the statutory instruments in this area are going to look like. It will obviously lead to a clearer conversation if the Government are able to move on that. The second thing is that, in my experience, things do not necessarily go the way you expect. When I sought my pension estimate before I retired, I ended up a year later getting a less generous pension than I had anticipated, perhaps because things had changed on the underlying demographics—health or whatever. We have to be quite careful to take account of the complexity of these things in the sorts of SIs that we make. Clearly, we need to consult on them for that very reason.
On a final point of clarification, if I have heard the Minister correctly—and I will read the record—I think she is trying to reassure us that she will consult and that this will be dealt with in regulations. The problem is that Clause 14(4)(b) states that regulations may include provision,
“specifying requirements to be met by the scheme relating to its financing, such as requirements,”
et cetera. All this amendment does is insert the words, “or by an employer”, because of the concern that the Bill may allow regulations to be made requiring the scheme to put money in. We want to be sure that the Bill will require the employer, rather than the scheme, to provide the money. That is why the amendment is written as it is, accepting that the Government will have to work out what is in the regulations and then what the regulator actually did as a result. Are the Government confident that the wording of the Bill will allow them to place a requirement on the sponsoring employer to do what the Minister has described?
I am advised that we are confident that that will be the case.
In that case, I seek clarification on what would happen if the employer became insolvent. There would still be the same problem that members’ pots would be needed to cover the costs of wind up, because they could not be got from the employer. If there is not a capital buffer up front and we rely on waiting to recover it from the employer, we may still end up with the same kinds of errors that we had in defined benefit schemes, where there was nobody to get the money from and the members ended up with potentially no pension.
In the absence of knowledge in this area I have had to resort to listening to the debate. I think the consultation is important. We need to be clear what the headroom is, what the buffer is and whether the headroom is to take account of inflation, as the Minister says. Taking account of inflation has nothing to do with sustainability, emergency action or catastrophes of other kinds, so we need clarity about, first, what questions are asked in the consultation and, secondly, what responsibility is taken.
It is all very well saying that the regulator will look at this and make sure it is sustainable, but I am not sure that the history of the Pensions Regulator gives me a good night’s sleep. I apologise if I have got it wrong, but there seems to me to be a bit of confusion about what this headroom or buffer is for, who takes responsibility for it and how the Pensions Regulator will keep a look out. It is not clear to me that statutory instruments will do it. However, if the Minister is confident that they will, we need to see them.
Our job is to give noble Lords comfort and to clarify matters, which we must do. I am advised that if there were to be an insolvency of an employer, that would be anticipated up front when the scheme was established and some provision would have to be made for the risk of it happening. It would of course be part of the ongoing monitoring.
With regard to the helpful suggestion from the noble Baroness, Lady Donaghy, about the questions in the consultation, I might be getting myself into trouble—I am very good at that—but maybe we could write to noble Lords who have taken part in this debate and ask for their opinions about what questions should be included.
Apart from those matters, if there are any other points that I have missed out, or if I have not done as good a job as I should have, we will write to all noble Lords to clarify.
Would the Minister be kind enough to write in any case, clarifying the helpful points that she has made here? They came in bits, so it might be useful to have a note setting them all out together, if that would be okay.
I am happy to make sure that that happens.
I beg leave to withdraw the amendment.
Amendment 3 withdrawn.
Amendment 4 not moved.
Clause 14 agreed.
Clause 15 agreed.
Clause 16: Systems and processes requirements
Amendment 5 not moved.
Clause 16 agreed.
Clause 17 agreed.
Clauses 56 to 68 agreed.
Clause 18: Calculation of benefits
Amendments 6 and 7 not moved.
8: Clause 18, page 11, line 34, leave out subsection (4)
My Lords, I shall speak also to Amendment 14 as well as to my clause stand part Motion.
Amendment 18 is a probing amendment whose purpose is to enable discussion of the powers given to the Secretary of State to make regulations altering various key aspects of the scheme. Clauses 18(4) to (8) set out what those powers are. The Government’s policy brief discusses Clause 18(4), and it is worth quoting what it says:
“Concern has been expressed that the Government could therefore use regulations to make changes to the basic principles underpinning a CDC scheme’s financial model, potentially leaving it financially unviable.”
It goes on:
“Concern has also been expressed that changes to the regulations under this clause could have the effect of re-designing an existing collective money purchase scheme—potentially years down the line—by overriding what the scheme rules say about the methods and assumptions to be used in calculating benefits. If this happened, it could undermine the actuarial modelling on which the initial design was based and change the deal offered to members when joining the scheme. It can also affect the intergenerational balance of the scheme.”
The Government’s response to this very serious set of concerns is in three parts, none of which seems to be particularly compelling. The first is to deny that any of this is the purpose of the power to make regulations, but Mandy Rice-Davies would have known to how to respond to that. The second is to say that the Government will expect Parliament to reject any attempt by a future Government to use them in such a way, but these powers will be exercised by secondary legislation so how will Parliament stop or modify that? What precedents can the Minister point to there? The third response by the Government in support of these powers is that they will consult before using them. None of these arguments strikes me as particularly convincing. The powers granted are enormously wide and unconstrained. Their existence would certainly not add to confidence in the stability of the scheme.
There is surely a more proportionate way of doing what is required. The Government say that without these powers, there is a risk that they would not be able to stop schemes operating on principles that run contrary to the basic principles underlying the provisions in this part of the Bill. If that is the case, surely it would be simpler and proportionate to set out in the Bill these basic principles and that compliance with them as a condition of the scheme’s authorisation. I look forward to the Minister’s response to that proposal. If the Government insist on proceeding with these wide and unconstrained delegated powers, I am sure that the House will want to return to the issue later in our discussions.
I turn to Amendment 14. The Government’s policy brief describes Clause 47 as allowing the Secretary of State to make regulations using the affirmative procedure to remove the restriction on CDC schemes for single employers or connected employers. This would open CDC schemes to multiple employers and master trusts. The DPRRC and the Constitution Committee have both examined the powers in the clause, and the Constitution Committee agrees with the DPRRC that the power granted in it is inappropriate. It notes that the clause is skeletal and contains a broad Henry VIII power. In paragraph 28 of its report on the Bill, the DPRRC states:
“The fact that the Bill currently prohibits multiple-employer collective money purchase schemes suggests that such schemes may give rise to significantly different regulatory issues from those presented by single employer … schemes which are currently allowed under the Bill. This is … supported by the fact that clause 47(3) to (5) gives the Secretary of State such wide powers to make changes to the provisions that govern single employer schemes”.
In the very next paragraph of its report, the committee says:
“Given this background, we consider it is inappropriate to leave the provisions for regulating multiple-employer collective money purchase scheme to subordinate legislation; and, therefore, that the delegation of powers by clause 47 is inappropriate”.
Subsection (5), the subject of my amendment, is a naked Henry VIII power, including as it does the delegated powers to
“(a) modify a provision of this Part, or any other enactment, as it applies to relevant schemes; (b) amend, repeal or revoke a provision of this Part or any other enactment.”
This kind of unfettered licence to amend, repeal or revoke primary legislation by statutory instrument has always been unattractive to this House. My amendment proposes to remove subsection (5) but I ask the Minister to consider withdrawing the whole clause. As the DPRRC and the Constitution Committee have said, if we want to legislate for multiple employer CDC schemes then it should be via primary legislation, not via the use of secondary legislation and Henry VIII powers.
I have also given notice of my intention to oppose the Motion that Clause 51 stands part of the Bill. I have done this so that we may ask the Government about their use of delegated legislation in Part 1. Clause 51 contains very wide-ranging powers, which
“may be used … to make different provision for different purposes; … to make provision in relation to all or only some of the purposes for which it may be used … confer a discretion on a person … make consequential, supplementary or incidental provision … make transitional, transitory or saving provision”.
The last two are probably okay—they seem boilerplate, to have common-sense meanings and to be properly restricted—but the first three powers are very wide. What exactly is it to confer discretion on a person? What does that allow in practice and what limitations are there to it? It is rather attractive but, I would be grateful if the Minister could explicitly answer those three questions when she replies, as well as explaining why the first two very wide powers are needed at all.
The Government have attempted some kind of explanation of Clause 51 on page 13 of their policy briefing note. It states:
“Clause 51 … (2) allows the regulations made under Part 1 to make different provisions for different purposes.”
That is not an explanation; it simply repeats the text of the Bill. I take it that what is meant is that the regulation-making powers set out in Part 1, in their proper context and given their proper purpose, may be amended to encompass different purposes in any way the Government might choose. Why is that necessary? The Government try to explain by way of example. They say:
“This will allow us to make different regulations to provide for different CDC scheme structures if necessary. They cite by way of example Clause 51(2) would allow us to introduce a different regulatory framework for the way in which multi-employer CDCs must calculate and adjust benefit values compared to single-employer CDC schemes should that prove necessary.”
This power already explicitly exists in Clause 47(3) to (5), which we have already discussed. As we have noted, both the Constitution Committee and the DPRRC thought these powers inappropriate. If they were inappropriate in Clause 47, they are no less inappropriate in Clause 51.
The Government give only this one example of the possible use of the powers in Clause 51. They could equally be used in unrestricted ways anywhere in Part 1. Can the Minister explain why it is necessary to have such wide-ranging and unrestricted powers in the Bill? As it is, most of the delegated powers in Part 1 are vague and undefined and await consultation before taking definitive legislative form, but at least they are tethered, no matter how loosely, to some purpose or objective. Clause 51 powers are not tethered, and it is hard to see why they are in the Bill.
Clause 51(4) and (5) helpfully set out the meaning of negative and positive resolution procedures. This is a helpful reminder given the large number of uses of both in Part 1. However, the use of the powers has another feature noted by the DPRRC in paragraphs 11 to 14 of its report. This is the use of first-time affirmative procedure, in which the first exercise of the power is subject to the affirmative procedure and subsequent uses to the negative procedure. This applies in particular to Clauses 11 to 14. The Government have set out what they consider to be the reasons for the first-use affirmative procedure. The DPRRC rehearses the reasons in paragraph 13 of its report, and it was not convinced. It concludes:
“The scope of the powers remains the same on the first and subsequent exercises, and therefore there is nothing in principle to prevent the changes made by subsequent exercises of a power from being as significant as the provision made on the first exercise. In the light of this, the House will wish to look carefully at the Government’s arguments in each case as to why they consider it likely that changes made on subsequent exercises of a power will not be of such a nature as to require the affirmative resolution procedure to apply.”
I strongly urge the Minister to take heed of the advice of the DPRRC and to let the House have a schedule of the appropriate arguments for each proposed first-use affirmative. There are many of these cases. Rather than letting us have a schedule of the arguments, perhaps it would be better and simpler for the Minister to agree to replace all first-use affirmative procedures with straightforward affirmative procedures. I beg to move.
My Lords, I support the amendment. My noble friend Lord Sharkey raised this matter at Second Reading and in subsequent briefings. I alluded to transparency earlier; there is also the issue of accountability. We have heard about the recommendations of the DPRRC. I note that the Constitution Committee agrees with the DPRRC that the use of Henry VIII powers is inappropriate in this Bill, regrets the inclusion of skeletal provision and notes that
“complexity is not an excuse for taking powers in lieu of policy development”.
It is an august committee, so we should treat its recommendations seriously. I support the amendments and would like to the hear the Minister’s response to the recommendations of the DPRRC.
My Lords, perhaps I might make a general comment. I support the way in which the noble Lord, Lord Sharkey, introduced his amendment. This is a problem with framework Bills. Why do we have framework Bills? It is because we do not know the answers to the problems posed, in this case by a particular kind of pension scheme. The results, if the Bill goes ahead as it is, will be quite worrying. I would not wish to be a trustee of this pension scheme. Why not? Because I would not have any powers. At any time, my efforts to play a proper role as a trustee of this pension scheme could be upscuttled by the Government changing their mind and introducing another piece of secondary legislation. All the fundamentals of this pension scheme—particularly in Clause 18, which the noble Lord referred to—are entirely in the hands of the Government of the day.
We have talked about all sorts of things that I am also thinking about from the point of view of the trustee. As a trustee, it would be my responsibility to try to ensure I had some sort of capital buffer, if I needed it. I would have to talk to the employer in a way that would give me some chance of success. With the Bill as it is now, the position of trustees is impossible or near to it.
The noble Lord, Lord Sharkey, has made a powerful case on these provisions and we look to support him. There must at least be a strong reason to say why they cannot be pared down and need to be as wide as they are. If there is an argument for them, at least they should be pared down. In so far as whether this is doable—the noble Lord said he is not sure what the answer is—in some of these areas, I am not sure that we know what the question is, which is deeply worrying. These things need to be sorted out because, as they stand, they are going to undermine a scheme that generally has a lot of support, particularly our support, in principle. I would like to get it back on track, so that we can deal with it, deliver it and not be waylaid by these very real concerns over delegated powers.
My Lords, I recognise the expressed concerns over the regulation-making powers in Part 1 of the Bill and how they might be used. There has also been comment on the principles underlying the choice of negative or affirmative procedure for some of the regulations. This is why we have shared illustrative draft regulations to help noble Lords understand how we intend to use these powers, but the secondary legislation to be made under the proposed delegated powers can be laid before this House in final form only after Royal Assent, in accordance with the procedures set by Parliament. This House will have the opportunity then to scrutinise the secondary legislation.
There are important legal principles at stake before the proposed delegated powers can be exercised properly. In many instances, the Government will wish or have promised to consult further on the technical substance, particularly in Part 1. There are instances where there may be a statutory requirement to consult because of a connection to existing legislation. There are instances where there may be a need to await the outcome of consultation being undertaken by the regulator or where consultation is needed with professional bodies. Finally, there are instances where proposed delegated powers are sought to enable the Government to react to future developments.
Where there is an intention, promise or legal requirement to consult on the substance of secondary legislation, the legal position is clear that the Government cannot prejudge the outcome. Had the Government purported to draft all the secondary legislation at the same time as drafting the Bill, that would have entailed, inevitably, prejudging the substance without the benefit of any necessary consultation or consideration of the eventual wishes of Parliament. Likewise, it is more appropriate to consult once the Bill is passed, so as not to prejudge the intentions of Parliament.
Those are the points of principle. I will now deal with the point that the provisions intended for future secondary legislation could, nevertheless, be written into the Bill, at the inevitable cost of delaying introduction. This approach is consistent with the approach to previous pension schemes Bills, recent examples being the Pension Schemes Act 2017 and the Pension Schemes Act 2015. As with those Acts, the provisions in the Bill embody the fundamental policy.
Provisions of a more technical nature, or which are by their nature liable to change, are delegated to secondary legislation. This staged approach has two benefits. First, it enables flexibility to ensure that the legal framework remains appropriately tailored to developments in the pensions industry. Secondly, it provides legal certainty more quickly and enables those affected to prepare for changes to the law. This is important for the pensions industry.
I note that comment has been made on the propriety of affirmative procedure on first use only. I take this opportunity to make it clear that the Government do not accept that the practice of specifying an affirmative procedure on first use is licence to use those provisions inappropriately at a future stage. The reason for affirmative on first use then negative is that a decision on when the scheme design is sound will be critical to the effective running of the scheme and to safeguarding members. Therefore, it is important that when first determining these matters the regulations are subject to full debate. Further use of the powers is likely to be limited to adapting matters the regulator will be required to take into account in the light of operational experience, so the negative procedure would be appropriate.
With respect, this House is called to scrutinise the scope of the proposed delegated powers and the parliamentary oversight of those powers. The Government can, of course, give this House assurance as to their future intentions in using these delegated powers. To assist the House, the Government have produced illustrative regulations relating to Part 1. I hope this illustrates both the way delegated powers in that part are intended to be used and the limitations in pre-empting their use.
Clause 18 provides for CDC schemes to be required to have rules for how the current value of CDC scheme members’ benefits must be calculated and adjusted each year and for powers for government to make provision about those rules. It is therefore a very important clause for ensuring that all members of CDC schemes are protected from inappropriate calculation methods, with all benefits calculated equitably, with no differentiation on the basis of age, gender and so forth.
The amendment moved by the noble Lord, Lord Sharkey, would significantly reduce the Government’s ability to ensure that all members of CDC schemes are treated fairly. For example, scheme rules could discriminate against certain members on the basis of age, and the Government would have limited powers to react swiftly to stop this unfairness.
We will also use regulations under Clause 18 to require all CDC schemes to use the central estimate in all financial assumptions and projections when calculating and adjusting benefit values. This means that a scheme would not be able to take an overly optimistic view of future investment returns, for example, but will also not be able to take an overly cautious approach. Regulations made under Clause 18 can also be used to make different provisions for different purposes. This is provided for in Clause 51. We will use this power to ensure that the regulatory framework for the calculation and adjustment of benefit values is tailored appropriately for different types of CDC schemes. Concerns have been expressed that regulations made under Clause 18 could have the effect of redesigning an existing collective money purchase scheme, potentially years down the line, by overriding what the scheme rules say about the methods and assumptions to be used in calculating benefits. I reassure noble Lords that while we must protect members from unfair treatment, we do not intend to undermine the way in which CDC schemes work through regulations.
One of the criticisms of Part 1 is that it does not go far enough. Many people, including those from the insurance industry, trade unions, pension providers and pension commentators, have called for CDC provision to be extended to master trust, accumulation-only vehicles and other models of non-connected multi-employer schemes. We can see merit in these other scheme types. We need to consult carefully with experts and interested parties in order to get the detail right. We can then make appropriate amendments to existing legislation to allow for these and other scheme types to operate. The regulation-making powers in Clause 47 allow for that. However, the proposed amendments to those powers could make the rollout of these other scheme types more complicated as it would require us to bring forward new primary legislation to achieve that.
I recognise that through this clause we are seeking a wider power. We do not do so lightly. It is important to remember that the provisions in Part 1 of the Bill were developed with real-world input from the Royal Mail Group and the Communication Workers Union. We want to work in a similar way with interested master trusts and others to ensure that when we come back to Parliament with regulations to extend CDC provision to other models, we get the detail exactly right. The underlying principles and requirements for other CDC schemes will be agreed during the Bill’s passage. Using regulations made under Clause 47(5) to amend legislation will allow us to ensure that these principles apply appropriately for other models of CDC schemes in future. This will allow employers and scheme members to benefit from new types of scheme without unnecessary delay, while providing for full parliamentary scrutiny through the affirmative procedure.
Clause 51 is a standard Bill clause. Provisions setting out the scope of regulation such as this are common in other legislation. For example, the Pensions Act 2014 and the Pension Schemes Act 2017 contained similar provision. The clause expands on the scope and procedures to be used in relation to the regulation-making powers in Part 1 of the Bill, such as enabling regulations to make different provision for different purposes, consequential or supplemental provisions, or transitional or transitory provisions. If the clause does not stand part of the Bill, we will be unable to make regulations to accommodate different types of CDC schemes. That would create a lack of clarity regarding the actual form that the regulations would take and the parliamentary procedure that would apply to them.
I concede that this speech has been a long one, but I know that this is an important issue. Discussion about the use of delegated powers has been a perennial feature of the House and I expect that it will remain so. I thank noble Lords for raising these important and necessary concerns. I hope I have demonstrated that the powers we seek are necessary and subject to appropriate scrutiny. I therefore urge the noble Lord to withdraw his amendment.
I have a question regarding the first-time affirmative point. I think the Minister said that the second use on the negative basis is likely to be limited to the uses that she talked about, but she did not say that it would be used only in those circumstances. Obviously, this could go on beyond the current Government. If she is not prepared to remove the first-time affirmative aspect, would she at least be prepared to consider limiting those secondary usages to the limited situation that she has described?
I thank the noble Lord for that important point, which we will certainly consider.
Before I come to the meat of the matter, may I ask what it means to “confer discretion” on a person?
It would be very helpful if the noble Lord would repeat that for my officials.
I am delighted to repeat it. What does it mean to “confer discretion” on a person?
As I understand it, it means to delegate powers.
If that is what it means, and I am sure it does, then we are giving the absolute, unrestricted authority for delegation of any power to anybody at all. That seems to me to be slightly wider than is normal.
I shall move on. I will have to read tomorrow’s Hansard very carefully to understand exactly what the Minister said, but there were several points that struck me as really quite controversial. One of those is about Clause 51. The Minister said, and she is obviously entirely correct, that you cannot set up a multi-employer CDC scheme by regulation if you remove Clause 51. Yes, that was the point of my amendment: it seemed wrong to introduce multi-employer CDC schemes by regulation. That is also exactly what the DPRRC said. It is wrong, or inappropriate, to do it that way: that was the whole point of my amendment. I do not think it is a substantive response to that to say, “Well, if we accept it, we cannot do it.” That was the point of the amendment.
I thought I also heard the Minister say that one of my amendments—I cannot now remember which—would adversely affect the ability to reduce intergenerational fairness because it would remove a delegated power. I am not at all certain, having thought about it, that it would have that effect, but in any case we have already heard very strong arguments for intergenerational fairness mechanisms being in the Bill. I did not hear in the Minister’s reply a lengthy argument against the view of the DPRRC that the powers in Clause 47 are inappropriate. I understand their absence is inconvenient, but it does not address the central argument put forward by the DPRRC that it is inappropriate to create these new schemes entirely by regulation.
To make a general comment about the framework Bill, a lot of what is going on seems to be effectively cutting Parliament out of meaningful participation in critical aspects of scheme design. I understand that there is a need for a strong element of a framework Bill when you are dealing with these kinds of pensions, but it seems wrong to deploy them so widely that Parliament itself is effectively cut out of the process. Parliament is cut out. No matter how many times we mention secondary legislation in this debate, it is clearly the case that we cannot amend and do not reject secondary legislation. It is difficult to see exactly what our participation in secondary legislation would amount to. Having said all that, I beg leave to withdraw the amendment.
Amendment 8 withdrawn.
Clause 18 agreed.
Clauses 19 to 23 agreed.
Clauses 69 to 74 agreed.
Clause 24 agreed.
Clause 25: Transfer rights
9: Clause 25, page 17, line 26, at end insert—
“( ) If the trustees receive an application under section 95 relating to money purchase benefits that are collective money purchase benefits, the trustees must check that the member or survivor has received appropriate independent advice before—(a) converting any of the benefits into different benefits that are flexible benefits under the scheme;(b) making a transfer payment in respect of any of the benefits with a view to acquiring a right or entitlement to flexible benefits for the member or survivor under another pension scheme;(c) paying a lump sum that would be an uncrystallised funds pension lump sum in respect of any of the benefits.( ) The Secretary of State may by regulations make provision about—(a) what the trustees or managers must do to check that a member or survivor has received appropriate independent advice for the purposes of this section, and(b) when the check must be carried out.”
My Lords, Amendment 9, which is tabled in my name and that of my noble friend Lady Altmann, seeks to give protection to beneficiaries of CDCs who want to transfer out. Basically, it extends the protection that already exists in statute for DB beneficiaries to beneficiaries of CDCs, which we are discussing this afternoon.
As the law stands, that protection does not apply to the beneficiaries of the schemes we are talking about, so I have done a cut-and-paste job, lifting a chunk of legislation and applying it to CDCs. I welcome the steps the Government are already taking to stop people being misled into giving up rights under pension schemes—they have banned cold calling for example—but there are still too many abuses out there and there is a risk of people being approached and encouraged to forgo the benefits they have accrued under a CDC scheme for something that may not be worth quite so much.
I found the meetings that the Minister held with officials and Members of your Lordships’ House enormously helpful. This issue was raised. If I remember correctly, two arguments were given for not doing what I propose now. One was that it will take time to build up a transfer value of £30,000, which is the trigger level at which you have to get independent financial advice. In other words, people who are subscribing to these schemes would not be able to build up £30,000-worth of assets very quickly so there would be time to introduce a scheme. The other argument was that we are talking about a new type of scheme and therefore independent financial advisers may need time to develop the relevant portfolio of skills to give relevant advice to those who are thinking of transferring.
I do not find either of those arguments convincing, particularly as it would be possible for people to transfer into, for example, the Royal Mail scheme. Like other noble Lords, I got a letter from Royal Mail:
“Dear Lord Young … If you have any questions or would like to discuss the issues raised during the debate at Second Reading, please do not hesitate to contact me.”
I contacted Royal Mail and asked whether it is envisaged that those who join Royal Mail after the scheme has started and have a pension pot from their earlier employment will be able to buy into the CDC scheme. The answer—it is now “Dear George” rather than “Dear Lord Young” as the relationship warms—was:
“In answer to your question, yes, the rules of our CDC scheme will allow members to transfer in (“buy in”) and provide themselves with additional benefits under the two parts of the scheme, (a CDC pension and a defined benefit lump sum on retirement).”
So it could be the case that quite soon after the Bill becomes an Act and Royal Mail goes ahead somebody who joins Royal Mail and after a few months or a year decides to transfer out may have a pot worth more than £30,000, but at the moment they will not have to seek any independent financial advice before taking that decision, putting them in a different category from other beneficiaries.
The other argument was that this is a different product and therefore different skills will be needed to give advice to a beneficiary about whether it is worthwhile transferring out. It is a different product, but I wonder whether it is so different that IFAs will not be able to give independent advice to an individual looking on the one hand at the advantages of remaining within a particular CDC scheme and on the other hand at the possible advantages of transferring out. Given that CDC schemes exist in other countries and that there has been a debate about CDCs for some time in this country, I would have thought it perfectly possible to require people to take that advice.
I was reading the briefing from the RSA, which drew my attention to the fact that:
“There is a provision in the Bill to allow the Regulator to temporarily ‘pause’ the transfer option, which mitigates the risk of large-scale transfers out of the system due to misinformation.”
There is indeed a provision in the Bill. It is tucked away in Clause 44 under a pause order. It seems very cumbersome. This clause enables the Pensions Regulator to pause certain activities once a collective money purchase scheme has experienced a triggering event, and one of the things that a pause order can then do is stop a scheme making transfers out of the scheme. I am not sure that is what we want. It involves the Pensions Regulator and is essentially reactive, whereas we need something proactive, which happens automatically and in advance. I did not find that provision in Clause 44 an adequate response to a problem that may affect just one or two individuals in a CDC scheme, and will therefore not engage the attention of the Pensions Regulator, because there is nothing systemically wrong with the way the CDC scheme is being run.
There is an issue here. It may arise slightly more quickly than was originally envisaged. The solution I have may not be perfect, but it is a little better than the pause order, the triggering events and the provision in Clause 44. I beg to move.
I support my noble friend’s proposed amendment. He has raised an important issue here. Once again, it is about pre-empting a problem that we have seen elsewhere and not importing it into brand-new legislation. The pause order and triggering events that might permit some protection against people transferring out inappropriately will arise only if the scheme is in trouble and the regulator has already picked that up. That will be a number of steps down the line.
I wholeheartedly agree with what my noble friend said. Before transferring out of a defined benefit scheme, one is required to take advice if one is losing a meaningful lifelong potential income—not guaranteed, but potential. That protects members and potentially the scheme. If there are risk margins in transfer values, members should also have somebody talk them through what they might imply for them. Given that the aim of the CDC scheme is to deliver a lifetime pension, having the same requirement for advice as we already have in defined benefit schemes does not seem overly draconian. I am not saying this is necessarily the right wording or optimal route for a CDC scheme, but the aim of this amendment to protect members has merit. I would be grateful if my noble friend and the department might consider introducing it.
My Lords, I say in support that, if I were a trustee of a pension scheme, and one, two or more people wanted to transfer out, I would be extremely unhappy if they had not taken independent financial advice. I would see that as a necessary condition of coming to the deal that we were possibly coming to.
My Lords, we should thank the noble Lord, Lord Young, for bringing this amendment which, as he said, mirrors other aspects of pensions legislation. I was unclear whether this sits alongside the pause and triggering events or would supersede it. I hope the former, as it would be the quickest and easiest way to deal with it. Intrinsic to the wording are challenges that have been met in other pension environments about how to deal with or define “advice”, “adequate” and all that, but it is not beyond the wit of noble Lords to cover that off.
My Lords, this amendment would mean that a member of a CDC scheme would be unable to transfer their share of the collective assets to another pension scheme, with a view to acquiring flexible benefits or accessing them flexibly under the pension freedoms where this was permitted by scheme rules, unless they had taken regulated advice. I welcome the interest of the noble Lord, Lord Young, and that of my noble friend Lady Altmann, in this area and agree that taking advice can play an important part in helping to ensure pension scheme savers make informed decisions about their pension savings. This includes whether to access them flexibly under pension freedoms or transfer their savings to another pension scheme, with a view to acquiring flexible benefits.
This is why we introduced the advice requirement under the Pension Schemes Act 2015 for members with safeguarded benefits. These are benefits, for example defined benefits, that contain a promise about the rate or amount of pension income that the member will receive in retirement. The advice requirement ensures that members with safeguarded benefits worth more than £30,000 must take regulated advice before they can flexibly access their benefits under the pension freedoms or transfer their pension savings to another pension scheme, with a view to acquiring flexible benefits.
Pensions transfer advice is highly specialised, involving a full assessment of a member’s financial circumstances and a personal recommendation. This helps the member to understand the potential implications of surrendering benefits, where the amount of pension that the person will receive under the scheme is guaranteed by the employer. Pensions transfer advice can be offered only by advisers whose firms have the relevant permissions set out by the Financial Conduct Authority, along with professional indemnity insurance. This comes at a premium, because it is restricted to those prepared to take on the business, and can be expensive. By setting a financial level at which the requirement is triggered in relation to safeguarded benefits, we have sought to ensure that it is applied proportionately. It may not be cost effective for members with smaller amounts of pensions savings to take and pay for such advice.
It is also worth noting that collective money purchase benefits, as a subset of money purchase benefits, are “flexible benefits” for the purposes of the provisions of the Pension Schemes Act 2015. As such, a CDC scheme could decide to allow members to access their share of the collective assets flexibly under the pension freedoms. Before such an option is offered in the scheme’s rules, we intend for trustees to consider fully the potential impact this might have on other scheme members and on the ongoing viability and sustainability of the scheme. For example, if significant numbers of members crystallise all or some of their benefits shortly before retirement, this might impact the scheme’s viability. As part of the authorisation regime, the Pensions Regulator must be satisfied that a scheme’s design is sound, and that such impacts have been considered and appropriately planned for, so that the scheme design meets the authorisation requirements.
We envisage that regulations in support of the scheme design criterion will require evidence that there has been appropriate consideration of risks relating to pension flexibilities, and that action has been taken to mitigate such risks. The ongoing requirement for review of the scheme’s viability report should ensure the scheme monitors any impacts arising from pension flexibilities. These are complex matters; accordingly, we will need to consult thoroughly on what the regulations might require in this respect.
CDC provision is new and the nature of CDC benefits is very different from defined benefits, to which the existing advice requirement relates. As I have explained, pension transfer advice is highly specialised. As CDC schemes are new and only one employer has so far committed to establishing such a scheme, it will likely take time—until more CDC schemes are in place—before advisers consider entering this new market. It will also take time for advisers to develop the necessary expertise to offer appropriate and effective transfer advice to members of CDC schemes. We would need to work closely with the Financial Conduct Authority, which will regulate these potential advisers, to determine what effective or quality advice might look like.
As I have said, CDC is a new provision. Even if we were to set a level—for example, £30,000—at which a requirement could apply, it may take time for members’ funds to grow to this level. I can assure the Committee that my officials will monitor this situation as these new CDC schemes bed in. Once it is clearer that an advice requirement for CDC schemes is warranted, for example because members’ funds have grown significantly, we will still need to work out what the appropriate financial level is for triggering the advice requirement in CDC schemes and how that requirement would work best in practice. At that time, we will engage with the industry and stakeholders to work out these details, and we will then consult on the proposal that has been developed. Subject to the outcome of that consultation, we will seek to legislate to implement the requirements.
In the meantime, we will require CDC schemes to provide their members with appropriate information to help them to understand how their scheme works. For example, we would want the communication that the trustees send to a member who has applied for a transfer to contain the estimated value of their share of the collective assets and to outline the potential implications of transferring out of the CDC scheme before normal retirement age. Member communications at joining and near retirement will also signpost CDC scheme members to the guidance that is available from the Money and Pensions Service. The Money and Pensions Service is responsible for providing guidance to people with pensions, and that will include members of CDC schemes.
I hope my explanations have reassured noble Lords that until a CDC advice requirement is needed, members with collective money purchase benefits will still have access to information and guidance to help them to make informed choices. For the reasons that I have set out, I urge my noble friend to withdraw his amendment.
My Lords, we are inching towards the solution that I was after. I think I heard my noble friend say that she did not rule out legislation in due course, once the necessary skills had been acquired.
I would like to pick up one or two points. At one point, I think my noble friend said it might not be cost effective to have advice for smaller amounts. The amount that I envisaged was exactly the same amount that is already required to get independent financial advice for a defined-benefit scheme, so if it is cost effective for a defined-benefit scheme beneficiary to get advice for an amount over £30,000 then I would argue that it is the same for someone with collective contributions.
I heard what my noble friend said about safeguarding the interests of other scheme members but that is not actually the point I was making. I understand that the trustees will want to look at the impact on other scheme members if a large number withdraw, but that is not quite the same as making sure that those who withdraw have had access to the right advice. I think she also drew a distinction between benefits that are safeguarded because they are defined benefits and benefits under this scheme, which are not safeguarded. Legally she is of course perfectly correct, but in effect one hopes that there will not be that much difference between the level of benefits that you get from the scheme that we are discussing and the level that you get from a DB scheme.
I look forward to the regulations that my noble friend referred to. I was reassured by what my noble friends Lord Eccles and Lady Altmann said about the role of trustees. At the moment, under Clause 25(2), all they can do is hold things up for three weeks. However, if trustees take the advice of my noble friend Lord Eccles and take steps to ensure that people have taken the necessary advice before they transfer out, that is the way to go. As I said, I am grateful to my noble friend for her response. We are moving in the right direction and I beg leave to withdraw the amendment.
Amendment 9 withdrawn.
Clause 25 agreed.
Clauses 75 and 76 agreed.
Clauses 26 to 28 agreed.
10: After Clause 28, insert the following new Clause—
“Duty to notify the Pensions Regulator: fit and proper persons requirement
(1) The trustees of an authorised collective money purchase scheme must notify the Pensions Regulator within two weeks of a person assuming a role listed in paragraphs (b) to (e) of section 11(2).(2) The Pensions Regulator must— (a) assess whether the person in respect of whom notice is given under subsection (1) is a fit and proper person to act in the relevant capacity, and(b) if it is not satisfied that the person is a fit and proper person to act in that capacity, consider whether to withdraw the scheme’s authorisation in accordance with section 30.”
My Lords, the provisions in the Bill dealing with the authorisation of CDCs are based on the equivalent provisions of the 2015 Act. We all know that those provisions have not been brought into effect and we therefore have no firm evidence as to whether they are robust, but there is a genuine problem with the way in which they are designed to work.
The powers conferred on the regulator appear to be confined to the initial authorisation of a collective money purchase scheme—I am talking specifically about the fit and proper persons test. The powers given to the regulator by Clause 11 are tied specifically to Clause 9, which, as noble Lords will see, is about the decision on the initial application to authorise a collective money purchase scheme. What is going to happen if, as inevitably will happen at some future date once the scheme has been authorised, there is a change in the trustee membership of the scheme, or if any of the other persons referred to in Clause 9 change? It is not at all clear that the Pensions Regulator at that subsequent point has the power to determine whether that person is a fit and proper person to act in any of the capacities referred to in Clauses 9 and 11.
The regulator has the power in Clause 30 to withdraw authorisation from a collective money purchase scheme if he or she regards the authorisation criteria as not being met. That might include, for example, that a trustee or any other person is not considered to be a fit and proper person. Clause 29 allows the regulator to issue risk notices if there is a prospect of the authorisation criteria being breached—that, again, might include that one of those persons is a not a fit and proper person. However, the power of the regulator at that point is to withdraw authorisation for a collective money purchase scheme; it is not to make a determination about whether anyone is a fit and proper person. It is really a sort of nuclear option, which is to withdraw authorisation from the entire scheme. That clearly cannot be appropriate; it would not be in the best interests of the scheme members.
I acknowledge that my amendment is almost certainly imperfect—let us get that issue out of the way—but it is designed simply to allow us to have a discussion. I hope that the Minister can reassure me that I am completely off beam, but is it not better to have it made explicit in the Bill that it is in respect not just of the initial application that such judgments have to be made about fit and proper persons but of each subsequent appointment?
My Lords, I have put my name to this amendment for the clear reasons that have just been stated. There should be a continuing obligation to make such a judgment, because, between decisions and determinations, many sorts of things could happen to the individual involved. Be it an annual event or a one-time event, there needs to be an ongoing obligation for a judgment to be made.
There is nothing that needs to be added; it has already been said. I just want it to be noted that I, too, support the principle behind the amendment.
I thank noble Lords for raising these amendments that relate to events which can occur in an authorised CDC scheme and which must be notified to the Pensions Regulator. The amendment in the names of the noble Lords, Lord Hutton and Lord McKenzie, would require the trustees of an authorised CDC scheme to notify the regulator where a person assumed a role that was subject to the fit and proper persons assessment. This notification would be required within two weeks of the change. The regulator would be required to assess whether the new person met the fit and proper persons requirement. Where it was not satisfied, the amendment would require it to consider withdrawing authorisation from the scheme.
The fit and proper persons requirement is set out in Clause 11 and is one of the authorisation criteria. The aim is to ensure that only suitable people are involved with a CDC scheme in order to protect the interests of members. It is also worth noting that the Bill already includes a power in Clause 30 for the regulator to withdraw a scheme’s authorisation if it is not satisfied that the authorisation criteria are met. The regulator will need to be satisfied that this is the case on an ongoing basis, including that the fit and proper persons requirement continues to be met. Some events would still warrant consideration by the Pensions Regulator because they could affect the ability of an authorised CDC scheme to continue to meet the authorisation criteria.
Clause 28 covers such “significant events”, which must be notified
“as soon as reasonably practicable”
to the Pensions Regulator. The draft illustrative regulations that we shared with noble Lords, and which have been placed in the House Library, provide an indicative list of potential significant events. Noble Lords may be reassured to know that the event in their amendment is contained in the illustrative regulations. We will work with the Pensions Regulator and others to develop the CDC significant events; we will also consult on the draft regulations in due course.
Amendment 11, tabled by the noble Lord, Lord Sharkey, would mean that the decision of any employer or relevant former employer
“to withdraw from the scheme”
would automatically be considered a triggering event. It may be helpful to point out that the triggering events listed in Clause 31 are already intended to capture withdrawal events that pose a significant risk to the future of a CDC scheme. For example, the withdrawal by the employer from a single employer-established CDC scheme or the largest employer in a connected employer scheme may trigger the winding up of a scheme. The withdrawal may also have arisen as a result of employer insolvency. In this scenario, it is clear that such a decision could risk destabilising the scheme. As such, it should be treated as a triggering event and be subject to greater scrutiny and oversight by the Pensions Regulator to ensure that the trustees are taking all necessary steps to address the issue and protect members.
Not every withdrawal of an employer, however, may pose such a significant threat to the scheme. For example, the impact of a small connected employer deciding to withdraw from a CDC scheme may be minimal on the viability and sustainability of the scheme; it may not warrant a decision to wind up the scheme as a whole. Such an event would be more appropriately dealt with as a significant event. We intend that such events should still be reflected in the continuity strategy, so that the regulator is aware that this risk has been considered and planned for.
We propose that regulations would provide for such events to be a significant event, which would need to be notified to the regulator. Such a notification will allow the regulator to engage with the trustees to ascertain the impact on the scheme’s viability and continuity, and whether this should lead to a formal triggering event or other regulatory action. This approach allows the regulator to retain appropriate oversight of withdrawal decisions and resulting actions, while providing some flexibility and proportionality in approach where the withdrawal of the employer is not expected to impact significantly on the scheme. I am also pleased to advise the Committee that the regulator will engage with the scheme to look at the options before withdrawing authorisation. For the reasons I have set out, I urge the noble Lord to withdraw his amendment.
I thank the Minister for her comprehensive explanation of why it may not be necessary to add what I proposed. However, I am uncertain on one thing about triggering events. It concerns the fifth of the triggering events which we have been talking about. I could not find anywhere in the Bill what the trustees must do in the event of an Item 5 triggering event apart from notifying the Pensions Regulator that such an event had occurred. I acknowledge that I may have simply missed it but I would be grateful if the Minister could say what the trustees are supposed to do after an Item 5 triggering event. What actually gets triggered?
I thank the noble Lord for his question. I am advised that we will write to him with the answer.
My Lords, I am grateful to the Minister for her response but something is still not clear to me. She says that there is a continuing power on the Pensions Regulator’s part to vet all appointments that fall under Clause 9. I cannot find that continuing authority; I do not know where it is in the Bill. If she could, at some future point, alert me to what provision of the Bill covers that ongoing authority on the regulator’s part to make appointments, I would be grateful.
The second interesting point is that the Minister referred to Clause 28 as if it had some relevance to the point covered by my amendment. There is no definition of “significant event” in the Bill; it will be set out in future regulations. My concern may well be addressed if the Minister were to confirm that any new appointments of trustees or other persons listed in Clause 9 falls within the definition of “significant events”.
I know that my final point goes beyond my amendments; I hope that I am allowed to make it. On the assumption that the Bill becomes law—I very much hope that it does—it is striking that we have a specific set of provisions for how trustees for these collective money purchase schemes are to be appointed; they must be fit and proper persons, for example. But if one looks at the appointment process for other pension schemes, such as defined contribution and defined benefit schemes, there is no parallel provision. Under the Pensions Act 2004, those trustees must have some knowledge of pensions law and of their own scheme, but there is no equivalent provision for the appointment of trustees to other pension schemes. I wonder whether it is justifiable to have this particular provision relating just to these new pension schemes—perhaps it is—but not to have a parallel provision for other trustee and significant appointments to DB and DC schemes.
My only request to the Minister at this point—we may come back to it—is that this may be an appropriate time for us to take a wider look at overall pension scheme governance. In my view, there is nothing more important to the health and well-being of a pension scheme than the quality of the governance in place to oversee it. If it is appropriate for trustee and other appointments to these new pension schemes, of which I am very supportive, to be subject to this process, there is a convincing case, too, for an equivalent provision for defined contribution and defined benefit schemes.
The noble Lord is absolutely right. It is extraordinary that one group has a lot of requirements when another has none. Historically—let us say 30 years ago—trustees of pension schemes were often not remunerated. Someone applying to be a CDC trustee today would not think of taking on the responsibilities unless they were remunerated.
On the first point made by the noble Lord, Lord Hutton, we will write to clarify things. We have not listed “significant events” in the Bill because if members are to be protected, it is important that such events can be adapted to emerging threats as well as lessons learned through live running. We want to ensure that these events are appropriate and reflect the specific risks that may be posed by CDC schemes. We will consult with the regulator and others before laying any regulations before Parliament. We will consider the noble Lord’s final point—it was well made—about pension scheme guidance in terms of the new CDC scheme and existing schemes and come back to him on it.
I beg leave to withdraw the amendment.
Amendment 10 withdrawn.
Clauses 29 to 30 agreed.
Clauses 77 to 81 agreed.
Clause 31: Triggering events
Amendment 11 not moved.
Clause 31 agreed.
Clauses 32 to 44 agreed.
Schedule 2 agreed.
Clause 45 agreed.
Clauses 82 to 95 agreed.
Schedule 5 agreed.
Clause 96 agreed.
Clause 46: Publication of information
12: Clause 46, page 37, line 14, at end insert—
“( ) require information to be made available to the Pensions Regulator relating to actions taken by the scheme to ensure diversity considerations are taken into account in the recruitment of the trustee board with regard to—(i) age;(ii) gender; and(iii) ethnicity.”Member’s explanatory statement
This amendment will require pension schemes to make available information on the diversity of the trustee board to the Pensions Regulator.
I ask your Lordships to note that this is the first time I have tabled an amendment in Committee, so please forgive any infelicities in my procedural approach. I would appreciate any nudges in the right direction, should I need any. In speaking to this and other amendments bearing my name, I note the assistance and initiative of the campaign group ShareAction, which has helped with what I am about to say and the amendments.
The noble Baroness, Lady Altmann, said earlier that in setting up CDCs we are starting with a blank slate. We are starting in the modern era. This is the chance to do things right. Many of your Lordships are aware of the numerous studies showing that more diverse groups of decision-makers make better decisions. If the trustee boards of the CDCs reflect the diversity of the wider groups of people they represent, their collective life experiences will improve their capacity to understand the unique challenges faced by different pension scheme members. Pension outcomes are affected by issues such as gender, ethnicity and, as we referred to in an earlier amendment, generational equity. I am sure there is a great deal of expertise on pensions in this Room. Many noble Lords will know that the gender pension gap is currently 40%—twice the gender pay gap.
I warn your Lordships that this amendment is very modest compared with many that I may put before the House. It is not calling for mandatory diversity rules. If we were talking about the composition of major company boards, I have long been a campaigner for mandatory rules on gender diversity on those. These are measures aimed to ensure that CDC trustee boards are fit for the modern era and that they have at least considered these issues of diversity that we know are so crucial to good decision-making. These are a new type of pension scheme. Let us make sure they are fit for this century. I beg to move.
My Lords, I thank the noble Baroness, Lady Bennett of Manor Castle, for raising this issue and for starting so gently with us—we look forward to seeing where she will take us in future. We do not get much excitement on pensions Bills, so we are looking forward to her giving us some.
I am glad that the noble Baroness raised diversity, because it is something that we are certainly concerned about, as most people interested in pensions should be. She is not alone in raising these concerns; the Pensions Regulator raised them, too. It published a consultation document last year on the future of trusteeship and governance, in which it made a strong case for the need to improve diversity in pension boards. It made many of the points that the noble Baroness raised about the size of the gender pensions gap, but it also flagged up the gap that those who are disabled or from a black, Asian and minority ethnic background have poorer pension outcomes than other workers.
A lack of diversity on pension scheme boards has long been acknowledged as a problem. The 2016 PLSA annual survey found that, on average, schemes had more than 83% male trustees, with one-quarter of trustee boards being all-male. We are not talking about these things not being entirely balanced. If in this day and age a quarter of trustee boards are all-male, something needs addressing.
The idea behind the noble Baroness’s Amendment 12 is that schemes should report on the action that they are taking to address diversity. It does not even mandate an outcome; it asks simply, “What are you doing about it?” In fact, TPR put that option in its consultation document. It said in response to the consultation that opinion was divided, pretty much down the middle, with half the people thinking that this was a good idea and the other half thinking that it was a bad idea. Therefore, it decided not to do it.
Obviously, I could make an alternative argument based on those same facts, but I just want to ask the Minister: if not this, then what and when? The back-up position from TPR was that it was going to have an industry working group to look at improving the diversity of scheme boards. Will that go ahead? If so, has it launched or when will it launch? Crucially, how will we know whether it works? What would success look like? If we are not going to ask people even to report on the actions they are taking, we would want to know that the alternative will make a difference. If TPR and the noble Baroness, Lady Bennett, are of one mind in saying not only that the lack of diversity is a problem but that more diverse boards make better decisions—and they are making decisions about diverse scheme membership—this is an issue on which the Government have to take some kind of action. So if not this, then what?
My Lords, the two amendments tabled by the noble Baroness, Lady Bennett, to Clauses 46 and 119, both relate to issues of diversity and protected characteristics.
I will speak first to Amendment 12. I note that the aim of Clause 46, which contains requirements relating to the publication of information concerning CDC schemes, is to drive transparency about how they operate. The noble Baroness’s amendment would require CDC schemes to provide diversity information to the Pensions Regulator on what actions the scheme has taken to ensure diversity with regard to age, gender and ethnicity in its trustee recruitment. As we heard from the contributions, particularly that of the noble Baroness, Lady Sherlock, there is work to be done on this.
We recognise the importance of diversity in trustee boards, not just for CDC schemes, but across all trust-based schemes. Indeed, the Pensions Regulator has recently published its response on the future of trusteeship consultation, which considered specifically whether there should be a requirement for pension schemes to report to the regulator what actions they are taking to ensure diversity on their board of trustees.
The response to the consultation advised that there was a lack of consensus on this issue, as has been referred to, with some respondents in favour of it and others suggesting that there were initiatives already in place or that such a reporting regime would place an unnecessary additional burden on schemes. The noble Baroness, Lady Sherlock, asked, “If not this, then what?” I can tell her only that the regulator concluded that
“it would be beneficial to create an industry working group”
to further investigate raising the profile of this important issue, with a view to developing additional guidance and supporting material to help improve the diversity of trustee boards. So, I think that will happen. As I am sure noble Lords will appreciate, I would not want to pre-empt this significant work, but we will keep it under review and consider it further as it progresses.
The Government’s focus on the trustee landscape, including for CDCs, is to ensure that trustees meet standards of honesty, integrity and knowledge appropriate to their role. I think that employers and members participating in these schemes would reasonably expect that to be the case.
Together with Clause 9, Clause 11 means that the Pensions Regulator must be satisfied that the persons involved in the CDC scheme are fit and proper persons to act in relation to it. If the regulator is not satisfied, authorisation of a CDC scheme cannot be granted. We recognise that if we want to engender confidence in CDC, and ensure that the interests of members are protected, it is vital that the schemes be managed by appropriate individuals.
On Amendment 15, relating to pensions dashboards, again the Government recognise the importance of diversity on trustee boards. However, we have had to consider what information to prioritise as being required from day one. As we set out in the Government’s response to the consultation on pensions dashboards, the intention is to start with the provision of basic pensions information. This initial information is intended to help consumers plan for their retirement, in line with our primary policy objectives.
The success of dashboards is predicated on there being a good level of coverage across pension schemes. Achieving good coverage is a complex task. There are over 40,000 pension schemes, with data varying in quality and stored to different standards. The Government expect that it will take three to four years for there to be adequate coverage, with pension schemes initially providing simple levels of information. Increasing the amount and complexity of information required from pension schemes in the early stages may significantly delay delivery. The development of dashboards will be iterative, and we will continue to consider what information is placed on them following their initial delivery to the public.
TPR has not launched the working group yet, and its timescale is not confirmed, but we will monitor the situation. For the reasons that I have given, I hope that the noble Baroness will withdraw her amendment, but I am sure that she will never let up on her campaign.
I thank the Minister for her response. She referred to the fit and proper persons test. I am not a legal expert, but my understanding is that the test looks at people as individuals, with the Pensions Regulator being asked to judge them as such. So far as I can see, there is no requirement on the Pensions Regulator to look at the group and ask, “Is this group appropriate to represent this body?”
On the Minister’s point about an industry working group, these can be a very good thing; however, they can also be an alternative to action. This subject has been widely researched and there is a great deal of knowledge about it, so I am not sure why we need a working group rather than action.
The Minister referred to putting high-priority information on the dashboard. I strongly suggest that what I have proposed should be high-priority information when pension participants are making decisions. However, for the moment, I beg leave to withdraw the amendment.
Amendment 12 withdrawn.
13: Clause 46, page 37, line 14, at end insert—
“( ) Regulations under subsection (1) must ensure that any information published relating to the scheme must clearly and prominently state that benefits that may be payable under the scheme are only targets and not guaranteed, and that benefits paid may vary, increasing or decreasing from time to time.”
I hope the Committee does not mind if I start by saying that my name is pronounced “Vaux”. I blame the noble Lord, Lord Brougham and Vaux, for the misunderstanding.
Amendment 13 is very straightforward and, I hope, not too controversial. We have already had discussions today on the importance of communication regarding CDC schemes. CDCs are often described as being somewhere in between defined benefit schemes and defined contribution schemes. That is an important misunderstanding; they are not. They are defined contribution schemes, with none of the guarantees of any level of outcome that a defined benefit scheme provides. We have heard comments today about accrued benefits and about transfer values being calculated based on target benefits payable. All these things are more like defined benefit schemes but, in reality, do not relate to CDC schemes.
Given that the schemes provide these target outcomes, there is a real risk that employees signing up will not fully understand the reality that they are taking all the investment risk and the employer is taking none. In particular, unlike with a DB scheme or an annuity under a DC scheme, the amount of pension can and does vary year on year, up or down, after it has started to be paid. This is again a very important difference from a defined benefit scheme or an annuity under a defined contribution scheme.
The experience in the Netherlands in 2012-13 shows how this can come as a surprise. People were deeply shocked when their pensions were cut in actual terms by up to 7%. Very few Dutch schemes have managed to keep up with inflation over recent years, and further cuts are expected in the coming years despite having been postponed this year by government jiggery-pokery. This has seriously undermined faith in the schemes because people expected to be paid a consistent, inflation-linked pension under them, and they have been shocked. If we are to avoid a similar loss of face, it is essential that the risks are made very clear in any publication issued by the schemes. That needs to cover all interactions: when people are considering whether to sign up; whenever statements and other communications are sent to members; when people are nearing retirement and deciding what to do; and, as pensioners, as time goes on. Most commentators on the Dutch situation highlight that the proper communication of risk is one of the biggest clear lessons that we should learn from the Dutch experience in setting up our own similar schemes.
The Minister said at Second Reading, and she has repeated today, that the Government will ensure that in communications to members, particularly at key points throughout a member’s pension scheme journey, CDC schemes are clear and transparent that benefit values may go up as well as down—or down as well as up, actually. However, that does not seem to be a requirement in the Bill. The regulations about publications in Clause 46(2) do not seem to facilitate that, and I cannot find it anywhere else. Clause 46(2) says that the regulations may, among other things,
“require the trustees to publish a document specified or described in the regulations … require information or a document to be made available free of charge … require information or a document to be provided to a person in a form or by means specified or described in the regulations … require or permit information specified or described in the regulations to be excluded from a document when it is published in accordance with the regulations.”
Nowhere does it talk about the importance of communicating risk. Amendment 13 would simply make the clear communication of the risks—just as the Minister has said will happen—a legal requirement. I very much hope that the Government can accept this really very simple proposal.
The noble Lord, Lord Vaux, has drawn attention to an important issue. The wording of Clause 15, which deals with communication requirements that the Pensions Regulator has to be satisfied with, is all about the systems and processes of communication. I accept that that is important but so is the content of the communication. The issue of risk, and who carries the principal burden of risk in a collective defined-contribution scheme, is central. Anyone who has followed what happened in the Netherlands a few years ago will be aware of the enormous sense of disappointment, anger and, I think, surprise that many of the scheme members felt when their pensions in benefit were reduced. No one thought that was possible but of course it was, because, at the end of the day, collective money purchase schemes are, as the noble Lord said, collective defined contribution schemes. The risk is entirely on the scheme member; it is not on the employer at all. No guaranteed promises are being made to scheme members about what their retirement benefits will be.
The issue of the content of the communications that the scheme must make available to its members is just as important as the systems and process of communication. It is a mistake in the Bill for the emphasis to be placed on just the systems and processes, as it is, with no acknowledgement of the importance of the content.
My Lords, I added my name to the amendment moved comprehensively by the noble Lord, Lord Vaux. I want to add a few points.
As many of us said at Second Reading, communication is one of the key issues of this type of pension scheme, especially in a country that is used to traditional defined benefit schemes, which were thought to offer guaranteed pensions—and have done so in most cases. This is completely different. Indeed, it relates to the idea of capital buffers and some kind of insurance. If there are no buffers and there is no insurance and things go wrong, it is entirely possible that the member will get no pension from this type of pension scheme. Will that concept of risk be explained to members? Will it be explained to members who may, as my noble friend Lord Young said, be transferring into a CDC scheme?
The aim of this scheme is to offer lower-cost administration and better returns on the investment than an individual defined contribution scheme because of the economies of scale and access to a wider range of assets—perhaps also with more individualised professional management of the scheme as a whole—and to offer better income prospects than what an individual would achieve through buying their own annuity, with all the risk and profit margins involved in that transaction. Communication to the members that this does not guarantee a pension and that there are no pension rights in this CDC scheme will be crucial. Explaining to members, who will be contributing their own resources, what this means—not least to Royal Mail members, whose guaranteed defined benefit scheme was ultimately picked up by the taxpayer and then moved into a new type of defined benefit scheme that was considered unaffordable by the new body and is being replaced by this scheme—needs to be an integral part of establishing the scheme.
I thank the noble Lord, Lord Vaux, for raising this important issue. I hope that my noble friend will take it on board.
My Lords, I should have added my name to this amendment; I apologise for not getting around to it. It is important, as has been explained.
Another question triggered in my mind is: what information relating to the lifetime allowance will be provided for the member? You get information from a defined benefit scheme; you know what you are expected to get—though, as we know from the NHS, you can get into difficulties if, suddenly, you are earning a little too much. If you pay into personal pensions, or whatever they are called nowadays, you get a number for the pounds that you are likely to have as a transfer value, but what will you get here, especially as you will perhaps be at risk? For example, you may think, “Well, I’d quite like to run a personal pension alongside this just in case.” How are you going to calculate whether you are at risk of breaching the lifetime allowance? If you did breach it and then got a tax charge, but then the scheme started to pay you less pension for whatever reason, would you get that tax charge back?
My Lords, I agree entirely with what has been said about the need to communicate and the basis on which to do so. I simply raise that, in 2018, we had extensive discussions on the Financial Guidance and Claims Bill, as it then was. A key point was the lack of full understanding of financial matters of the general public. I have forgotten the statistics, but there was a House of Lords review of financial inclusion, and its conclusions were stark. This is not a reason not to communicate; it is a reason to communicate even more intensively. In how we communicate, we need an understanding of how people might receive these messages and we should not assume they can operate in an environment like this—as many, we know, cannot.
My Lords, I agree that, for CDC schemes to be a success, a high degree of transparency and effective communications are key. If we want to foster member trust in this new provision in the UK, the full scope of risk and benefits of collective schemes must be clearly communicated to members and others, particularly highlighting the nature of benefits, their potential fluctuations and that they are targeted. I mentioned this at Second Reading.
I have already shared with noble Lords a draft illustrative statutory instrument. Paragraph 32 gives examples of the documents and information we plan to require CDC schemes to publish. This includes documents that relate to target benefits, including the actuarial valuation and a statement informing members and prospective members that benefits may be adjusted based on the actuarial valuation and are not guaranteed. We will also require CDC schemes to publish their scheme rules, which will include details of benefit design.
In addition to those regulations under Clause 46, the existing disclosure requirements under Section 113 of the Pension Schemes Act 1993 that currently apply to money purchase occupational pension schemes will apply to CDC schemes, as they are a subset of money purchase benefits. This covers targeted individual member information, and we intend to amend the existing disclosure regulations under Section 113 of that Act to ensure that, for CDC schemes, such information includes key risk messages about benefit fluctuation; for instance, providing full details regarding the possibility of benefit fluctuation at the point of joining in scheme information; emphasising that benefits can change in the member’s annual benefit statement for active and deferred members; being clear that benefits can change during retirement in retirement information packs; and notifying members in advance of any change to their rate of benefit during retirement.
I appreciate the intention behind the noble Lord’s suggestion but, if this amendment stands, all documents and information published would need to include a risk warning message, which would not be relevant in all circumstances; for example, in the scheme’s statement of investment principles. I suspect this would also not meet the noble Lord’s intention that such messages be included in other important communications also made under existing powers. I believe that the best way to approach these concerns is to set out the required information in regulations, as I have indicated, as this would allow the Government to work with the pensions industry to ensure that relevant targeted messages are developed for each relevant document or piece of information.
The noble Lord, Lord Vaux, mentioned Holland, communications about pensions and the target not being a guarantee. Communication issues in Holland occurred mainly because, for many years, the Dutch system worked as though benefits were guaranteed. When adjustments needed to be made, they came as a surprise. We will ensure that CDC schemes must make it clear and transparent in their member communications that benefit values may go down as well as up, particularly at key points throughout the member’s pension scheme journey, at joining, and annually both before and during retirement. In addition, one of the authorisation criteria requires that the regulator is satisfied that there are adequate systems and processes for providing information in relation to scheme members and others.
The noble Lord also made a point about informing people properly about the risks in CDC schemes. This will be made clear and transparent in key member communications at points throughout their pension scheme journey. Regulations under the Bill and under existing regulation-making powers in the Pension Schemes Act 1993 will be made to require CDC schemes to, for instance: publish a clear statement and the scheme rules on the scheme website; provide full details at the point of joining; emphasise benefit changes in the member’s annual benefit statement for both active and deferred members; be clear that benefits can change during retirement in their retirement information packs; and notify members, in advance, of any change to their rate of benefit during retirement. Members and other interested parties will also have access to scheme documentation that must be published on the scheme’s website—for instance, the scheme’s annual actuarial valuation.
I assure noble Lords that, as occupational pension schemes, CDC schemes are already subject to a broad range of regulatory disclosure requirements, including the provision of key information to members on joining and at retirement, as well as annual statements. The intention is to use regulation-making powers to adapt or supplement those requirements, allowing for these and other relevant matters to be set out in detail for CDC schemes. We want to consult thoroughly on these important provisions to ensure that we get them right.
I am pleased to confirm for the noble Baroness, Lady Bowles, that HMRC is looking at her point and will bring forward its own legislation. We will consider the communications on that.
For the reasons I have explained, I believe that our favoured approach provides a more targeted response while still ensuring that members are protected. I therefore urge the noble Lord, Lord Vaux, to withdraw the amendment.
I thank the Minister for her answer. I do not think that we are a million miles apart—the intentions are the same.
I still struggle to see how the Bill relates to what she is telling us because I do not think the regulations that it refers to do what she is suggesting they should. I urge her to take a closer look at that.
Also, because the communication of risk in this situation is so fundamental, there is a benefit in placing in the Bill the obligation to make sure that that communication is made properly to members and potential members, taking the point made by the noble Lord, Lord McKenzie. There is an argument for it appearing in the Bill, even if not in the wording that I have provided—I am happy to look at any other form of wording—but something must make it clear that it is necessary for that risk to be communicated properly to members, prospective members and pensioners.
On the basis of what the Minister said, I beg leave to withdraw the amendment.
Amendment 13 withdrawn.
Clause 46 agreed.
Clause 97 agreed.
Clause 47: Powers to extend definition of qualifying schemes
Amendment 14 not moved.
Clause 47 agreed.
Clause 98 agreed.
Clause 48 agreed.
Schedule 3: Collective money purchase benefits: minor and consequential amendments
15: Schedule 3, page 131, line 18, at end insert—
“22_ The Pensions Act 2014 is amended as follows. 23_ In section 54(2) (regulations subject to affirmative procedure), omit the “or” after paragraph (e) and at the end of paragraph (f) insert “, or(g) the first regulations under paragraph 1 or 3 of that Schedule that make provision in relation to collective money purchase schemes within the meaning of Part 1 of the Pension Schemes Act 2020 (see section 1 of that Act).”24_(1) Schedule 18 (power to restrict charges or impose requirements in relation to schemes) is amended as follows.(2) In paragraph 1(1) (power to restrict charges), in each of paragraphs (a) and (b), for “a member” substitute “members”.(3) In paragraph 4 (interpretation), after sub-paragraph (2) insert—“(3) Where a pension scheme is divided into sections, each section that is a collective money purchase scheme for the purposes of Part 1 of the Pension Schemes Act 2020 (see section 1(2)(b) of that Act) is to be treated for the purposes of this Schedule as a separate scheme.””Member’s explanatory statement
This amendment ensures that regulations under Schedule 18 to the Pensions Act 2014 may be made in relation to collective money purchase schemes. The first such regulations will be subject to the affirmative procedure. The power to make regulations in relation to other types of scheme is unaffected.
My Lords, we are committed to protecting members of workplace pension schemes from unfair charges. This is why we introduced a 0.75% cap on charges in the default funds of money purchase schemes used for automatic enrolment. This cap, which received cross-party support, has proved successful, with average charges in schemes used for automatic enrolment reducing by a significant margin. We want to ensure that members of collective money purchase schemes in Great Britain and Northern Ireland can be similarly protected, which is why we are tabling these amendments.
Our response to the consultation on delivering CDC schemes confirmed our intention to implement an annual CDC charge cap set at 0.75% of the value of the whole CDC fund, or an equivalent combination charge. The response also confirmed our intention that the scope of the CDC cap will be the same as the existing charge cap. Unlike the existing charge cap, which applies at member level, our intention is that the CDC charge cap will apply across the whole of the fund. This reflects the collective nature of these schemes and means that the CDC charge cap will apply to all members in the collective money purchase scheme, including pensioner members. Again, this reflects the collective nature of the schemes and the fact that the same fund will provide members with a variable pension income in retirement. We want to ensure that members of CDC schemes also benefit from other existing charge control measures, such as the member-borne commission ban and the early exit charge cap.
I will speak first to Amendment 15, which will amend the Pensions Act 2014 to ensure that the powers in that Act, under which we are able to provide for a charge cap and other charge control measures, can also be used in the case of collective money purchase schemes in Great Britain. We are amending paragraph 1 of Schedule 18 to that Act, which provides a power to prohibit by regulations certain charges in relevant schemes. This is to make clear that regulations under this power can also be made in relation to collective money purchase schemes. As with the existing default fund charge cap for DC schemes, it is appropriate to use regulations to define the details of the cap and how it will apply. We will of course engage with the regulator and stakeholders in developing these details and will then consult on the draft regulations. We aim to align the application of the CDC charge cap with that of the existing charge as far as possible.
It is entirely appropriate that members of collective money purchase schemes benefit from similar charge control protections that apply to members of individual money purchase schemes. This amendment makes clear that regulations made under the powers in Schedule 18 to the Pensions Act 2014 can provide for controls on the charges borne by members in collective money purchase schemes. The amendment to paragraph 1 of Schedule 18 to the Pensions Act 2014 means that where a scheme which provides CDC benefits has more than one section, each section offering CDC benefits will be treated as a separate scheme for the purposes of the charge cap provisions. This is consistent with other provisions about how sections of schemes offering CDC benefits are to be treated and ensures that sections offering CDC benefits do not cross-subsidise other sections of the scheme.
The amendment to Section 54 of the Pensions Act 2014 means that the first regulations under paragraphs 1 or 3 of Schedule 18 made in relation to CDC schemes will be made by the affirmative resolution procedure. Section 54 already provides for the first regulations under these paragraphs to be made by the affirmative procedure, but regulations have already been made under these paragraphs. We wish to ensure that the first regulations made in relation to charge caps for CDC schemes have the same level of parliamentary scrutiny as those regulations did. Turning briefly to Amendment 16, this makes corresponding changes to Northern Ireland legislation to provide for a charge cap for CDC schemes in Northern Ireland. This will ensure parity of member protection for members of CDC schemes across the UK. I beg to move.
My Lords, I have no objection to making things the same everywhere, but last time I came across this 0.75% cap I did not ask a question, so I will now. What exactly does it cover? Compared to some SIPP investor platforms and so forth, it seems rather high. Does it cover all the trading charges as well? You can get 0.15% from Vanguard, 0.25% from AJ Bell and up to 0.45% with all your trading charges covered from Hargreaves Lansdown. I could go on. If you go to some of the insurance companies —I will go on—they tend to be greedier, up to 0.3%, but that is far short of 0.75%, so what is this paying for?
I shall raise similar points. Will ask my noble friend say how the 0.75% charge cap was arrived at, given that the purpose of the CDC scheme, as I understood it, is to provide members better value than if they had their own defined contribution fund and to benefit from the economies of scale of collective management and administration, which clearly should be much lower per member than an individual defined contribution scheme?
Another point my noble friend mentioned is that that there should be no exit penalty. If that were the case, the issue we were discussing earlier about potentially reducing or applying a risk margin to transfer values would become impossible. Intergenerational fairness, which we were concerned about in our earlier discussions in Committee, may be undermined if there is an express prohibition on what may be called an exit penalty, but which to others is a risk margin or buffer against future market dislocations or changed assumptions.
The noble Baroness, Lady Bowles, asked what the cap covers. This is defined in the regulations, and we will send details to all Members of the Committee. We will consult on 0.75% and the final level of the cap, as part of the regulations, so there will be more opportunity for noble Lords to influence that. The noble Baroness, Lady Altmann, raised the exit penalty. I will have to write to her on that.
Amendment 15 agreed.
Schedule 3, as amended, agreed.
Clause 99 agreed.
Schedule 6: Collective money purchase benefits: minor and consequential amendments for Northern Ireland
16: Schedule 6, page 139, line 22, at end insert—
“22_ The Pensions Act (Northern Ireland) 2015 (c. 5 (N.I.)) is amended as follows.23_ In section 51(4) (regulations subject to confirmatory procedure), omit the “or” after paragraph (e) and at the end of paragraph (f) insert “, or(g) the first regulations under paragraph 1 or 3 of that Schedule that make provision in relation to collective money purchase schemes within the meaning of Part 2 of the Pension Schemes Act 2020 (see section 52 of that Act).”24_(1) Schedule 18 (power to restrict charges or impose requirements in relation to schemes) is amended as follows.(2) In paragraph 1(1) (power to restrict charges), in each of paragraphs (a) and (b), for “a member” substitute “members”.(3) In paragraph 4 (interpretation), after sub-paragraph (2) insert—“(3) Where a pension scheme is divided into sections, each section that is a collective money purchase scheme for the purposes of Part 2 of the Pension Schemes Act 2020 (see section 52(2)(b) of that Act) is to be treated for the purposes of this Schedule as a separate scheme.””Member’s explanatory statement
This amendment ensures that regulations under Schedule 18 to the Pensions Act (Northern Ireland) 2015 may be made in relation to collective money purchase schemes. The first such regulations will be subject to the confirmatory procedure. The power to make regulations in relation to other types of scheme is unaffected.
Amendment 16 agreed.
Schedule 6, as amended, agreed.
Clauses 49 to 51 agreed.
Clauses 100 to 106 agreed.
Clause 107: Sanctions for avoidance of employer debt etc
17: Clause 107, page 90, line 24, after “person” insert “wilfully, recklessly or unscrupulously”
My Lords, this important group of amendments deals with the definitions of new criminal offences and new regulatory fines, and with the defences to the criminal offences. I will also speak to my Amendments 18 and 22 as well as to Amendments 23 to 26 in the name of the noble Lord, Lord Hutton.
Amendments 17 and 22 are probing amendments. They would require that, for the criminal offences of avoidance of employer debt and risking accrued scheme benefits, the person has to have behaved wilfully, recklessly or unscrupulously. I want to say a few words about each of those terms, which is where the probing comes in.
I do not think that “wilfully” changes much in the sense of the clauses because later, in subsection (2)(b) of the respective new sections, it is stated that the person intended the actual course of conduct to have such an effect. It could be argued that the wording of the subsections further highlights the necessity for a greater understanding of the consequences but, in my view, the insertion of “wilfully” would make those subsections redundant. My Amendment 18 and Amendment 24, tabled by the noble Lord, Lord Hutton—to which I have put my name—would delete those subsections.
It gets a little more complicated when it comes to considering “recklessly” but it is important to consider that term because, as several noble Lords pointed out at Second Reading, the Government consulted on “wilfully” and “recklessly”. As I see it, “recklessly” does not require the same degree of intent as to outcome, so it broadens the scope. It implies a lack of due diligence or a high degree of negligence. One could perhaps express it almost as wilfully negligent—that is, not bothering to have proper checks in place and caring even less.
These are egregious matters we are considering, when pensions are put at risk either deliberately, without caring or for ulterior motives. To my mind, it would be unthinkable to allow unscrupulous individuals to get off the hook of criminal charges with the defence of “I didn’t know” because they had not made, and had no intention of making, the right kind of checks. “Recklessly” is not the same as “accidentally” or “incidentally”; “recklessly” is “I don’t care” and it should be covered. It should not require that the precise end effect was intended, which is why both subsections (2)(b) in the offences, which say that the person intended the actual course of conduct to have such an effect, need to be deleted because they would negate recklessness as an offence.
Of course, having appropriate checks and procedures in place would be an obvious defence, just as they are in the various “failure to prevent” types of offences that have come into being, such as for bribery and money laundering.
Now I come to probing the third term: “unscrupulously”. This may not be a normal legal term, but everyone knows what it means. It is used in describing the objectives of those whom it is wished to catch. It is used about the new offences—starting at the bottom of page 7 of the Explanatory Notes, which state:
“They will provide additional deterrents for unscrupulous behaviours and will enable the Regulator to punish abuse and wrongdoing within the occupational pensions industry appropriately.”
That is exactly what we want to be able to do: punish unscrupulous behaviours.
Compared with some of our Commonwealth colleagues, we in this country are rather a soft touch. Australia has an offence of unconscionable conduct in commerce. It works under common law and shows that expressions describing bad behaviour do not need to be shunned in legislation. Yes, it is a catch-all phrase, but we should be starting to give it serious thought when it accurately describes the underlying behaviour.
As a little thought experiment, what happens if we apply the three words “wilfully”, “recklessly” and “unscrupulously” to driving fast in a 30mph zone? What would we get? “Wilfully” means that there was an intention to drive faster. “Recklessly” might mean not bothering to look or have regard to surroundings or missing the sign. What might be “unscrupulous”? I have had some fun thinking about this. Here are a few possibilities: blanking out your number plate with a fancy gizmo or having false number plates; getting a friend to remove the 30mph sign; or perhaps making someone else the fall guy, saying that you were not the one driving. These may be wilful acts but while it is questionable whether they are specifically wilful at the time of the actual offence or what the precise intended effect was, they are certainly unscrupulous.
I turn briefly to the amendments in the name of the noble Lord, Lord Hutton. I apologise for going ahead of the mover but there are words in common. In his amendments, “wilfully” and “recklessly” are used in a slightly different place but what I have said about their meaning also applies. There is also the consequence of needing to delete the subsection reciting intent.
Amendments 23 and 25 are applied to deal with the criminal offence and civil fine relating to putting accrued scheme benefits at risk. The wording
“detrimentally affects in a material way”
appears and has caused some concerns, which were referenced at Second Reading. I think that the positioning of the wording works well and support the addition of those words to the fine offence. Obviously, it is possible to merge the noble Lord’s proposal and my own with regard to the criminal offence of risking the accrued scheme benefits.
More broadly, it seems that “wilfully” or “recklessly” could be usefully incorporated into the financial penalty on avoidance of employer debt, so that it was in all four of the new offences, including the two criminal ones and the new fines. Then there would be no playing off about different meanings. But I will listen carefully to the Committee, particularly to see whether the noble Lord, Lord Hutton, has a different nuance to mine.
The other amendments in this group, tabled by the noble Baronesses, Lady Noakes, Lady Neville-Rolfe and Lady Sherlock, relate to defences and call for guidance. I sympathise with the general intent but have some reservations; however, I will speak to them later when we have heard from the movers, as their wording is not interconnected like my amendments and those of the noble Lord, Lord Hutton. I beg to move.
My Lords, I refer to my entry in the register of interests and shall speak to Amendments 19 to 21, which are grouped with those of the noble Baroness, Lady Bowles. My amendments are also in the name of my noble friend Lady Noakes, who sadly cannot be in her place today. We are concerned that the powers in Clause 107 may be drawn too widely. This is a concern shared by a number of those involved in the pensions sector—indeed, it was touched on by the noble Baroness, Lady Drake, a great expert in pensions matters, at Second Reading.
In the same debate my noble friend the Minister helpfully said that the intention of the clause was,
“to punish those who wilfully or recklessly harm their pension scheme”.—[Official Report, 28/1/20; col. 1353.]
In the light of that, it seems that the criminal offence is really aimed at parties whose conduct is extreme and lies outside the range of ordinary reasonable conduct. If so, we believe that the thought could be captured better by applying the offence only where,
“no reasonable person having regard to all of their duties and all relevant circumstances”,
would have acted as they did. The change from “reasonable excuse” to “no reasonable person”, as in Amendment 19, may not sound like much of a change; however, I assure noble Lords that it is important. I am advised that a substantial body of case law makes it clear that the two are very different. The former potentially creates a fine objective judgment, while the latter recognises that there is a range of conduct that can be seen as reasonable. Our Amendment 20 proposes for consideration today a list of factors that could be taken into account by the courts.
Finally, Amendment 21 proposes an exemption, drawing on an idea in the Pensions Act 2004. It would provide a system of binding comfort that could be given by the regulator or the Pension Protection Fund. Given the gravity of the criminal offences those involved in the pension world will potentially face as a result of the Bill, there seems to be a strong case for examining this. We want good, honest people to be involved in the sector and not deterred from any involvement. These amendments deal with new Section 58A of the Pensions Act 2004, but obviously if the argument were accepted by the Government, a similar change would be needed to new Section 58B.
In responding to these amendments, would the Minister —I think it will be the deputy Leader—give more detail and further examples of the harms we are trying to remedy in this part of the Bill? Much mention was made at Second Reading of BHS and Carillion, but these companies had unique factors that went way beyond pensions. The impact assessment assumes up to five cases every year. Is there other evidence in recent years that justifies criminal penalties and these estimates?
In closing, I shall make a wider point. We need to get this legislation right, and we have been trying to do that today, because the costs of getting it wrong, and the inevitable legal costs, will fall on pension schemes and therefore leave less for the very pensioners we are trying to help with the Bill. The new criminal offences appear to cover not only the employer but trustees, advisers, third parties and possibly the regulator. They could embrace routine debt funding necessary for a viable business, or changes to investment strategy designed by trustees to improve their fund. The perverse effect of getting the arrangements wrong—this is a theme I always return to—could be cost and delay, which might be problematic in a tight financial situation and push more businesses into the Pension Protection Fund, which is exactly what we all want to avoid. It could also deter trustees from taking on the responsibility for pension funds. My noble friend Lord Eccles, who I am sorry to see is not in his place, made this point in relation to the wider regulation-making power in Clause 51, although I very much understand the difficulties that my noble friend faces in this area.
My Lords, I shall speak to my Amendments 23, 24, 25 and 26. It was clear at Second Reading and has been again today that most Members of your Lordships’ House accept the need for this new criminal offence: I certainly do. Recent events have confirmed that there is a gap in the law and we should try to fill it—that is our responsibility. However, when it comes to the creation of new criminal offences, there are always some important questions to be clear about, from the beginning. Who are we aiming this new criminal offence at? Have we got that right, and are we clear, in the way the offence has been drafted, that we are catching or bringing within the net of this new offence those people and those people alone?
We need to be clear who can prosecute. It is interesting to look at the origins of this offence, and the way it came about in the consultations. It is clear in the Green Paper and the White Paper that the Government, rightly, had in mind that the Pensions Regulator would be the prosecuting authority. That is not the case in the Bill, where we have the rather unsatisfactory state of affairs that not just the Pensions Regulator but the Secretary of State and the Director of Public Prosecutions can prosecute. As I said at Second Reading, that does not clearly set out where the prosecuting authority lies, which is why I support Amendment 35, tabled by my noble friend Lady Sherlock.
There is a parallel here with other offences. This is a new offence, complicated in nature and unclear in its precise scope. When Parliament is creating new offences such as this, it has a responsibility to the general population—and, in this case, to those concerned with the governance of pension schemes—to help them understand what is covered by this new legislation and what actions people need to take to make sure they stay on the right side of the law. Amendment 35 would help us clarify some of those issues.
There is a general problem with the way this clause has been drafted, which has been a familiar theme of the comments of the noble Baronesses, Lady Neville-Rolfe and Lady Bowles. I support much of what they said. I am concerned that this offence, in its current form, is drafted too widely. When it was envisaged, and the Government did their consultation, it was going to be an offence to catch the behaviour of unscrupulous employers or directors of companies. That is the origin of this offence. We do not need to go into the detail of the case, but we all know what we are talking about.
It is clear, from a cursory reading of this clause, that this offence would cover more than just employers and company directors. It could cover scheme trustees, actuaries or advisers, or pretty much anyone in a position to give advice on the management of a pension scheme. I genuinely doubt that was the intention of the Government when they consulted on this clause. They have made this provision too broad in scope. They should have another look at the way that this clause has been drafted.
They should definitely have another look at who the prosecuting authority should be. Generally, in our system, it is very unusual for the Secretary of State to be able to bring a criminal prosecution against another person. There may be one or two examples I am not aware of, but I am sure the Minister is well advised about how many situations there are in which the Secretary of State has such a power. Generally, it is best to leave criminal prosecutions in the hands of criminal prosecutors. With the best will in the world, and the high regard I have for the Secretary of State, she is not a criminal prosecutor. I would not want her to be in the position of being advised to bring a prosecution. I would like the Minister to set out how that process would work within the department. It would be unusual. As a Secretary of State, I was never advised to bring a criminal prosecution. Particularly if the DPP and the Pensions Regulator both decided not to bring a charge, it would be extraordinary for the Secretary of State to be able to carry on with a criminal prosecution none the less.
The third question about criminal offences is pertinent to this offence. What is the penalty for the wrongdoing that we have in mind? To go back again to the Green and White Papers, the origin of this offence was the behaviour of unscrupulous employers, who deliberately put at risk scheme members being able to acquire their scheme benefits. By its very nature, that is a serious offence and the draft statute we are discussing has a sentence of up to seven years’ imprisonment for such an offence. Bring that on. That is an appropriate statutory offence.
What I do not understand about this offence, in what would be new Section 58B(9)(b) of the statute, is that it could be tried either way. It could be tried on indictment, where the statutory sentence of imprisonment would kick in, or it could be tried on a summary conviction. But by its very nature a summary trial implies that an offence is not as serious as a charge that can be brought before a jury in a Crown Court. For the life of me, I cannot understand why this offence has mutated into a serious and a less serious offence at the same time. That is incomprehensible to me. This is a serious offence that should be tried on indictment by an appropriate criminal prosecutor.
I am afraid that in my humble view this clause needs a complete rethink. It is too wide of the mark and obtuse in what it is covering, and the sentencing arrangements are indecipherable; they are an inherent set of contradictions. This should be an offence triable on indictment only, period, because we are talking about serious offences.
The noble Baronesses, Lady Neville-Rolfe and Lady Bowles, both referred to the wording used to describe this offence. I have simply tried to bring into the Bill the wording that the Government themselves consulted on when the offence was being talked about and conceived. It was about wilful or reckless behaviour; in fact, I think the Government used the phrase “grossly reckless behaviour” in their consultation. In the way that this offence has been drafted, I absolutely accept that the Government are trying to ensure that the offence is based on wilful or reckless behaviour, but there is almost an obligation on the Government when they have consulted on a particular offence to stick as closely as possible to how that consultation was done, developed and extended, and to bring forward legislation that as closely as possible represents that offence in any new legislation. I think there is a way that the Government could do that. My amendment is one simple way of doing it, although there may be a better way. I think it is incumbent on the Government to try as far as possible to stick to what they consulted on, but there is a very real danger that this clause will not do that. I hope the Minister will be able to offer me and other Members of the Committee some reassurance that the Government might be willing to have another think about the nature of this new offence.
My Lords, I am sorry to rise again but I did warn the Committee. I agree that it is necessary to look again at the precise wording. I do not think that “recklessly” is covered, and it should be. It may well be a solution to remove trustees from the scope.
I want to address the concerns I have about defining “reasonable excuses”. Sometimes you can end up forcing unintended interpretations that can work both ways, either giving loopholes to bad behaviour or unintentionally limiting the scope of excuses. That means, if you like, it can work for the prosecution or the defence, but it means you do not get what you thought you had got. If anything is specified or picked out as an example, it needs to be clear that it may not be binding in all circumstances and that the examples are not an exhaustive list, so that if something else is brought forward as a defence it is legitimate for it to be considered.
There are certainly regulators that have fallen into the trap of too many guidelines. The FRC was criticised in the Kingman report for the detrimental effect on reporting and audit of too many guidelines, resulting in boilerplate recitations rather than thoughtfulness. In this subject, we are also interested in thoughtfulness and people thinking about what they are doing. We debated the FCA report into GRG in the Chamber on 27 June last year, and the FRC gave a line-by-line report of how its published interpretation of “fit and proper” had greatly narrowed what in my personal experience was always held out to be a wide-in-scope basic test. It was even described to me by some people as our version of “unconscionable conduct” in that bad conduct would not be fit and proper and that was the way in which we went about getting bad behaviour. However, in the GRG case and the report from the FRC we found that not to be the truth because of the guidelines and training that were put around those words. So what we do here needs to be done with care.
Concerning Amendments 19 and 20, it should not be a reasonable excuse to do something just because someone else has or might have done it. That is an excuse for a race to the bottom and to disengage from responsibility. It is reasonable to have regard to market practice but the competitive urge to do what others do or to push it a bit further has to be resisted—such behaviour was among the causes of the financial crisis.
I fully accept that there are difficult matters to balance for business; these are in part explored in later amendments relating to dividends. Perhaps the law has not been clear enough so far about what are the right priorities; in the past, pensions have been put at the bottom of the pile, with deficits paid down slowly and surpluses raided and holidays taken rather more eagerly, with a lax attitude when the company is generally well capitalised. That has been the wrong message. I believe it is now the right time to clarify that obligations rank ahead of options in the balance of legitimate interests and call on capital.
My Lords, I will speak to Amendment 35 in my name and respond to the debate on the other amendments. In doing so, I remind the Committee of an historic remunerated interest as the former senior independent director of the Financial Ombudsman Service.
At the outset, I say that we on these Benches place a high priority on ensuring that the regulator has the powers and sanctions that it needs to tackle bad behaviour in the operation of pension schemes. I agree with the noble Baroness, Lady Bowles: conduct that puts at risk the assets that people have worked for all their lives is serious behaviour indeed. It can have a dramatic effect on the lives of millions of people and push them, in the end, into a retirement based in penury rather than the security that they could have reasonably expected. Of course, allied to that is a public policy interest: it may discourage people from saving if they do not feel that the vehicles are secure and that their money will be safe. So we welcome the introduction of the new offences and the focus on preventing bad behaviour and stepping in before the consequences get too serious or, even, the situation becomes irrecoverable.
In the Committee, at Second Reading and outside, I have heard some concerns about the Bill’s drafting, especially around what reasonable behaviour is and what conduct causes material detriment. The noble Baroness, Lady Bowles, expressed that point well. I accept that there is a balance at stake here and that the drafting must strike a balance. It is right to expect those charged with managing or overseeing pension funds to do so with appropriate skill and knowledge, and with care and integrity. However, I am also conscious that the Government would not want inadvertently to discourage good, capable people from, for example, serving as pension scheme trustees if they feared the unforeseen consequences of making reasonable judgments in good faith; nor would they want to foster unhelpful levels or types of risk aversion.
There is a need to have more clarity, for Parliament and the sector, as to how these provisions will operate in practice. Reading the impact assessment, it seems clear that the Government expect the criminal offences in particular to catch hardly anybody. It is based on one person a year being convicted, so the clear expectation in the minds of those drafting this is to have a nod that a safety net will go out—unless I have misunderstood, in which case please correct me.
Amendments 17 and 22 propose the formulation “wilfully, recklessly or unscrupulously”. I do not need to revisit this but I would be interested to know whether the Minister agrees with the noble Baroness, Lady Bowles, in her probing approach on what that phrase means. Also, why did Ministers decide not to go with “wilfully” or “recklessly”? What did they think was changing between that and the formulation that they used in the Bill in the end?
The amendments tabled by the noble Baronesses, Lady Neville-Rolfe and Lady Noakes, are interesting. I hear that the noble Baroness, Lady Neville-Rolfe, regards the current reasonable test as being too low. Many people would regard the test that no reasonable person would do something as very high indeed. I wonder whether the Minister has a sense of how easy it would be for anyone to be convicted on a test of that nature. That is the judgment.
I am also a bit worried about the factors being taken into account, including normal market practice. I am with the noble Baroness, Lady Bowles, on this. What would happen when normal market practice was in contravention of the aims of the Bill? For example, the way that PPI was sold was normal market practice, yet we are now in a position where probably some £50 billion of compensation will be paid to consumers by banks and financial service companies. That was normal market practice; it did not make it right, and now it is having to be put right at vast expense.
My noble friend Lord Hutton made a very interesting speech. His amendments shift the test in a slightly different direction towards the impact of an act deemed to put benefits at risk rather than the material detriment test elsewhere. I would be interested if the Minister could tell us what the Government think that would mean. I have seen a copy of a letter written to the noble Baroness, Lady Stedman-Scott, by the Association of Pension Lawyers, as I am sure other noble Lords have. It thinks that the current drafting would capture an act which made a small change in the risk but suggests that the formulation written by my noble friend Lord Hutton would mean,
“in order to be guilty of a criminal offence, someone must have moved the scheme benefits from ‘not at risk’ (i.e. a broadly secure position) to ‘at risk’ (i.e. a broadly insecure position), rather than merely made a small change.”
Does that accord with the Government’s understanding of that question? I would also be interested to hear the Government’s response to my noble friend’s question on prosecuting authorities and how the offences will be prosecuted.
Amendment 35, which is in my name, tries to steer a way through this by offering an opportunity for the Government to give some clarity, without moving too far in either direction. We are trying to steer between the classical rocks and give the Government a path through the middle. I take the point made by the noble Baroness, Lady Bowles, that the wording we have might prove either too restrictive or not sufficiently restrictive, and I will be open to the Government finding their own way to do this. The aim of this amendment is that the regulator should clarify how it understands the nature of reasonable behaviour, and
“conduct that detrimentally affects in a material way the likelihood of … scheme benefits being received”.
The aim is to indicate that the bar for material detriment has been set lower than the Government clearly intended it to be set. If the Government are to go down this road, either by accepting my amendment or by telling us that the regulator intends to make a statement, they need to do that as soon as possible because they will have to consult on it. Before the Bill finishes its passage through this House, it would be helpful to have some idea of how they are going to go about that because we have heard today that clarification could take us in lots of different directions, making different people variously happy or unhappy depending on the way the Government go about it.
The Minister’s reply to this group is of particular importance. I have tried to point out the specific hurdles he will have to jump over, but it will be important for him to give us as clear an answer as he can to each point to help us—and the many people who will be listening to this debate and reading the transcript—to understand where the Government are going. We have no desire to undermine the ability of the regulator to pursue those who put at risk the hard-earned funds of pension savers; equally, we need to be sure that appropriate safeguards are there. I look forward to the Minister’s reply.
My Lords, this is quite a large group of amendments, all having as their subject matter Clause 107. I want to do justice to them so I therefore hope the Committee will forgive me if my reply is somewhat longer than might be welcome or the norm.
Let me briefly set out what this clause seeks to do. Clause 107 introduces two new criminal offences into the Pensions Act 2004, in new Sections 58A and 58B, and provision in new Sections 58C and 58D for mirroring financial penalties. These provisions strengthen the deterrent and punishment for certain conduct which puts pension schemes at risk. My noble friend Lady Neville-Rolfe and the noble Lord, Lord Hutton, asked what sorts of acts we are targeting. The types of acts that could fall within the criminal offences—and which, incidentally, the Pensions Regulator has previously encountered—are, for example, the sale of an employer with a defined benefit scheme without replacing an existing parental guarantee over the employer’s Section 75 debt, resulting in the loss of the guarantee, including failing to tell the trustees about the sale in advance. That might be one example.
A second example would be the purchase of a company, subsequent mismanagement of that company and extraction of value prior to it going into administration, while a third might be the stripping of assets from the employer, resulting in a substantial weakening of support for the scheme. I do not mean to suggest that that is an exclusive list, but I hope it gives the Committee a flavour of the actions that we are targeting.
If found guilty of an offence under these new sections, a person would be liable to a fine on summary conviction or, on conviction on indictment, a fine or imprisonment for up to seven years. Where a financial penalty is issued in respect of these provisions, the person may receive a penalty of up to £1 million. The noble Lord, Lord Hutton, asked me why we had drafted it so that the offence could be tried either way. I think that, in sum, the reason is that it gives the Pensions Regulator discretion to focus on all ranges of what might be considered bad behaviour or wilful or reckless behaviour, not just the most severe. It gives the regulator that flexibility.
I realise that Amendments 17 and 22 are probing amendments. They seek to probe whether and how far the two new offences should apply to any person whose conduct is within the scope of the offences, and they suggest that they might apply only to a person who wilfully, recklessly or unscrupulously does an act or engages in such conduct. I will say something about the words “wilfully” or “recklessly” in a moment, but is it is important first to understand that the new criminal offences and financial penalty provisions target conduct that avoids employer debt to pension schemes or risks accrued scheme benefits being paid. It is the conduct that we are focusing on here. It is an offence only if the person intended to harm the scheme or should have known that the conduct would have that effect and has no reasonable excuse for their actions.
In proposing these criminal offences, it is absolutely not the Government’s intention to interfere with routine business activities. The Pensions Regulator also continues to be responsible for making sure that employers balance the needs of their defined-benefit pension scheme with growing their business. However, it is important that where the elements of the offences are met, no matter who has committed them, the Pensions Regulator should be able to respond appropriately. Any restriction of the persons would create a loophole for these people to act in such a way.
Leading on from that, Amendment 18, tabled by the noble Baroness, Lady Bowles, seeks to remove the requirement in the new criminal offence in new Section 58A for the Pensions Regulator to prove that a person intended an act or course of conduct to have the effect stated in the offence. The amendment would significantly change the nature of the new offence. It would also duplicate many elements of the new offence contained in new Section 58B. In practical terms, new Section 58A as introduced applies only where wilful behaviours have occurred. That is evident as the section requires that
“the person intended the act or course of conduct”
to have the effect as set out. It is worth my adding that this offence also mirrors the existing main purpose test in the contribution notice regime and has been worded accordingly.
The noble Baroness made reference at Second Reading to the difficulty, in her view, of proving intent in the corporate environment. I have to say that I am not with her on that. Proving that a person’s behaviour was intentional is something that the regulator currently does under the main purpose test in the contribution notice regime, so we are confident that this should not be cause for concern.
In contrast to some of the earlier amendments, Amendments 23, 24, 25 and 26 would change the basis of the new criminal offence, as included in new Section 58B, making the scope of the activities caught by the offence wider than as set out in the Bill. Mirroring changes have also been made to the corresponding financial penalty provision, as included in new Section 58D. As introduced in the Bill, the basis of the test in these new sections is whether a person does an act or course of conduct which,
“detrimentally affects in a material way the likelihood of accrued scheme benefits being received”.
The test requires that the person knew or ought to have known that the act or course of conduct would have this effect. However, the amendments as tabled would mean that the test is met where a person,
“wilfully or recklessly puts at risk accrued scheme benefits being received”.
There are two main points I would like to address on these amendments and on why their wording is not appropriate. The first is a point of clarification around why we have not drafted the new offence and corresponding financial penalty in terms of the words “wilful” and “reckless” conduct. We have listened to feedback following consultation around the application of a test and we concluded that there would be too much uncertainty regarding what the words mean for us to legislate on this basis. Instead, the provisions have been drafted in such a way that it should be clear whether the test is met.
Secondly, changing the basis of the test to “puts at risk” could cause uncertainty within the industry. We consciously used the existing contribution notice tests as the basis for the new sanctions, as they target similar behaviours and are already familiar to the industry. By comparison, changing the basis of the test at new Sections 58B and 58D to “putting at risk” would create a new concept. Our view is that this would create uncertainty and a lack of clarity about the application of the new sanctions. In particular, changing the basis of the test could raise questions around the interpretation of the legislation, which the Bill, as introduced, already seeks to address.
It is clear that the types of conduct that either,
“detrimentally affects in a material way the likelihood of”,
benefits being received or, as per the amendment, “puts at risk” benefits being received, could be wide-ranging. This is why the Bill, as introduced, includes the concept of materiality, as a means to indicate that consideration will need to be given to the level of impact the conduct has on the likelihood of accrued scheme benefits being received. The concept “puts at risk” does not include any indication that the level of impact should be considered at all. Therefore, if the amendments were to be accepted, it could be argued that conduct that puts benefits at risk by even a fraction of a per cent could be in scope, which would go beyond the policy intention.
Amendments 19, 20 and 21 seek to provide further clarity around the way in which the reasonable excuse defence will work and to provide protection from prosecution if an act or course of conduct has been approved by the Pensions Regulator or the Pension Protection Fund. I believe that Amendments 19 and 20 are unnecessary and will set out why.
The existing phrase in the Bill “reasonable excuse”, which is to be removed by Amendment 19, has an inherently wide meaning in practice and could be interpreted to include the factors being presented in the amendment. It is therefore unnecessary to set out those factors. The factors that the prosecuting authority would consider when determining whether there is a reasonable excuse would depend on the individual circumstances of each case. Amendment 20 could, however, limit the factors the prosecuting authority and the courts could consider when determining whether there is a reasonable excuse and may potentially result in unintended consequences. For example, a person may have a reasonable excuse that does not fall into one of the factors to be considered. It is the age-old problem of including a list in legislation—a problem with which my noble friend is very familiar, I am sure.
The decision on whether a person has a reasonable excuse and, ultimately, has committed an offence in a particular case is a matter for the courts. In coming to such a verdict, the courts will have given due regard to all the circumstances in the case in question. That can only be right.
Turning to Amendment 21, I start by outlining that it is not the policy intention to give the Pensions Regulator or the Pension Protection Fund the power effectively to grant immunity against prosecution, in respect of the new criminal offence at new Section 58A. It is for the court to decide whether or not a person should be convicted of an offence, having regard to all the circumstances of the case in question.
As regards whether a prosecution is brought forward, it is for the prosecuting authority to determine whether to do so, having regard to its own prosecution policy and the Code for Crown Prosecutors. It is common practice that if the prosecuting authority thinks that there are insufficient grounds to prosecute, or that there is no public interest to do so, it does not prosecute. In this case, the regulator has the choice not to bring forward a prosecution if it decides that the behaviour in question is reasonable.
Further, as it is not just the Pensions Regulator which could bring forward a prosecution, the amendment would give the Pensions Regulator and the Pension Protection Fund the power to overrule the decision of other prosecuting authorities, such as the Director of Public Prosecutions. We believe that that would be inappropriate.
I hear what the Minister says about prosecuting authorities but can he turn his remarks to the subject of why in those circumstances the Secretary of State should be considered a legitimate prosecuting authority? He has not mentioned that. I understand his points about the DPP and the Pensions Regulator but what about the Secretary of State?
I was coming to that but I will deal with it now. The Secretary of State for Work and Pensions can institute proceedings for an offence under new Sections 58A and 58B in England and Wales only. This drafting mirrors the legislation of similar offences, such as insider dealing in the Criminal Justice Act 1993, as well as offences in the Financial Services and Markets Act 2000 and the Insolvency Act 1986, where the Treasury or the Insolvency Service could bring prosecutions.
The inclusion of the Secretary of State here enables the Government to ensure that the most serious conduct that harms pension schemes will remain punishable in the future. For example, if the ability of the regulator to bring about proceedings is hindered or the regulator ceases to exist—or exists in a different form—this provision could cut in. It is not envisaged that the Secretary of State will institute prosecutions where the Pensions Regulator or, where relevant, the Director of Public Prosecutions has decided against it. Further, where the power to institute prosecutions is exercised, the guidelines from the Code for Crown Prosecutors will apply.
Where will that be set out? If the Secretary of State will not prosecute in those circumstances, how will that be made clear?
It will be made clear—in practice, if anything—but the Secretary of State will reserve the power for the rarest of occasions, I imagine, in the circumstances that I outlined. The normal course would be for the traditional prosecuting authorities to act. Only where the Secretary of State sees an egregious example of someone likely to get away without prosecution for reasons beyond the control of the prosecuting authorities will he or she step in. I cannot generalise about the circumstances. That power is there, as in the other Acts that I mentioned, very much as a long-stop provision.
Amendment 35, in the name of the noble Baroness, Lady Sherlock, proposes a new clause requiring the Pensions Regulator to publish guidance on how it intends to use the new criminal offences. We think this amendment is unnecessary. The Pensions Regulator already has a general prosecution policy in place which sets out the matters it considers when using its prosecution powers. The Pensions Regulator intends to issue further specific guidance explaining its approach to prosecuting the new offences under Part 3 of the Bill.
I fear there is also a practical difficulty, because it is unclear how the amendment could be implemented. The amendment would require the Pensions Regulator to publish guidance pertaining to the new offences at the point of Royal Assent. The problem with that is that the provisions in Part 3, which include the new criminal offences, are subject to changes up to the point of Royal Assent and it would be unwise to pre-empt the will of Parliament by preparing guidance based on draft provisions. It is expected that, following Royal Assent, the regulator will consult on the contents of the guidance for the new offences and expects to publish this guidance prior to commencement. It is clearly important that the industry’s views are sought on what is contained in the guidance, and the timing requirement proposed in this amendment would mean the regulator would consult before the offences are finally settled.
A further reason the amendment is unnecessary—indeed, I would say inappropriate—is due to the inclusion of the phrase
“guidance … concerning the operation of law”.
This phrase has a very specific meaning, and implies that the intention behind the amendment is that it will be for the Pensions Regulator to determine how the legislation should be interpreted. This is of course a matter for the courts, which will make the decision as to whether an offence has been committed in a particular case. Therefore, while the regulator’s guidance will provide assistance as to how the regulator intends to use the new criminal offences, it will not be definitive; nor could it or should it be, since something deemed to be reasonable in one case, for example, may not be reasonable in another. I should mention, for completeness, that there are a number of technical issues with all these amendments which could cause confusion. I shall not go into them here, but I can explain the details to noble Lords if necessary, outside the Committee.
My noble friend Lady Neville-Rolfe asked what kind of estimate we make of the number of people who might go to prison under these criminal offences. Clearly, irresponsible treatment of pension schemes is rare; however, it is important that where we have wilful or reckless behaviour, appropriate sanctions are available. The Pensions Regulator has successfully brought 16 convictions over the past two and a half years—it is of course for the courts to decide who gets convicted and what the penalty should be. I hope it is widely accepted that the Pensions Regulator must meet a higher threshold before a criminal prosecution can be commenced. As the Pensions Regulator has already commented, it would use these new powers only in the right circumstances.
The noble Lord, Lord Hutton, asked a further question about the words “any person” and what other legislation uses that phrase. It is the norm for criminal offences across the statute book to be drafted as applying to “any person” and I can give him examples—I would be happy to write to him.
It is clear that the majority of employers want to do right by their scheme. However, we must ensure that there are sufficient safeguards to protect members’ pensions from the minority who are prepared to put them at risk. If the category of persons whose conduct is within the scope of the offences as set out in Clause 107 were to be narrowed in the way that some of the amendments propose, we believe that the deterrent provided by the offences would be weakened, as indeed would the safeguards built into them. In contrast, making the scope of the activities caught by the offences wider, as separately proposed by other amendments, not only risks removing a key consideration of the level of impact of the conduct but also reduces safeguards. The Government have therefore sought to strike a balance to ensure that members’ benefits are protected while taking into account impacts on business.
I apologise again for speaking at such length, but I hope that the comments I have made will allow noble Lords to feel comfortable in not pressing their amendments.
I thank the Minister for his comprehensive reply. I had intended to probe especially around the words “wilful” and “reckless”; I had a little add-on for fun. When I first thought of putting those words in after “person”, I rapidly came to the conclusion myself—I think the noble Baroness, Lady Stedman-Scott, was there—that in the end they did not make any difference. However, I am not actually sure that that is quite true with regard to the offence of the avoidance of employer debt. New subsection (2)(b) states
“the person intended the act or course of conduct to have such an effect”
but that has to be applied to the examples that might be targeted given by the Minister. In the case of sale of the employer and a parental guarantee not being replaced, that might be done through negligence rather than intent and then it would not be caught because the words “ought to have known” do not appear in the new Section 58A offence, although they do in the new Section 58B offence. So the Government have caught recklessness in new Section 58B but not in new Section 58A. Maybe the words “ought to have known” or something like them could be put there.
It might be helpful to the noble Baroness if I clarify. New Section 58A is intended to capture the concept of wilfulness and new Section 58B the concept of recklessness.
I see. I do not see why we could not have them caught in both. Anyway, we have debated this long enough. I thank the Minister for his replies, and I beg leave to withdraw the amendment.
Amendment 17 withdrawn.
Amendments 18 to 26 not moved.
Clause 107 agreed.
Clause 108 agreed.
Committee adjourned at 7.44 pm.