Motion to Consider
My Lords, in my view, the provisions in these regulations are compatible with the European Convention on Human Rights. By way of these draft regulations, we have responded to concerns raised by stakeholders by making some changes to ensure that occupational pension scheme governance requirements work as intended.
We already have over 6 million workers automatically enrolled into pension saving. We expect this to rise to around 10 million by 2018. Therefore, it is vital that pension schemes are well governed, particularly as most workers will not have made an active choice about their scheme or investments. With this in mind, we introduced new governance requirements from April 2015 in the Occupational Pension Schemes (Charges and Governance) Regulations. These cover occupational pension schemes providing money purchase benefits. They include annual statements regarding governance, certain requirements for processing financial transactions, appointing a chair of trustees responsible for signing the annual statement, and further requirements relating to the default arrangement. We also wanted to strengthen the independent oversight of schemes used by multiple employers, so in those regulations we introduced additional governance requirements for relevant multi- employer schemes. Under these requirements, relevant multiemployer schemes must have at least three trustees, and the majority of all trustees, including the chair, must be independent of providers of services to the scheme. These independent trustees must be appointed for limited terms and by open and transparent recruitment processes. The trustees must also make arrangements to encourage members or their representatives to make their views on matters relating to the scheme known to them. This could be done through members’ panels, annual general meetings or similar.
These additional governance requirements do not apply where the employers are part of the same corporate group, as we considered these schemes to be closer in nature to single employer schemes and thus less likely to require these additional member protections. These regulations amend the definition of “relevant multiemployer schemes” to ensure that it captures both commercial and industry-wide schemes that promote themselves to unconnected employers. Under these new regulations, a corporate group scheme may consist of one or more holding companies and subsidiaries of such companies.
We also made a temporary exemption from these additional requirements, until April 2016, for schemes set up by statute. This was because we wanted to carry out further work on their current governance arrangements before deciding whether this exemption should continue. I should also add that the National Employment Savings Trust is exempt from these additional requirements, as it already has rigorous governance requirements set out in law.
These governance measures cover occupational schemes offering money purchase benefits regardless of whether they are used for automatic enrolment or not. In addition, they exclude schemes where the only money purchase benefits offered are from additional voluntary contributions.
I recognise that pension law is complex and technical, and sometimes we need to change it to ensure that it does the job we want it to do. Since last April, some stakeholders have told us that the way in which we currently define a relevant multiemployer scheme has the unintended consequence of bringing corporate group schemes, which may undergo mergers, acquisitions or disposals, within the additional governance requirements, thereby causing an employer to become unconnected from the group. We have addressed these concerns by way of these draft regulations, which will amend the definition of a multiemployer scheme to ensure that such corporate activity does not bring a corporate group scheme within the additional requirements unless it promotes itself as open to unconnected employers.
I appreciate that the pre-existing governance arrangements for schemes set up by statute may be a good reason to continue their exemption from the additional governance arrangements. However, as I am sure the Committee will agree, we need to have better regulatory safeguards in place for the future across the pensions landscape. These draft regulations will not extend the temporary exemption for multi- employer schemes set up by statute. On balance, we considered that there was no significant reason to provide a further exemption from good governance standards. However, we will give such schemes up to six months to comply with the requirements for the appointment of independent, non-affiliated trustees.
We are also using these regulations to make some minor tidying-up provisions to ensure that the governance standards work as we want them to. They will remove the requirement for the chair of NEST to be appointed within a three-month timeframe, as this appointment is already covered by other statutory requirements and NEST has to comply with the public appointments process. They will also ensure that a deputy chair, or a person appointed by the trustees, can sign the annual governance statement if there is no chair in place—for example, if the chair has recently resigned.
We know that, for some schemes, certain provisions governing the appointment of trustees are set out in their trust deeds and rules, and these may conflict with what is required in the governance requirements on how independent trustees are appointed. We want to make it easier for these schemes to comply with these requirements and in these regulations we have introduced a statutory override where any provisions in trust deeds and rules conflict with the requirements for the appointment of independent trustees in multiemployer schemes.
Finally, these draft regulations will correct a typographical error in the Occupational Pension Schemes (Investment) Regulations 2005. This simply involves substituting paragraph “(9)” for paragraph “(8)” in the definition of “default arrangement” in regulation 1(2) of those regulations.
As required by the Small Business, Enterprise and Employment Act 2015 for secondary legislation that regulates business, these regulations will oblige the Secretary of State to review both the original governance requirements and the amendments made in this instrument, publishing a report within the next five years.
In conclusion, by way of these draft regulations we will be clarifying the scope of the governance requirements. These regulations will also ensure that the governance requirements are practicable for occupational pension schemes and multiemployer schemes in particular. I commend these draft regulations to the Committee.
My Lords, I thank the noble Baroness, Lady Altmann, for introducing these regulations in such a clear manner. We share the commitment to the importance of schemes being well governed. It is accepted that these regulations are generally focused on several technical amendments following on from governance requirements that were introduced last year, driven in part by the requirement to ensure that the growth of money-purchase schemes flowing from auto-enrolment is fit for purpose.
As we have heard, the thrust of these amendments seeks: to put beyond doubt that multiemployer group schemes are excluded from the additional governance requirements; to remove the chair of NEST from the required appointment timescale, because this is otherwise dealt with in statute; to allow a deputy to sign the chair’s statement when the latter is not in place; to enable a statutory override where scheme rules are in conflict with the trust deed requirements; and to let those schemes established by statute have a limited period to comply with the trustee appointments so that the current exclusion can expire—as well as some other tidying up.
We have no quarrel with those amendments, but seek clarification on just one aspect. In regulation 4, the substituted sub-paragraph (2ZA)(a)(ii), participating employers are “connected” if, inter alia, they are,
“are or have been partnerships, each having the same persons as at least half of its partners”.
The test seems to be a head count rather than being a sufficient commonality of shares of partnership activities. Is this what was intended?
That having been said, I should like to return to some points that my colleague, Angela Rayner MP, raised when these matters were debated in another place, particularly as they received scant response from the Minister in the Commons. Of course, we know that our Lords Minister, particularly being forewarned, will be able to do better. These issues concerned the growth of multiemployer schemes or master trusts. It was said that there is no official list of master trust providers although as many as 70 or 80 could be operating at the moment. What is the Minister’s understanding? My honourable friend cited two pieces of evidence given to the Work and Pensions Select Committee, one from the ABI and the other from the Pensions Regulator. The former pointed out that:
“Trust-based … schemes (including master trusts) … are not currently subject to the same stringent regulatory standards as contract-based schemes, which are regulated by the FCA”.
The latter pointed out that:
“Due to their scale, commercial purpose and design for use by multiple employers, master trusts represent different risks to members and consumer protection … master trusts themselves are not authorised prior to market entry and the regulatory framework is not designed for similar levels of ongoing supervision”,
unlike providers regulated by the FCA.
Does the Minister share these concerns? To what extent if at all has the position been ameliorated by the governance arrangements that we are discussing today? Is it satisfactory that the take-up of the voluntary master trust assurance framework seems to be so low? Does the Minister have an update on the previous figure of just five schemes? Is the Minister satisfied that the fit and proper persons test is being applied rigorously? Is it the case that master trusts are not protected either by the Financial Services Compensation Scheme or the Pension Protection Fund and is this an acceptable position?
The Minister will have read the Hansard record of other concerns expressed in the debate. I will not go over them all. It is understood that the Minister is on record as asserting that legislation is needed, particularly to deal with master trusts given their proliferation and the ongoing progress of auto-enrolment. We will have to wait and see what is in the Queen’s Speech in a few weeks’ time but one way or another, there are substantial issues here that need to be addressed.
My Lords, I thank the noble Lord, Lord McKenzie, for his remarks. I am grateful that he shares our commitment that schemes should be well governed and welcome that he has no quarrel with our proposed regulations on these measures. I shall try to respond to some of his questions.
The noble Lord asked if the Minister shares the concerns that have been raised, and I can tell him that the Minister does share those concerns. It is true that trust-based schemes are not subject to the same regulatory controls. The authorisation of master trusts and trust-based schemes is the responsibility of HMRC. There is a “fit and proper persons” test now, but clearly even if that is applied rigorously more protection may be required. That is under active consideration. Such schemes are not, unless they are defined benefit, protected by the Pension Protection Fund, and even if the assets are protected by the FSCS, it is true that the costs of winding up the scheme could be deducted from the protected assets. Therefore, there is still a requirement for us to make sure that we protect as many people as possible in auto-enrolment and protect their pensions. These regulations, however, will ensure that there are improvements in governance standards. They will ensure that multiemployer schemes are better run and will clarify the governance requirements, which of course are such an important part of our pension system, to ensure that trustees are in place who can protect the interests of members.
With regard to the figures, over 90% of members who automatically enrolled into master trusts have been enrolled into those schemes that had signed up to the master trust assurance framework, which ensures that some quality features apply but is not, in and of itself, sufficient as a guarantee. It is a good indication of well-run schemes. There are a number of large master trusts available for auto-enrolment, and the Pensions Regulator is obviously trying to signal to employers that they have been through some quality assurance testing. Again, that is important because the worker who is auto-enrolled into a pension scheme has no control over the scheme chosen for them by their employer. It is therefore essential that we help employers to know how to choose a good pension scheme for their staff that is safe and secure, and indeed that they do so.
Well-run master trusts can and do offer good value for consumers and their employers, and of course we are keen that this market develops in the right way. We are aware that there are some potential issues and, as I am sure the noble Lord is aware, we are working with the Pensions Regulator to improve protection and ensure that the right protection is in place, which is likely to require legislation. We will come back to the noble Lord when the measures can be further elaborated upon.
There are a number of governance requirements that master trusts already have to meet under the current law, and I believe that the voluntary master trust framework covers seven schemes—is that right? I understand that it covers five at the moment, but others are in the pipeline. Still, we need to be sure that we are exploring, and will succeed in achieving, other protections in addition to those that already exist as auto-enrolment moves forward. Currently the contribution levels are extremely low, but numbers will increase—contribution levels will be quadrupling by 2019—so we must ensure that we have protections in place for those who enter auto-enrolment in the coming years.
On the noble Lord’s question about the head-count issue in partnerships, the purpose of the definition of “connectedness” is to help schemes to establish the degree of connection within a corporate group or partnership. If they are sufficiently connected, it can be exempted from the requirements. The partnerships definition is designed to ensure that two employers that are partners share a sufficient number of partners—that is, at least half—in order to be connected. This is about not just numbers but connection. As long as the multiemployer scheme is multiowner only because of connected employers, it is treated more like a single-employer scheme, but if a scheme promotes itself to bring in other employers rather than just being within the group then it is a multiemployer scheme, and we are trying to clarify that with these regulations. We hope that that will be clear.
I will perhaps expand a little on the question, although maybe we should follow it up outside this session. I understand the thrust of employers needing to be “connected” for these purposes and, so far as partnerships are concerned, connection looks to be driven by a certain commonality of numbers of partners. However, numbers of partners may not tell you very much about where the weight and financial interest of any particular partner is. It would have been quite easy to construct something where you had a sufficient number of partners but all the clout and financial substance was with just one or two partners. I wonder how the “connected” rules would operate in those circumstances. I am afraid that this is a bit of a nerdy issue, and maybe we should deal with it outside this session if the Minister is not able to cover it fully today.
I am happy to try to cover it if the answers that I have given are not sufficient. One of the crucial tests here is whether a scheme is promoting itself to outside employers rather than being part of a group. If a company is being taken over or if shares are changing hands, but it is all within the same group, same company and same partners, it is likely to be considered a connected scheme rather than a multiemployer scheme and therefore exempt. However, if there are other issues that the noble Lord would like me to elaborate on outside this debate, I am happy to explore those.
I was not going to come in on this regulation but the Minister’s comments have prompted a question in my mind. If a company is in the corporate group and participating in a pension scheme—so it does not come under the definition of a multiemployer scheme—and that company then leaves the corporate group but continues to participate in that pension scheme, would that automatically transfer it to the status of a multiemployer scheme?
The noble Baroness raises an interesting point, which I myself have explored. It is the case that if an employer leaves a previous group but the employees are still part of that scheme, it will be considered a connected scheme because the members are still part of the same group. The group stays in the scheme, so in that circumstance it would still be part of the group rather than becoming a multiemployer scheme, as long as it is not then opening itself to promotion to attract other employees and employers. I hope that that answers the noble Baroness’s question.
I do not want to labour the point but I am still not clear in my mind: if you have a corporate group of companies and one of them literally is divested in some way, and it continues to use that pension scheme but is no longer part of the corporate group, what status does that trigger? I am happy to pursue this question offline.
Regarding these regulations, as I have just described, if employers that are outside the group can fit within these corporate scenarios—that will include where an employer was part of the corporate group but has now left the group and continues to participate in the scheme—they are considered a corporate group scheme.
I thank the noble Lord. I am grateful for noble Lords’ careful attention and scrutiny of these draft regulations. We believe that good governance is fundamental to securing good member outcomes and these draft regulations will help ensure that schemes are better run, in members’ interests. The regulations that we have put forward today will make amendments that will help to clarify the scope of the governance provisions. I am grateful for Members’ contributions to this debate. I hope I have set out the need for these regulations, and have responded as best as I can to the matters raised. If necessary, I will continue to answer any further questions that noble Lords may have. I commend these draft regulations to the Committee.