Relevant documents: 6th Report from the Delegated Powers Committee
Clause 1: Master Trust schemes: definition
1: Clause 1, page 1, line 8, at end insert “and is not an AVC only scheme,”
My Lords, the intent of my Amendments 1, 3, 5 and 6—and, I believe, similarly the intent of the Opposition’s Amendment 2—is to remove from the definition of master trust certain non-associated multi-employer schemes, known as NAMESs, that are supported by employers and are not run for profit. Such schemes are often industry-wide schemes set up to provide benefits for employees within a particular industry sector.
I have identified at least 12 of these schemes, with member numbers ranging from 900 to 340,000 and the value of assets ranging from £80 million to £48 billion. They include the Railways Pension Scheme, the Merchant Navy Officers Pension Fund, the Merchant Navy Ratings Pension Fund, the Plumbing & Mechanical Services (UK) Industry Pension Scheme, the Cheviot Trust, the ITB Pension Funds, the Industry-Wide Coal Staff Superannuation Scheme, the Industry Wide Mineworkers’ Pension Scheme, the Motor Industry Pension Plan, the Pilots’ National Pension Fund, the YMCA Pension and Assurance Plan, and the Registered Dock Workers’ Pension Scheme.
The concern is that, without my amendments or other ways in which the Government may choose to address the issue, these schemes will need to comply with the new regulations on master trusts, despite being subject already to a very comprehensive regulatory regime. I had always understood that the intent of the new Government was not to double up regulation but to streamline it. I believe the USS—the Universities Superannuation Scheme—has raised this point already with the Department for Work and Pensions. I sympathise with its argument that such not-for-profit hybrid schemes should be excluded. By inserting,
“is not a relevant centralised scheme”,
my Amendment 3 would create such an exclusion.
Mostly, the schemes are occupational pension schemes regulated by the Pensions Regulator. They do not have a commercial agenda and have not been established with a view to making a profit, unlike the commercial master trusts, which are surely the intended target of the Bill. The NAME schemes provide defined benefit—DB—pensions and so are subject to the scheme-specific funding requirements of the Pensions Act 2004. It is usual in schemes such as these for the participating employers to be liable for the expenses of running the scheme. When relying on employers to fund the scheme and to pay expenses, there is the risk of employer insolvency but this risk is faced by trustees of all occupational pension schemes, except where there is a government guarantee.
The reason many of these schemes will be caught by the definition of master trusts for the purposes of the Bill is that they give members the option to accrue money purchase benefits on top of their DB pensions by choosing to pay additional voluntary contributions. Having to comply with the requirements for master trusts would cause difficulties for many NAME schemes and result in additional expense for those employees and, ultimately, employees participating in such schemes. In particular, there will not usually be a person involved with a scheme who fits the requirements of being a “scheme funder”. The Bill requires that a scheme funder,
“must be constituted as a separate legal entity”,
and that the only activities it carries out relate directly to the master trust.
It is not entirely clear whether or not the drafting of my amendments in this technical area succeeds in excluding all NAME schemes that the Government might want to carve out of being a master trust, and it is impossible to know what different pension arrangements may be developed in the future. The amendments therefore include a regulation-making power to enable the Secretary of State to remove further schemes from the definition of master trust.
I have referred to the Universities Superannuation Scheme, which is a classic example. Its starting position is that it believes it is “unintended, unnecessary and burdensome” that,
“hybrid schemes such as USS, which provide pension benefits for multiple non-connected employers … will be caught by the new regulation”.
It would like to see the definition of master trusts clarified in secondary legislation to ensure that it targets only those schemes which are currently subject to inadequate regulation.
I feel sure that it is not the Government’s intent that these NAME schemes should be covered by the definition of master trusts. If the particular changes that my amendment proposes are not to the Government’s liking, or if they think that it does not work, I hope to hear that they have alternative proposals to deal with these issues.
My Lords, I shall speak to Amendment 2, which we have in this group. I say to the noble Lord, Lord Flight, that the intent of our amendment is not to take schemes out of the definition of master trusts but to probe where those boundaries currently are, because there is a lack of clarity in some respects.
Before I touch upon the detail of the amendment, it might be helpful if I set out the context in which we plan to approach Committee. We have already made clear our support for the thrust of the Bill and what it seeks to do, but much of the detail is missing and will depend on regulations, at least some to be informed by further consultation. There are policy gaps, as well as gaps in the operational detail. The impact assessment recites that there is still,
“significant uncertainty over the full impacts of the proposal, as costs will be determined by the details to be set out in subsequent secondary legislation”.
Additional costs for master trusts and for the Pensions Regulator cannot currently be determined, as the charging structure has yet to be finalised.
The Constitution Committee has also commented on the degree of delegation in the Bill. It instances Clause 24(4), which lists 15 matters that regulations must address relating to continuity option 1. It also draws attention to the wide provisions of Clause 39, which would allow the Secretary of State to adjust the range of pension schemes to which Part 1 of the Bill applies, either to extend the regime or to disapply it in whole or in part. We will come back to this extraordinarily wide provision later. This almost turns on its head the normal approach, which is to determine policy first and then to legislate. We accept the importance of having flexibility to deal with the changing models which an agile sector might bring forward, but in scrutinising this legislation we need to have the opportunity to test the boundaries of that flexibility. I think it has already been indicated that we will not get a full set of draft regulations before the Bill leaves your Lordships’ House, but perhaps the Minister will set out when we might see the drafts of key regulations, as we have requested, or at least policy notes to expand on their intended coverage. In the meantime, we will proceed with a range of probing amendments to flesh out as much detail as possible.
The purpose of Amendment 2, in my name and that of my noble friend Lady Drake, is to probe why the Bill excludes single-employer occupational schemes from the scope of its provisions and why connected employers are therefore effectively treated as one. As it stands, the Bill would leave single/connected employer arrangements regulated as at present. These arrangements sit alongside the regulation of group personal pension plans, which is within the remit of the FCA, so we will be going from two approaches to three.
We understand the reasons why the existing regulation for trust-based schemes is inadequate, notwithstanding some prospects for improvement under the assurance framework and the 2015 code. It is inadequate to deal with master trusts, which have developed new types of business structures. This can alter the relationship between members, employers, trustees and providers, with some being run on a profit basis but not all, as the noble Lord, Lord Flight, indicated. The scale of some of them is also unprecedented in occupational pensions.
Our probing amendment is designed to give the Government the opportunity to put on record the overall scope of the new regulatory environment to justify how it all fits together and that the boundaries of the system are clear and do not overlap. We accept that the master trust regime is focused on schemes with particular risks, but does there not have to be some consistency across the piece? As it stands, the definition of master trust is potentially very broad. We do not particularly have a problem with that, but it can cover those set up by unregulated businesses as well as those set up by regulated businesses, such as insurance companies or investment managers. It can also cover what are described as “white label” master trusts, which are set up by a pension provider with commercial or non-commercial partners being allowed to brand their sections of the trust. Others may have partnering arrangements with large employers where each employer gets its own section of the master trust but does not make any profit from it. Schemes can include industry-wide schemes and schemes that happen to include two or more unassociated companies and schemes in the university, charitable and religious sectors. So within the master trust definition there are a range of differing situations, and a question arises about whether the line to exclude single unconnected employer arrangements is the appropriate line to draw.
The amendment also seeks, as a probe, to delete the exclusion from the definition of a master trust those schemes which are to be used only by connected employers. I have some questions on that. What is the position where a scheme starts life as a scheme for connected group employers only, but where one of the employers enters into a time-limited joint venture which causes it to cease to be connected? Does it then have to seek approval to operate? What is the position when the joint venture has run its course and the scheme reverts to being used only by employers which are connected? How do the Government justify the juxtaposition of a connected group of employers being outside the scope of the Bill and another connected group of similar size but with just one small associated employer presumably being inside it? This is a very thin distinguishing line. Are there any circumstances currently envisaged where Clause 39 would be used to bring within the scope of the Bill a single-employer occupational pension scheme?
So far as the amendment moved by the noble Lord, Lord Flight, is concerned, it is understood that AVC-only schemes are a type of arrangement that has been developed of late, prompted by the introduction of the Pensions Regulator DC code of practice, which introduced a degree of comprehensive governance and management tests for DB schemes where the only DC benefits are AVCs. It is suggested that the new code can lead to disproportionate costs—hence the plan to remove AVCs from individual DB schemes and corral them in a master trust. As we have heard, the proposition now is to remove them from this Bill’s provisions. Presumably, this implies that the current regulatory regime, as enhanced by the April 2015 changes, would continue to operate. However, in so far as comfort is being taken from the voluntary master trust assurance framework, its future is uncertain. We wonder whether that should be relied upon. In any event, do not such arrangements—that is, AVC-only schemes—exhibit at least some of the risks which this legislation is seeking to address, such as the existence of providers, funders, the profit motive and the promotion of the scheme? In the circumstances, it is difficult to see why they should be outside the Bill, acknowledging that some may have been created specifically to take advantage of the current regime.
We have a similar position in relation to the other group of schemes to which the noble Lord referred. So far as the noble Lord’s amendment about having the power to modify the Bill is concerned, the Bill already provides that power. In fact, we think the power is too broad and do not like it. We look forward to the Minister’s comments.
My Lords, I support my noble friend Lord Flight in his amendments, in broad terms. The Minister will recall that at Second Reading, at col. 570, I raised the question of mutuals and the mutual movement. His noble friend on the Front Bench confirmed that since a great many of them were defined benefit pension schemes, they would be outside the scope of the Bill. However, that does not take everybody out. Since that time I have had discussions with the Universities Superannuation Scheme. It is perhaps a bit of an oddball, but it is deeply concerned about the Bill and its effect on it and its members. Its representatives emphasised to me in our meeting that they were very much behind the intention of the Bill—so it is not a question of some organisation trying to undermine the situation.
They made three particular points on why the Universities Superannuation Scheme should not be subject to the Bill. First, there is,
“the comprehensive regulatory regime already in operation for hybrid schemes, which already provides a well-established, ample level of protection for pension savers”.
“the protection already afforded to USS members with Defined Contribution … benefits both under statute and the scheme rules, whereby the DC benefits are underwritten by the whole fund (DB and DC) which means that the only circumstances where DC benefits could not be fully satisfied would be where the whole scheme fund (assets currently circa £49 billion) was depleted in full”.
Lastly, there are,
“the anticipated costs of compliance”—
a common thread that has been raised by noble friends across the House. The cost of compliance is estimated at,
“in the region of £10.5 million in order to satisfy the financial sustainability requirements over 2 years, plus a further £250,000 per annum for compliance with the requirements of the Bill, which would be funded from the scheme assets”.
I hope very much that the Minister will take these points on board. I do not expect a full and complete answer this afternoon, but I would have thought that schemes such as this—there probably are others that have not been brought to noble Lords’ attention—could be dealt with in secondary legislation. It certainly seems to me that they need to be addressed at some point. All I am seeking this afternoon is a reassurance that my noble friend recognises that there are some schemes out there that should not be covered by the Bill but may need to be covered in some form in the regulations. I look forward to his response.
My Lords, I will make just a few remarks at this stage. My noble friend Lord Flight mentioned the position of the NAME schemes. There are significant problems with the DB sections of those schemes, and a number of employers have written to me who are about to go personally bankrupt because they cannot meet the obligations—and that is setting aside the defined contribution issue that we are talking about today. From the perspective of the Universities Superannuation Scheme and other schemes that may have AVC-only sections to them, it would seem to me that we cannot, given the intentions of the Bill to protect scheme members’ benefits in the event of wind-up, just assume that the money will come from somewhere if there is not any proper provision for it—and currently there is not. It would suggest—my noble friend the Minister might consider this—that there may be a case for extending the Pension Protection Fund itself, which already covers the DB benefits of those schemes, to take care of any residual risk in the AVC section.
Indeed, the capital adequacy mentioned in the Bill will not necessarily achieve the aim that the Pension Protection Fund achieves for defined benefit schemes. In the event of wind-up, with a scheme’s records in disarray, it is not clear that any initial estimate of capital adequacy might be sufficient to cover those costs. I would be grateful for some comment from the Minister on the possibility of some sort of backstop or tail-risk insurance. That could also pick up the AVC schemes that have been mentioned. I understand the points that have been made there.
My Lords, I wonder if I could make a short contribution on this amendment. I declare an interest: I am chair of a DB scheme for the superannuation fund for the GMC and have been chair for a number of years. It is a DB scheme and I do not have as much experience of DC schemes, but I am interested in the Bill. I am sorry that I was abroad when the Second Reading debate took place; I have read it carefully and some very powerful speeches were made.
We have heard again from the noble Lord, Lord Naseby, on the important point about mutuals and AVCs. An important point about AVCs has also been made by the noble Lord, Lord Flight, and I hope we will get some kind of indication about how the Government are going to respond to that.
My real reason for speaking is to support the comments by the noble Lord, Lord McKenzie. I have been doing legislation of this kind for some time, and this is by some margin the most statutory-instrument-framework type of Bill that I have come across. I understand perfectly well that there are reasons for this; long consultations about some of the problems that the Bill addresses could have provoked some of the outcomes we are trying to avoid. But I spent the weekend looking at the Bill and found that its vagueness—in terms of the policy that is left to the Government to decide at a later stage, much of it through negative rather than affirmative regulations, as currently set out in the Bill—makes it impossible to fit the pieces together properly.
I may be revealing my lack of experience—there are other colleagues in the Committee who know far more about some of the detailed aspects of master trusts—but I make a real plea to the noble Lord, Lord Freud, who has experience of dealing with concerns of this kind on all sides of the House from other Bills in the past.
Policy notes are one way of doing that. I do not think anyone is seeking to stop, hold back or prevent any of the ambitious and necessary outcomes that the Bill seeks to achieve, but we could well be in a position of being presented with statutory instruments in an undesirable way. We have had some conversations about what powers we in this House should properly have over secondary legislation and how we should exercise them. I think that can be avoided if the Minister adopts his tactic of consulting at every opportunity—at the appropriate moment as soon as the policy is finalised; offline, as it were—and with some policy notes. Then we will be confident that it will be safe for us to sign off Royal Assent for the Bill in the expectation that every opportunity will be taken by Ministers at every stage, if they cannot provide draft statutory instruments, to make alternative arrangements such as policy notes so we can be sure that we know what we are voting for and considering in secondary legislation. That is a very important point that the noble Lord, Lord McKenzie, made.
The Constitution Committee does not do notes of this kind unless it is seriously concerned, and we as a Committee would be foolish not to pay careful attention to the fact that it is urgently drawing matters of this kind to our attention. So I hope that we can get some kind of reassurance on that point from the Minister on the wind-up on these important amendments.
Clause 1 is critical to the Bill. It sets out the scope for the regime, so I welcome these considered amendments, which give us the opportunity to explore this important clause in detail.
We have taken considerable care in defining master trusts and setting the scope for the new authorisation regime. The guiding principles throughout have been twofold: the first is to ensure that members are protected against the risks that arise in these new structures; the second is to ensure that the extent of any regulation is proportionate.
For example, the definition applies to schemes which are open to more than one employer because the level of engagement and involvement of the employers and scale of such a scheme is likely to be very different from that of a single employer scheme or a scheme in which all the employers are part of the same corporate group. It applies only to schemes which offer money purchase benefits because of the risks that the member bears in relation to such benefits, but we have been careful not to create a loophole for schemes which offer mixed benefits—as we will come on to later.
However, we also need to be mindful of the fact that master trusts are a recent development in a rapidly changing pensions landscape, and the master trust market is evolving all the time. A one-size-fits-all regime may not be proportionate, and we therefore need flexibility to be able to respond to the needs and changes. It is for this reason that Clause 39—which we will come to later in Committee—makes provision allowing for the disapplication of some or all provisions of the Bill for certain schemes.
Turning to the specific amendments, my noble friend Lord Flight seeks to exclude from the definition “AVC only” and “relevant centralised” schemes. I have sympathy with his intentions. Many defined benefit schemes offer AVCs for historic reasons and could be considered to be DB schemes to all intents and purposes, but schemes such as this could be excluded from regulation under our powers under Clause 39, and we prefer to use this power rather than to create a list of exemptions in the Bill, allowing time for more detailed consultation with industry about the diverse types of scheme that currently exist.
I put it on record that our intent is to propose such a carve-out. That is: we intend to consult on regulations under Clause 39(1)(b) to disapply some or all of the provisions of the regime for a mixed benefit master trust scheme, where the only money purchase benefits are those related to additional voluntary contributions of non-money purchase members, but we will also be considering carefully the need to avoid creating any avoidance loopholes as we go through that process.
In relation to the relevant centralised schemes, I am concerned that my noble friend’s amendment may go too far. The definition to which he refers is not confined to industry-wide or not-for-profit schemes, and although there may be a case for excluding some such schemes, I am wary of creating a loophole.
Our aim is to protect members from the risks that are particular to master trusts, and these may equally arise in industry-wide schemes. Similarly, although it is true that most master trusts are run for profit, and that this gives rise to certain risks which the regime seeks to protect, it is not this feature alone which determines the nature of master trusts.
I am grateful for the amendment tabled by the noble Lord, Lord McKenzie, and the noble Baroness, Lady Drake. As the noble Lord said, it is a probing amendment to investigate the boundaries of the definition. The amendment would change the definition of master trusts in the Bill and extend it to all schemes which offer money purchase benefits, including those which are used by only a single employer or employers connected to each other.
On the noble Lord’s question of how and when we plan to consult on draft regulations, and indeed on the question asked by the noble Lord, Lord Kirkwood, we have worked with the industry and the regulator to establish the key criteria for master trust authorisation. We intend to continue these discussions to develop more detailed policy and secondary legislation. We will follow the published government principles to ensure that consultation is an ongoing process, using the most appropriate forms of communication. The timing of that formal consultation on draft regulations will depend on a number of factors. We anticipate that the initial consultation to inform the regulations may take place in autumn 2017. I hope that that gives the noble Lord, Lord Kirkwood, some reassurance about the process.
The amendment would extend the scope of the definition and the authorisation regime considerably and would do so in a way that would be disproportionate. To take the example of the scheme starting as a single group employer picking up a non-associated one and moving back and forth, if the scheme is intended to be used for more than one unconnected employer, it is within the scope of the regime. If it starts with only connected employers but takes on an unconnected employer, it will fall within the regime at the point that it takes on the unconnected employer.
Will the noble Lord help me on that point while it is on my mind? If you take on an associated entity and therefore have to join the scheme, what happens if you have a joint venture and that joint venture comes to an end? Are you perpetually in and out of the scheme? How does that work?
In practice, one has to be fairly formal about the definition. The noble Lord has drawn up an example of a potential revolving door which I suspect may be in the black swan category. I will take that point away. I need not write to him on it because we will have a chance to come back to it, or I will make sure that we do. He describes a very volatile situation, but I suspect the very existence of a precise regime will tend to stop people doing that kind of thing unnecessarily, or without a very good reason.
On the question of bringing into the regulations schemes that have only one employer, we are currently considering whether some schemes offering decumulation-only benefits have the same rules as some master trusts. Any use of the powers to deal with this issue will clearly be subject to the affirmative procedure. My noble friend Lady Altmann asked whether PPF could be extended; an amendment has been tabled—I think it is Amendment 18—to explore this issue, and we will deal with it when we reach that point.
Much of our debate at Second Reading indicated that there is general acknowledgement that further regulation of master trusts is both desirable and necessary. Master trusts have developed in part in response to the success of the automatic enrolment programme emerging as a different kind of beast to the traditional structures that have existed in the occupational pensions sphere.
There is much to recommend master trusts as the schemes of choice for employers and members. They can drive value for money due to competition in the market and the economies of scale and offer a neat solution for smaller employers, for whom setting up an individual pension scheme for employees would be impractical and burdensome. But these very qualities also give rise to new risks that are not present in single employer defined contribution schemes in the same way. In a single employer scheme, the employer is typically far more closely involved in the running of the scheme and tends to have a more active relationship with the trustees. With master trusts used for automatic enrolment, employer involvement is generally limited to paying over the employer contribution. The different dynamics that exist in master trusts give rise to the need for a different approach to ensure that members are properly protected. These issues do not arise in the same way in single employer or connected employer schemes, and it is for this reason that we have been careful to confine the definition to multi-employer schemes in which the employers are not all connected.
I ask my noble friend for some reassurance on the issue of defining the whole structure via the word employer. An employer in a single employer scheme may be considered a single employer but they may be attracting money from members who used to work for other employers and do not currently accrue. Therefore, I hope that the intention of the Government for the Bill is that it should apply in the case where there is a single employer but he has attracted money from people who worked for other employers in the past. I recognise that my noble friend says that this may be captured in Clause 39, but I would be grateful for some reassurance on that point.
At the moment, these schemes would not be within the master trusts legislation. I cannot give a full answer now because I am not sure what other protections there may be for people in this situation, but we will have a chance to come back to this issue again and again and I shall make sure that we have a dialogue on this point later, as we consider the Bill in Committee.
This Bill addresses the risks that arise in master trusts. It is important to remember that these risks are specific to this particular type of structure, and it is therefore important that the definition reflects those structures and does not go wider. This ensures that the regulation in the Bill is a proportionate response to the issues arising. I hope that with these explanations and assurances particularly on the process of consultation, noble Lords are reassured, and I ask them not to press their amendments.
In relation to the use of Clause 39 for carve-outs, is it envisaged that that will be done on a broad scheme basis or on an individual scheme basis? How will it work in practice? Will it be a carve-out for a defined type of scheme, as in the AVC scheme referred to, or could it be more specific?
I raised a point on the specifics of the universities superannuation scheme, which is really very large. I do not expect a concrete answer this afternoon, but could my noble friend cover it for me in writing or make sure that it comes back in some form so that the universities can be reassured?
My Lords, I am pleased to hear the Minister advise that Clause 39 will be used for further consultation, and that he is certainly minded to introduce a carve-out for AVCs. I would like to push the case for NAME as well, particularly as regards the arguments made by the university schemes. However, I understand the Government’s reservations here. Considerable further discussions with the industry are needed. On the basis of such constructive use of Clause 39, I beg leave to withdraw the amendment.
Amendment 1 withdrawn.
Amendments 2 and 3 not moved.
4: Clause 1, page 1, line 13, leave out subsection (2)
My Lords, I refer to the interests that I recorded at Second Reading. I will speak also to the other amendments in this group. In part, these amendments are probing to understand what happens to non-money purchase benefits in master trusts under the Bill.
Clause 1(2), taken together with other clauses, means that the Bill applies only to money purchase benefits provided through a master trust, and excludes non-money purchase benefits. This means that potentially some of the members’ benefits provided by these schemes, including retirement products, are excluded from key protections in the Bill. On first consideration of that clause, it does not seem fair or sensible to exclude certain members’ assets from all of the Bill’s provisions. Master trusts can provide a variety of services both to employers under auto-enrolment and to individuals exercising pension freedoms. The master trusts may provide at-retirement products, such as annuities, guaranteed draw-down, and investment products which include some form of guaranteed rate of return. Annuity payments, for example, may be paid to the member but the actual annuities supporting those payments may be held as an asset of the scheme rather than in the name of the member. How are savers protected in that situation? Pension freedoms have seen the annuity market shrink, and they may radically transform the market for guaranteed income products. Pension savers will still have an appetite for some form of guaranteed product. The Bill will not apply to non-money purchase benefits, so it is unclear what happens to those benefits and, importantly, the assets backing them, when the master trust fails.
Master trusts are innovative. One such trust, for example, allows members to add in other savings and assets such as ISAs and property used for funding retirement. I read that, of the approximately 100 master trusts, only 59 are being used for auto-enrolment. Some have blossomed on the back of pension freedoms. Regulation should anticipate that master trusts will expand further into the decumulation market of retirement products. The exclusion of non-money purchase benefits raises three important issues. It is not clear what happens to the treatment of all non-money purchase benefits, and the assets backing them, in the event of a wind-up or other triggering event occurring. Will those members’ benefits be protected against funding the costs of a triggering event, and how, and where, will they be transferred on exit?
The Government’s position is that all the requirements in the Bill bite only in relation to money purchase elements in the scheme because other legislation protects non-money purchase benefits. But will all retirement products with an element of guarantee be covered by the PPF regime? I doubt it. Master trusts are not regulated by the FCA, so where does the saver look for protection?
The continuity strategy required under Clause 12 in the event of a wind-up will have to set out how the interests of members of a scheme in receipt of money purchase benefits are to be protected in a triggering event, but it appears that it will not have to set out how members in receipt of non-money purchase benefits will be protected. Such a requirement would at least clarify what range of member benefits were in the master trust; Amendment 26 in this group addresses this issue. Will master trusts be required to set out how members with non-money purchase benefits will also be protected if a triggering event occurs?
Amendment 16 provides for any assessment of a master trust’s capital adequacy backing money purchase benefits, required under Clause 8, not to take account of resources related to benefits other than money purchase benefits. There is only a brief reference—in Clause 38(2)—to both money and non-money purchase benefits being included in a master trust account. How will this work in practice? Will master trust accounts have to be disaggregated by type of benefit? Will requirements be imposed to identify the assets backing money purchase benefits, those backing non-money purchase benefits and any cross-subsidies between the two? Is it the intention that none of the assets backing non-money purchase benefits could be used to fulfil the requirements for financial stability under Clause 8 or to meet costs arising from a triggering event, including wind-up? The Bill raises uncertainties as to the treatment of the different categories of benefits at authorisation, ongoing supervision and when a triggering event occurs.
Finally, Clause 8, to which Amendments 16 and 17 are directed, is the capital adequacy provision clause. At Second Reading, several Peers expressed concerns about the adequacy of these provisions. The terms used are rather open-ended and will require implementing instructions, of which we have yet to see a draft. Concepts such as “sustainability” and “sound” are undefined, and the Bill does not include any explanation of what is meant by a scheme having sufficient financial resources. Even the reference to a scheme holding sufficient resources to continue running as a scheme for between six months and two years means that there is a big gap between the minimum and the maximum requirements. Yet the capital adequacy regime is intended to be the cornerstone or linchpin protecting members in a master trust in the event of its failure.
I will return to these arguments in more detail when we reach Amendment 21 in my name and that of my noble friend Lord McKenzie, but they are compelling reasons why Amendment 17 seeks regulations under Clause 8 to be subject to the affirmative rather than the negative resolution procedure set out in the Bill.
My Lords, I am grateful to the noble Lord and the noble Baroness for tabling these amendments. Amendments 4, 16 and 26 relate to the question of how non-money purchase benefits in a master trust are dealt with and affected by the new regime, and Amendment 17 raises the question of the appropriate parliamentary procedure for regulations under Clause 8.
I will first deal with the question of non-money purchase benefits, as we have given a great deal of thought to it in developing the Bill. Amendment 4 seeks to amend Clause 1(2) so that the provisions apply to non-money purchase benefits in master trust schemes. Amendment 16 seeks to ensure that the Pensions Regulator does not take account of resources which relate to non-money purchase benefits in assessing whether the scheme has sufficient financial resources.
Amendment 26 seeks to ensure that master trusts set out the protections for non-money purchase benefits in their continuity strategy. Many master trusts will be money purchase schemes—that is, they will provide only money purchase benefits. However, a number provide both money purchase and non-money purchase benefits, and we therefore need to make provision to take account of this. As we have previously discussed, it is important that we do not create a loophole for schemes that offer mixed benefits. However, the policy intent is to specifically address certain risks that apply to members in master trusts related to the nature of the structure and funding of these schemes. These types of risk are managed in different ways in relation to non-money purchase benefits, and it is the risks around money purchase benefits that the Bill is focused on addressing.
If the authorisation regime were to apply to non-money purchase benefits, such as salary-related pensions, this would create duplication of regulation and add additional unnecessary costs and burdens to the running of those schemes, with little purpose in terms of protecting members. This is because there is already extensive regulation of occupational pension schemes providing non-money purchase benefits, regarding funding requirements, employer debt provision and winding up, for example. Non-money purchase benefits are not generally offered by schemes aiming to make a profit. They are calculated according to what is promised rather than solely by reference to the funds available in the members’ pot.
These factors mean that requirements for the set-up and administration of master trusts which are necessary for money purchase benefits are not appropriate for non-money purchase benefits. Requiring them to apply across the board would be unnecessary and disproportionate. Indeed, in some cases it would give rise to potential conflict and confusion. For example, the provisions requiring transfer of member benefits and wind-up of the scheme where there is a triggering event that cannot be resolved, or where the Pensions Regulator withdraws authorisation might have a detrimental impact on members in relation to the non-money purchase benefits if they were to apply.
We have taken care to craft the authorisation regime, including the authorisation criteria, so that it addresses the risks that arise for master trusts offering money purchase benefits. It would not therefore be appropriate for the regime to extend to other types of benefits for which it is not designed and where these risks do not arise in the same way. For this reason, we have made provision for non-money purchase benefits to be generally disregarded for the purposes of the new authorisation regime, and that is why I cannot accept Amendment 4.
For the same reason, I am, conversely, in agreement with the intention behind Amendment 16. We do not wish the Pensions Regulator to be able to take account of resources that relate to non-money purchase benefits. As I have explained, the Bill achieves this already through the provision at Clause 1(2), which the noble Lord and the noble Baroness seek to remove with Amendment 4. In determining whether the master trust is financially sustainable, the Pensions Regulator will be able to take account only of resources that relate to the money purchase part of the scheme. Anything relating to the non-money purchase part of the scheme is to be disregarded. For this reason, Amendment 16 is unnecessary.
Amendment 26 seeks to ensure that master trusts set out the protections for non-money purchase benefits in their continuity strategy. We will discuss continuity strategies in more detail in due course. By way of background for present purposes, a continuity strategy is a document that addresses how the interests of the scheme members will be protected if the scheme experiences a triggering event—that is, an event that could put the scheme’s future at risk. The aim behind the continuity strategy requirements is to try to ensure that members continue to save in a pension even when the scheme of which they are a member experiences an event that could put its future at risk.
Amendment 26 seeks to ensure that a master trust’s continuity strategy includes information on what protections there are for any non-money purchase benefits. As previously stated, there is extensive protection in legislation already for non-money purchase benefits. This includes protections in relation to scheme funding, transfer of benefits and what happens upon wind-up. I reassure noble Lords that schemes that fall within the master trust definition but which offer non-money purchase benefits will still be required to comply with all existing requirements in respect of those benefits. In such cases, the reference to winding-up of the master trust is to be read as a reference to the scheme ceasing to operate in relation to money purchase benefits. So, if authorisation is withdrawn from a master trust which offers mixed benefits because it no longer meets the authorisation criteria, it will be required to stop operating in relation to the money purchase benefits only, but it may still continue to operate in respect of non-money purchase benefits if it is compliant with the relevant requirements for non-money purchase benefits. In most cases this continuity is likely to offer the best outcome for members with non-money purchase benefits in the scheme.
Where a master trust has a triggering event, the impact of that event on the money purchase and non-money purchase benefits may be very different. The protection requirements needed in respect of money purchase benefits for actions such as transfer or wind-up may not be appropriate for non-money purchase benefits. Bringing non-money purchase benefits into the continuity strategy provisions would create more problems than it would solve, creating complications in the interaction between the requirements of the Bill and the requirements of existing legislation or creating possible overlap. For this reason I cannot accept Amendment 26.
I turn now to the question of the appropriate parliamentary procedure for regulations under Clause 8 in relation to financial sustainability. Amendment 17, tabled by the noble Lord, Lord McKenzie, and the noble Baroness, Lady Drake, would require any regulations made under this clause to be subject to the affirmative rather than the negative procedure. It might be helpful if I explain the rationale behind the financial sustainability requirement in Clause 8, which forms part of the authorisation criteria in relation to the money purchase benefits by a master trust, before I discuss the amendment in more detail.
The financial sustainability requirement is intended to address risks in master trusts from which members of other types of workplace pension schemes are protected. For example, providers of group personal pensions are subject to regulation and supervision by the Financial Conduct Authority, and sometimes the Prudential Regulation Authority, which imposes requirements in relation to capital adequacy among other things. The fundamental aim of the financial sustainability requirement is to avoid disruption to members and employers through schemes failing because of inadequate financial planning or resources, and to ensure that if a scheme does fail the cost of transferring members out and winding up the scheme can be met without resort to members’ funds.
In order for a master trust to meet the financial sustainability criteria, the regulator must be satisfied that the master trust’s business strategy is sound and that it has sufficient resources to meet specified costs. In making its assessment of whether the scheme meets these requirements, the regulator will be required to take account of prescribed matters which will be set out in regulation. We intend to use this regulation-making power, for example, to require the regulator to take into account the nature and terms of a scheme funder’s liability in respect of a master trust scheme and the capital held by the funder to absorb any losses that may be incurred. We also anticipate requiring the regulator to take into account the financial resources required to enable the scheme to meet its costs following a triggering event and the extent to which those resources would be protected in the event of the scheme funder’s insolvency.
Additionally, the regulations are expected to set out the factors that the regulator will need to consider in assessing whether the business strategy is sound. These will include assessing the reasonableness of the calculation of the specified costs such as the scheme’s set-up, running and continuity costs. The reason for taking a regulation-making power is primarily that the requirements under these regulations will need to be flexible and responsive to an evolving market. They will need to take account of a variety of different structures and funding arrangements which may change over time to ensure that the risks can continue to be mitigated effectively.
It will, of course, always be open to Parliament to debate any regulations made under this power, but requiring all such regulations to be debated as a matter of course, particularly in view of the fact that some of the changes to be made may be relatively minor, does not seem proportionate. It is for these reasons that we think that the negative procedure is appropriate. However, I appreciate the concerns expressed by noble Lords and I will consider the matter further. In particular, I will consider the proposition that the noble Baroness makes elsewhere in her amendments that the first set of regulations should be subject to the affirmative procedure with the negative procedure for amendments thereafter. I hope that I have helped to answer the concerns raised, and I invite the noble Baroness to withdraw her amendment.
I thank the noble Lord for his detailed and helpful comments. I hope I have followed them all but I will read Hansard at leisure to make sure that I have captured them. In terms of money purchase, I completely accept that one would not want to create a regime that allows arbitrage between a weaker regime and a stronger one on non-money benefits, and I agree that it needs to be proportionate. My main concern is that given that everyone, including the Government, recognises that a key risk with a master trust is the members having to bear the cost of failure, then if there are assets of different types of members in that master trust, it is very important to have clarity about how the risk is shared or borne and the rules that apply. It is helpful that the Minister has confirmed that the Pensions Regulator will not be able to take into account the assets backing non-money purchase benefits when assessing financial resources and capital adequacy because it is the first time that we have had that clearly confirmed. However, I am still a little unclear as to how that will translate into equal levels of confidence when an actual triggering event occurs, and what will be the rigour around clarity as to which asset belongs to each benefit class. If I may presume, it would be helpful to the Committee to have a note or a letter setting out the thinking on that because it might address some of the issues which have certainly been of concern to my noble friend and me.
On the matter of capital adequacy and the amendment to Clause 8, I am anxious not to anticipate what I think will be a larger debate around Amendment 21. I do not want to run the risk of repeating myself, but it is the debate about what happens if a capital adequacy regime fails and the resources are simply not there. I will try not to go there, but the Minister’s comments have been helpful. There is still a lack of confidence about how the key concepts will be interpreted under the regime. When the phrase “more flexible” is used, I tend to have an instinctive reaction that it could actually reduce the level of confidence rather than increase it. More flexibility does not always produce good outcomes. If the Minister could consider that regulation should be subject in the first instance to the affirmative procedure rather than the negative one, that would be really helpful because people are struggling. They do not want to hold up the Bill but the capital adequacy regime in Clause 8 is so integral to the linchpin the Government are providing that people are anxious to understand it. That would be a helpful concession if the Minister is able to make it. I am happy to withdraw the amendment.
Amendment 4 withdrawn.
Amendments 5 and 6 not moved.
Clause 1 agreed.
Clause 2 agreed.
Clause 3: Prohibition on operating a scheme unless authorised
7: Clause 3, page 2, line 33, at end insert “under all of the provisions of Part 1”
My Lords, in moving Amendment 7 I shall also speak to Amendments 8 and 78. Amendment 7 would require that, for a master trust scheme to be operated, it must be authorised under all the provisions of Part 1. Part 1 covers provisions relating to authorisation, supervision, triggering events, continuity options, pause orders and withdrawal of authorisation—in others words, the totality of the Bill’s requirements apart from Part 2, which deals with administration charges.
We have already touched on the reason for the amendment with our reference to the Constitution Committee. In its letter of 11 November to the Minister, the noble Lord, Lord Freud, it drew specific attention to Clause 39, which we just debated, pointing out that it could be used not only to extend the master trust regime to schemes to which it might otherwise not apply, but to prevent a regime applying in whole or in part to schemes to which, according to the terms of the Bill, it would otherwise apply. We would counter this by deleting the authority of Clause 39(1)(b) with Amendment 78. As I said, we would require all the Bill’s provisions to apply if someone is to be authorised to operate a master trust.
Clause 39, as we have debated, is an extraordinarily wide power to allot to the Secretary of State, notwithstanding the proposed use of the affirmative resolution procedure. I suggest it is incumbent on the Minister to do much more to justify these powers. In what circumstances will it be envisaged that the provisions would be disapplied? We identified some areas, but which provisions do the Government have in mind? This gives the opportunity to disapply some or all of the provisions. Some might be taken out of the scheme entirely—AVCs, for example—but how would they be partially disapplied? Further, if the provisions are to be ignored, what authority might there be to make alternative arrangements? What other regulatory procedures would kick in? This legislation is important to protect the savings of millions of people. However, much still needs to be developed.
Amendment 8 would require that a scheme’s policies relating to systems and processes be added to the list of matters to be included as part of the application. While we acknowledge that the Secretary of State can, by regulation, add to the list of matters that have to be addressed as part of the application, it seems odd not to include in the Bill information regarding matters about which the Pensions Regulator should be satisfied pre-authorisation.
Amendment 8 would also require the application to set out the extent to which it proposes to adopt the master trust assurance framework. This is a probing amendment. As an at least interim response to the acknowledged poor standards of governance administration, in 2014 the Pensions Regulator and the ICAEW developed a master trust assurance framework to help improve governance for DC schemes. This is a voluntary framework that has been adopted by only a minority of master trust schemes to date—some 11 out of a current total of 84. It involves commissioning an independent reporting accountant to assess the design and operational effectiveness of the control procedures in place. As we know, there are two types of report: type 1 checks the design of a scheme’s control procedures; type 2 checks the operational effectiveness over a reporting year.
The point has been made to us that, other things being equal, accreditation will increasingly become a commercial imperative for providers so they can demonstrate that their scheme is well run. We agree with the Government that simply making the assurance framework compulsory is not a full response to the risk that such master trust schemes engender. In contrast to the Bill, it does not cover, for example, the financial stability of the provider and capital adequacy. Although it is not an alternative to the legislation, a question arises as to the future of the framework. This is particularly pertinent, as it appears that the regulations which will enable most of the Bill to come into force are some way off—possibly two years. Can the Minister give us the Government’s view on what should happen in the interim? We urge them to set out some analysis of the key areas of consistency between what the Bill requires, in so far as it can be determined, and the assurance framework, and to encourage schemes which have not obtained assurance to do so.
The FCA states that master trusts are expected to obtain independent master trust assurance to demonstrate the meeting of standards of governance and administration that meet the DC code and DC regulatory guidance. Clear indications from the Government are vital now so that schemes under the Pensions Regulator and the ICAEW can know where they stand. I am aware that the noble Lord, Lord Flight, has an amendment still to come. I will withhold my comments on that until we have heard from him. I beg to move.
My Lords, I support Amendment 8. It is disappointing that reference to the master trust assurance framework was not already in the Bill, particularly given that the accreditation procedure confirms the rigour in the administrative procedures within the master trust. It is right that that should be added.
My Amendment 9 is a probing amendment to ask whether a continuity strategy not be the ongoing responsibility of the trustees rather than something which the regulator determines.
My Lords, this group of amendments relates to the nature of the authorisation regime, the requirement to meet the criteria, the information provided in the application and the regulation-making powers to vary the scope of the regime in respect of specified characteristics.
Amendment 7, tabled by the noble Lord, Lord McKenzie, and the noble Baroness, Lady Drake, would modify the central tenet of the authorisation regime: the prohibition on a person operating a master trust scheme unless the scheme is authorised. It would amend Clause 3(1) so that it read:
“A person may not operate a Master Trust scheme unless the scheme is authorised under all of the provisions of Part 1”.
The prohibition on operating a master trust scheme has been drafted so that a person may not operate a master trust unless it is authorised and that, to become authorised, the master trust must satisfy the Pensions Regulator that it meets the authorisation criteria. As is set out in the Bill, these are that the persons involved are fit and proper, that the scheme is financially sustainable, that the scheme funder meets certain requirements, that the scheme has sufficient systems and processes to run the scheme and that the scheme has an adequate continuity strategy.
All the criteria must be met in order for the master trust to be authorised. They must continue to be met on an ongoing basis, with the Pensions Regulator having the power to withdraw authorisation if it ceases to be satisfied that all the criteria are met. It is these criteria that are relevant for determining whether a master trust should be authorised. For that reason, I am happy to be able to reassure the noble Lord that all the authorisation criteria must be met for the scheme to be authorised and for the master trust to be allowed to operate. I hope that he will agree that the amendment is not necessary.
I would be delighted to agree that the amendment was unnecessary, but Clause 39 is about the Secretary of State making regulations,
“applying some or all of the provisions of this Part”,
and in particular,
“disapplying some or all of those provisions to Master Trust schemes that have the characteristics set out in the regulations”.
This is the point that we are getting at: if you are in, you should be in in respect of all the provisions. What alternative situations are envisaged in which just some of them might apply?
I will come to Clause 39 in just a moment but my understanding is that at this stage all the criteria must be met. Clause 5(5), for example, says:
“If the Pensions Regulator is not satisfied that the Master Trust scheme meets the authorisation criteria, it must … refuse to grant the authorisation”.
That implies that it must tick all the boxes. I will come to the point that the noble Lord just raised about whether Clause 39 trumps some of the requirements in Clause 5.
In the hope that some in-flight refuelling might arrive on Clause 39 in the meantime, let us turn to Amendment 8. Tabled by the noble Lord, Lord McKenzie, and the noble Baroness, Lady Drake, it would add to the information that the trustees of a master trust scheme seeking authorisation must submit as part of their application. Specifically, it would require that the scheme must submit policies that relate to the systems and processes authorisation requirement of the Bill, and it would require that the scheme submits some form of statement setting out the extent to which it is prepared to adopt the standards set out in the master trust assurance framework.
The first part of the amendment points to the regulations made under Clause 11, which are quite extensive. That clause deals with the requirement for a master trust to have adequate systems and processes. The Bill provides that these regulations may cover certain areas, such as processes for risk management and resource planning, which the Pensions Regulator must take into account in deciding whether the requirement is met. However, the Bill contains no provision for schemes to have policies in relation to the systems and processes requirement. It requires only that the scheme meets those requirements to become authorised. Requiring master trusts to include this information as part of an application creates a new requirement for those running schemes, who will have to develop these policies, but would not of itself ensure that the systems and processes are suitably robust. It is not clear how placing that additional requirement on the industry would increase protection for the members of master trust schemes.
Of course, it is important that the regulator has enough information to be able to assess whether schemes meet the criteria and it is in the interests of any applicant to provide such information to ensure that the regulator can be satisfied that the criteria are met and the application granted. Certain key documents are required under Clause 4, which also contains a regulation-making power to allow the Secretary of State to set out further information to be included in an application. We wish to consult on this matter before deciding what this information should be, and in that context can take on board the point made by the noble Lord, Lord McKenzie. We would also wish to retain appropriate flexibility to update the requirements at a future point to reflect experience of operating the new regime or changes in market practices.
The second piece of information that this amendment would require is a statement setting out the extent to which the scheme is prepared to adopt the standards set out in the master trust assurance framework. This would not be appropriate given the stringent new requirements the Bill introduces for master trust schemes, which go beyond those required to achieve accreditation under the framework. The master trust assurance framework provides a valuable set of principles and standards for good governance but it is and was always designed to be voluntary. I agree with what the noble Lord just said—we should encourage people to sign up.
In addition, as the amendment itself notes, the ownership of this framework rests with the Pensions Regulator and the Institute of Chartered Accountants in England and Wales. It will be for them to determine the future of the framework in the light of the new legislative requirements. It would not be appropriate for the Government to point towards this framework in primary legislation when we do not know what direction it will take or what its future will be. I hope that provides clarity about the relationship between the master trust assurance framework and the authorisation regime, and I trust it explains why the Government do not consider this amendment appropriate.
Amendment 9 is a probing amendment from my noble friend Lord Flight, which would remove the requirement for a master trust scheme to submit a continuity strategy to the Pensions Regulator as part of an application for authorisation. The master trust authorisation regime put forward in the Bill has been designed to protect the interests of scheme members by addressing the specific risks that arise in master trust schemes. The key to the regime is that master trust schemes will not be able to operate unless they have obtained authorisation to do so from the regulator. To do this, the trustees must satisfy the regulator that the scheme meets the authorisation criteria. One of those criteria is that the scheme must have an adequate continuity strategy.
We will debate the details of that strategy in further detail when we discuss the amendments to the relevant clause, but for the moment, suffice it to say that a continuity strategy is a document that sets out how the interests of the scheme members will be protected if the scheme experiences a triggering event. Of course, the trustees have an obligation towards the members of the scheme but the Bill introduces a new process for the Pensions Regulator to be satisfied that before a master scheme can start trading it has met the necessary standards, which I have just mentioned. A triggering event is an event which could put the scheme’s future at risk.
The requirement to submit a continuity strategy is a very important part of the authorisation process. Ensuring that master trusts have from the outset given proper thought to what will happen if things go wrong and have drawn up a strategy is vital to ensure that members are protected. The regulator cannot determine whether the master trust has an adequate strategy if it has not had sight of it. If the strategy was not submitted as part of the application, the regulator could not make a decision on whether or not the scheme should be authorised. I hope that explains to my noble friend why I must resist his amendment and I hope he will consider not moving it.
Amendment 78, tabled by the noble Lord, Lord McKenzie, and the noble Baroness, Lady Drake, would prevent the Secretary of State being able to make regulations disapplying some or all of the provisions to master trust schemes that have the characteristics set out in the regulations. This would mean that the application of the regime could not be modified for particular master trusts. As my noble friend Lord Freud said in the debates on the first two groups of amendments, considerable care has been taken in considering the scope of the Bill’s provisions to ensure that we address the risks and respond proportionately. Similarly, great care has been taken in crafting the definition of master trust to meet the policy intention. It is, however, necessary to have some flexibility in the application of the regime.
There are some schemes, such as those highlighted earlier by my noble friend Lord Flight, where application of the full regime may not be appropriate. That is why Clause 39(1)(b) makes provision allowing for the disapplication of some or all provisions of the Bill for certain schemes. Again, as my noble friend mentioned in speaking to the first group of amendments, this need for flexibility is driven by the context of the current market. Master trusts are a recent development in a rapidly changing pensions landscape, which continues to evolve. We therefore need some flexibility to be able to respond to these changes. It is for these reasons that we have taken this power. We recognise, however, that such regulation-making powers have the potential to alter the scope of the regime and that noble Lords will wish to debate and approve the making of any such regulations. For this reason, the regulations are subject to the affirmative procedure.
Turning to the specific questions about what other regulatory provisions might kick in if part of Part 1 is disapplied, we would disapply only if we did not think it was proportionate to apply the regime due to other existing protections in place. Finally, I recognise that Clause 39(1)(b) gives the power to disapply all or part of the provisions. We do not currently envisage disapplying part of the regime, although this debate has raised some interesting points around certain schemes and we need to allow for future developments in the industry. I hope that clarifies in part some of the issues raised by the noble Lord, Lord McKenzie, and that he might consider withdrawing his amendment.
I listened carefully to what the Minister said. Clause 39(1) has two parts, (a) and (b). Paragraph (a) would apply some of the modified applications in respect of schemes that are currently not master trusts, while paragraph (b) would disapply some of the provisions in respect of schemes that are already recognised as master trusts. There is no question of their identity under Clause 39(1)(b): they are master trusts. The Minister said that the Government’s policy was that they would not modify any application on the authorisation criteria for master trusts, or that they would modify those criteria for existing master trusts only if there was an alternative regulation in place somewhere else. Are we therefore talking about a substitution, so that the authorisation criteria for master trusts would be modified only if there was a pre-existing regulation or piece of legislation that met the part that it needed to play? Is that what I understood him to have said?
My Lords, perhaps I may make two quick points in response to the Minister’s explanation on these amendments, which was on the whole very helpful. The first is a wide point in support of the plea of the noble Lord, Lord Flight, that trustees need to be left with some discretion. I understand the responsibilities of trustees in a defined benefit context and I cannot believe that they are that different in a DC context. There is a body of trust law which they can found on; they have duties and responsibilities flowing from that. I think that a scheme’s continuity strategy would be an integral part of what trustees would want to do anyway. They would be derelict in their duty if they were not doing that, so the point made by the noble Lord, Lord Flight, is important. Other amendments which we shall come to later in Committee seem to take trustees for granted and use primary legislation to require them to do things that would interfere with their proper trustee duties. I would like the Minister to reflect on that.
My other point is that although I agree with the case of the noble Lord, Lord McKenzie, on Amendment 8 in preparing to adopt a master trust assurance framework— I do not make this as a cheap point just because I am Scottish—the Pensions Regulator and the Institute of Chartered Accountants in England and Wales may give the best advice in town but there is another part of the United Kingdom with a trust law which is, in some respects, slightly different from that of England and Wales. The Minister is on pretty firm ground in saying that putting this into legislation might startle the horses north of the border. We need to remember that trust law differs in some respects on each side of the border. However, the point made by the noble Lord, Lord McKenzie, was in principle the right approach. I support what he was trying to do but the Minister was also right to say that Amendment 8, as drafted, would not be acceptable—certainly not to me, if nobody else.
If I may respond briefly to the first point made by the noble Lord, Lord Kirkwood, we are rolling out auto-enrolment, where employers have to enrol employees into a policy. Very substantial sums of money are in the process of being invested and it is crucial that there should be public confidence in the regime. I accept entirely what he said about the responsibility of trustees but we want to go beyond that and have a statutory framework in which people can have confidence that their master trust, which is getting their money and the employer’s money, is robust, has been approved and ticks all the boxes that we have outlined in earlier clauses. This is not to take away from the responsibilities of trustees but to give an added bonus of public endorsement and confidence in an area of public policy.
I thank the Minister for his detailed reply to the amendments. In relation to the amendment tabled by the noble Lord, Lord Flight, we, too, would not be able to support it. The continuity strategy is very important. It sets out how members’ interests are to be protected if a triggering event occurs. Crucially, it sets out levels of administration charges which apply, and it must be approved by each of the scheme funders. It is a fundamental part. As for ignoring the trustees, the trustees themselves have to start the process to apply for authority, so they are covered in that respect.
I note what the Minister and the noble Lord, Lord Kirkwood, said about the institute’s framework. I am not sure I need to declare an interest as a retired member of the institute. It is a long time since I did any meaningful work in that regard.
My noble friend Lady Drake properly probed the Minister’s response to misapplying parts of these provisions. I think we want to go away and think long and hard about getting some more information on that. Basically, the Minister is saying that they would not apply this unless they were certain there was a satisfactory alternative in place. That is fine as a matter of principle but we would like to understand a bit better what likely alternative arrangements would be in place for the sorts of disapplications we would seek to engender by this. I beg leave to withdraw the amendment.
Amendment 7 withdrawn.
Clause 3 agreed.
Clause 4: Application for authorisation
Amendments 8 and 9 not moved.
10: Clause 4, page 3, line 15, at end insert—
“( ) the scheme’s member engagement strategy.”
My Lords, I shall speak also to the other amendments in this group, Amendments 25, 31, 36, 41, 43 and 44. Amendment 10 adds to the matters which must be part of the application for authorisation of a scheme’s member engagement strategy. Understanding members’ views and needs is essential to designing investment strategies and to the assessment of value for members. It is, or ought to be, an essential component of designing a pension scheme and something which is integral to its creation and continuance. Amendment 25 is a parallel amendment. It requires that the Pensions Regulator should also be satisfied that the scheme has set up a communication strategy defining how it will communicate with members. Indeed, as the DC guide sets out:
“Good member communications, provided at the right time and in the right format, are vital if members are to engage and make decisions that lead to good outcomes in retirement”.
The strategy should cover not only style and approach but key content, and the code expects all communications sent to members to be clear, relevant and in plain English. Preferred methods of communication should be checked with members. Some will be more technologically savvy than others. A strategy should also cover the need for ongoing communications throughout membership to help members prepare for choices at retirement.
We know that pensions can seem complex and confusing to some and that the recent growth in schemes has largely been due to auto-enrolment, which has harnessed the power of inertia, the need not to make a choice. But at retirement, or earlier, new flexibilities now offer an increased range of choices which encourage the reverse of inertia, making effective communications more important. The risks of not communicating effectively on pensions are all around us: the growth of scams—albeit there is, belatedly perhaps, some good news due from the Government this week; confusion over the new state pension; and a failure to communicate properly changes to the state pension age, hence the WASPI campaign.
The Pensions Regulator should have the opportunity to review the systems and processes related to communications just as much as the features and functionality of the proposed IT system.
Amendment 31 would require the holding of annual member meetings. If trustees are to fulfil their duties to act in the best interests of beneficiaries, they must find out what those interests are. Savers should be able to subject decisions made on their behalf to healthy scrutiny and challenge. The trustees or managers of relevant multi-employer schemes must make arrangements to encourage members of the scheme, or their representatives, to make their views on matters relating to the scheme known to the trustees or managers. Master trust schemes would be required to include details of these arrangements in their annual statements.
Some master trusts, such as Legal & General’s as I understand it, set out extensive details of the steps they have taken to encourage members to make their views known. Although companies are obliged to hold annual meetings at which the board accounts to shareholders, no such requirement extends to pension schemes, yet the case for such an accountability mechanism is, if anything, stronger. Few investors have their entire life savings in a single company, but many pension savers are reliant on a single fund.
The Bill can address some schemes’ lack of transparency and failure to communicate adequately with scheme members by mandating annual meetings. The Pensions Regulator guidance accompanying the new DC code highlights annual member meetings as one way in which schemes can stay close to their members and focus on their perspectives. The precise format should be for individual schemes to decide, based on their circumstances, but some form of face-to-face meeting, held at least once a year, with the option to attend virtually, should be the minimum expected. Meetings would have an advisory function. It is acknowledged that for some schemes, size, in terms of the number of members, can present challenges, but we surely have the technology to handle this. In any event, the amendment is not prescriptive as to the form of the meeting.
The other amendments in the group identify specific items where the Bill is weak on keeping members informed. Amendment 36 would require that members as well as employers must be notified by the trustees of the occurrence of a triggering event. The triggering event is potentially very significant, and as it stands, the Bill does not require the members to be informed under option 1 until a transferor scheme has been identified. If option 2 is pursued as a solution, there seems to be no obligation to inform members or indeed employers.
Amendment 41 would require that members and employers should be notified by the trustees where the Pensions Regulator is satisfied that a triggering event has been resolved. Amendment 43 deals with the duty on the trustees to pursue an implementation strategy when it has been approved by the Pensions Regulator. There is a requirement on the trustees to make the strategy “available”—I am not quite sure what that means—to the employers, but no mention of members. The contents of an implementation strategy are dealt with in Clause 27, which states that:
“An implementation strategy is a document setting out how the interests of members of the scheme are to be protected”.
However, no engagement is required with those members for the submission or approval of the strategy—unless we are missing something.
On Amendment 44, given the significance of the provisions, we support the affirmative rather than the negative procedure being used for these regulations. I beg to move.
My Lords, I rise to support the arguments that have just been expressed so well by my noble friend. In doing so, I declare an interest as a trustee and chairman of the members’ committee of NOW: Pensions, which has 1 million members and 20,000 employers signed up. The whole area of member engagement and communications is a major preoccupation for us in a period of what has been very rapid growth—not just of NOW: Pensions but of certain other master trusts.
To find the right way to communicate with 1 million people is an extremely tricky task, but we note with some interest that a range of solutions are now being developed. For example, we note that Legal & General, which I think has about 500,000 people in its trust-based schemes, does hold annual meetings, as the amendment calls for, while others who find that concept difficult are beginning to look more seriously at what they can do in that area.
Finding ways to encourage the member voice is pretty close to the top of most of our agendas. Putting communications at the heart of a master trust, which is by definition a rather sprawling outfit, is very important to try to get it to centre stage. The Government’s idea of a dashboard would help. I hope that is not being put on the back burner, because it would be a very useful tool to show people where they are with their pension investments and entitlements. Trustees themselves need to work very hard to explain basic messages about pensions to the people who have signed up. A pension pot, for example, is the members’ money now—it is theirs. If that penny really dropped, a lot of people would take rather more interest in the process rather than simply pushing it to one side as they often do.
Getting members to see how their workplace pension sits alongside the new state pension is also important. Members need a wider view than just the workplace scheme to get a picture of their total position when they are coming up to retirement. Where schemes offer a choice of contribution rates, as some do, drawing the availability of higher contribution tiers—and associated higher employer contributions— to members’ attention would help to make them aware that these higher contributions in fact mean a greater amount of money from the employer contribution. These kinds of points are in the spirit of helping people to maximise their interest and entitlement in the pensions area. Members should be encouraged to set themselves targets, take ownership of their pot and see if they are getting a good return when they try to work out their pension arrangements for the future.
I accept that these ideas will never be legal requirements—nor should they be; they are more good practice—but they are in the spirit in which every master trust worth its salt should be acting, and they put the members of the trust more at the core of its work. A master trust needs a very good communications strategy. I support all the things that my noble friend Lord McKenzie mentioned, such as online technology and forums. We at NOW: Pensions conduct regional meetings of employers at the moment and are thinking of extending it to members, probably on a first-come, first-served basis as we are not inclined to try to hire Wembley Stadium to run the meetings.
In supporting my noble friend, I urge the Government to take this communications area very seriously and put it not on the edge of their requirements but in the middle, right at the core of the work that is to come.
My Lords, I very much welcome the opportunity to support this group of amendments. I have put my name to Amendment 10 but, having heard the speeches so far, I can see no difficulty in supporting the rest of the amendments in the group—and if they come back on Report I would be pleased to sign up to them. The arguments have been strongly made but I will make three specific points about why member engagement is really important.
The first reason is that the risk in contributory pensions is totally with the employee. They are not like direct benefit schemes, where the employer is sharing a lot of the risk; in this type of pension, employees are holding the risk and therefore their engagement and involvement with how their money is being handled is pretty important. If you are introducing a regulatory scheme at this stage, it should be a central point.
My second point is that if you are introducing a regulatory system, you do not want sole reliance on the regulator to make sure that things are running well and that members are satisfied; you want a counterweighting source of evidence and interest from members themselves to support that regulatory role. That is why this should have the attention of the Government in the Bill.
The third reason is that, as we have already heard, organisations such as Legal & General are already doing that. If that is good practice, the Government should take the opportunity of the Bill to encourage it, take it forward and make it more widespread. The concept of an annual meeting, which Legal & General already accepts as a valuable new forum for communication with members, should be examined and included as an option in the legislation. That would be a way to introduce the discipline of finding out what members want and to make it the fiduciary duty of the trustees to understand what members want from their pension investment. For all those reasons, the Government must take this very seriously. I hope that they will look at this more closely so that when we get to Report, there will be no need to retable the amendments.
First, I support my noble friend’s remarks about the master trust assurance framework under the previous amendment, because that framework already exists and there are a number of shortcomings in it, so I could not support including it in the Bill’s requirements.
However, in these amendments we are dealing with member engagement—and, indeed, employer engagement, because with a master trust, the employer has in a number of ways handed over responsibility to the trustees. Many of the smallest employers who are currently joining auto-enrolment and using master trust schemes are not fully aware of all the implications and intricacies of pension arrangements. Therefore, it is important to have member engagement and information requirements as part of an authorisation process.
In particular, this might help to address one of the big injustices that your Lordships’ House has not yet addressed. Members who earn less than £11,000 a year who join a pension scheme—in particular, a master trust—which happens to use a net pay arrangement, are charged about 25% more for their pension than they would be if their master trust used a different scheme. I have to mention that that is apart from the NOW: Pensions master trust, which has itself made up the extra money that those low earners are unable to receive from tax relief they are due because of the administration of their scheme.
If there were proper member engagement and information that told both members and employers that this particular complicated administration arrangement denies low earners a significant amount of money, perhaps the operation of the schemes would work better in members’ interests and the employers themselves would be better informed.
I am very grateful to all noble Lords who have taken part in this debate, and I agree with nearly everything that the noble Lords, Lord Monks, Lord McKenzie and Lord Stoneham, and my noble friends have said. We should encourage people to take an interest in their pension pot. Having auto-enrolled them, we should enfranchise them by giving them regular information. I agree with those who suggested that the pressure should come not just from the top down but from the bottom up. These amendments, in their various ways, all address the issue of how trusts should communicate and engage with their members. Then there is an amendment on the procedure for the regulation-making power about the time within which the implementation strategy must be made available.
As I said at Second Reading, I support the principle of member engagement and communication. Master trusts are no exception to any other pension scheme in seeking to keep their beneficiaries in the loop. Having said that, I may have one or two issues with some of the amendments. First, however, I shall deal with the three amendments relating to general communications. The first two relate to proposed member communication and member engagement strategies, and the third would make provision requiring the trustees of an authorised master trust scheme to hold an annual member meeting. I will then pick up on the important matters raised in the last four amendments in this group relating to communications during the triggering event period. Perhaps I may write my noble friend Lady Altmann about the position of those on just £11,000, who may be disadvantaged by the current regime.
Amendment 10 would add to the information that the trustees of a master trust scheme seeking authorisation must submit as part of their application for authorisation. Specifically, it would require the scheme to submit a member engagement strategy. As I said a moment ago, I have a lot of sympathy with the rationale behind this amendment. It is important for schemes to operate in a transparent manner, and for members to be kept informed on key matters, such as the charges that apply to them and the amount of money they have accrued in the scheme, which, as the noble Lord, Lord Monks, said, is their pot.
Indeed, the position of this and previous Governments on this matter is reflected in the various comprehensive statutory requirements that already apply to all schemes, including master trust schemes. These requirements set out the minimum standards for communicating with their members. The Pensions Regulator also publishes guidance for trustees which sets out the further standards it expects quality schemes to meet in relation to communications.
Some of the key requirements include the following. Trustees must provide members with basic information about the pension scheme within two months of their joining. There are also requirements to provide members with updates where this information changes. Trustees must provide most members with a statutory money purchase illustration, which illustrates a member-specific projected pension, and an annual benefit statement that provides details of contributions credited, before deductions, to the member in the preceding scheme year. That information must be provided within 12 months of the end of each scheme year.
Trustees must provide other information on request, including: the trustees’ annual report, including the scheme’s investment report, audited accounts and the auditor’s statement; scheme rules or other documents constituting the scheme, including names and addresses of participating employers; a statement of investment principles; and finally, ad hoc benefit statements and transfer values—obviously key pieces of information.
Those are just the statutory measures. The Pensions Regulator publishes detailed guidance for trustees about the standards it expects quality schemes to meet to ensure they communicate effectively and transparently with their members. Details of that can be found on its website.
The Bill does not seek to stipulate how the trustees of a master trust should run an excellent scheme, or to replicate other general requirements that apply to schemes more broadly. It seeks to address the key risks that arise in relation to master trust schemes to ensure that the interests of scheme members are protected. The Government’s view is that, provided that the communication requirements which already apply to all schemes are met, the trustees of an authorised scheme should have the ability to exercise their discretion in considering the most effective forms of member engagement without being unduly constrained by an additional prescriptive statutory requirement. In this debate we have heard many examples of good practice in that area. It is also worth noting that the amendment does not define the term “member engagement strategy” so, as tabled, it is not entirely clear what this would constitute. I hope that explains that, while I agree with the principles behind the amendment, I am not of the view that it should form part of the Bill.
I shall now touch briefly on Amendment 25, as tabled by the noble Lords, Lord McKenzie and Lord Monks, and the noble Baroness, Lady Drake. This amendment is very similar to the one that I have just touched on, although the precise wording is:
“The scheme must set out a communication strategy to define how it will communicate with members”,
and the amendment is inserted into a different clause. The effect of the amendment would be very similar, in that the content of such a strategy would become a matter the regulator must consider when determining whether it is satisfied that the scheme meets the authorisation criteria relating to the adequacy of systems and processes. As with the amendment we have just discussed, the effect would be that the trustees of a scheme must prepare such a strategy, although again its proposed content is not entirely clear. For this reason, the points that I would raise regarding this amendment would mirror the points I set out a moment ago, which I shall not repeat. I hope that argument might be accepted.
Amendment 31 would require the trustees of an authorised master trust scheme to hold an annual meeting which would be open to all members of the scheme and made accessible online. While I have set out my views on the more general matter of member communications, there are specific implications raised by this amendment which need further consideration. It is not clear that requiring trustees to hold an annual member meeting is necessary, nor that such a measure would significantly improve communications between the scheme and its members. Some master trust schemes have hundreds of thousands of members—indeed, I think we heard a higher figure from the noble Lord, Lord Monks. It is not clear that there is demand among this membership for such a meeting, nor is it clear what the financial and administrative implications of hosting such a meeting would be for master trust schemes.
According to the amendment, the meeting would need to be capable of hosting every scheme member. While a great many would in theory be able to connect to the meeting online, it seems likely that, in a scheme with hundreds of thousands of members, a significant number might need or want to attend in person. The cost of hosting a meeting capable of accommodating that number of attendees, in person and online, has not been set out, but it could be significant and might not be in the best interests of scheme members, especially if, in the event, demand turned out to be low. That is not to say that schemes should not hold such a meeting but, as I have said, the Government’s view is that, provided that the communication requirements which already apply to all schemes are met, the trustees of an authorised scheme should have the ability to exercise their discretion in considering the most effective forms of member engagement without being unduly constrained by additional prescriptive statutory requirements.
I turn to the amendments related to the triggering events—and here the balance is crucial. My noble friend Lord Flight touched on that issue in his intervention. Amendment 36 requires the trustees of master trust to notify members when it has a triggering event. Amendment 41 requires the trustees to notify the employers and members in the master trust that the Pensions Regulator is satisfied that the triggering event has been resolved. Amendment 43 requires the implementation strategy to be made available to members, in addition to employers.
The principles that we have applied to the policy and the Bill measures about communicating with members during a triggering event period are to consider, first, the current level of member engagement and understanding; secondly, the potential effect of the provision of certain types of information, which, again, my noble friend touched on; and thirdly, the level of protection afforded to provide demand-side pressure, in the absence of the provision of information or assumed member engagement. It is the consideration of these principles that leaves me with some doubt that the amendments as proposed are appropriate.
Amendment 36, tabled by the noble Lord, Lord McKenzie, and the noble Baroness, Lady Drake, would require the trustees of a master trust that had had a triggering event to notify the members of that scheme that this event had occurred, and other such matters as will be set out in regulations under this clause. Triggering events are events that pose a risk to the scheme and could lead to it failing. These events could put members’ pension pots in the scheme at risk. The scheme’s trustees must notify the participating employers that the event has occurred, and such other information as will be set out in regulations.
A master trust that has had a triggering event poses an increased risk to the members’ savings in the scheme. That is why additional measures and protections are required at this point—this is, indeed, what the Bill does. These aim either to resolve the issue the scheme has had and, with the regulator’s approval, enable it to continue, or, where this is not appropriate and the scheme is going to wind up, make sure that the members are transferred out. Following a triggering event, additional measures are in place to protect members’ pension pots and enable the Pensions Regulator to have more involvement with these schemes. The regulator will have additional oversight over schemes that have experienced a triggering event and extra controls that it can use. For instance, where the regulator was very concerned about a master trust, these controls include the regulator being able to direct the scheme not to take on any new members. This might be where the regulator considered that there was an immediate risk to the interests of the members of the scheme and that it was necessary to protect the interests of the generality of the members. This is covered by Clause 31.
This amendment would require the trustees to notify the members of the same information that they notify employers of. We specifically did not require schemes to notify members at this stage—again, for the reason that my noble friend gave—as we did not want to worry members unnecessarily and at a point when definitive information about the next steps may not yet be available. This is because informing members could risk them opting out of the scheme and stopping to save in a pension. We have instead provided additional protections during this period. Many members will have joined because they were automatically enrolled into the scheme by their employer. It will not have been an active decision on their part. Also, many members in this situation tend not to actively engage with the scheme of which they are a member. We would hope that, in many cases, the triggering event the scheme has experienced will be resolved and the scheme will simply continue, so in that case the members should not see any disruption to their pension saving, and we would not want them to be unduly alarmed or confused.
If members thought that their scheme was going to collapse and could not be given information about the next steps to maintain and protect their pension savings, they might opt out of saving in their current scheme, as I just said, and even lose confidence in pensions and not continue to save in any pension at all. Where the scheme is going to have to wind up, members would be informed ahead of this in accordance with requirements under Clause 24 and the regulations made under it. If the scheme is going to pursue continuity option 1, members will be informed of the situation well ahead of anything directly impacting them and given information about options.
The aim behind the clauses in this section of the Bill is that, where a master trust experiences a triggering event, members of the scheme continue to save in a pension. To this end, we do not think that members should be informed at the stage set out in the amendment because of the adverse implications it could have and the absence of any practical advantage to the members that would flow from them being informed at such an early stage. However, we recognise how important it is that members are informed well ahead of something happening that directly impacts on them and may disrupt their pension saving, and I think the Bill gets the right balance.
Amendment 41 seeks to make the trustees notify the employers and members in the master trust that the Pensions Regulator is satisfied that the triggering event has been resolved. This situation is where a master trust has experienced a triggering event but has resolved it, and the regulator is so satisfied. The aim behind Clause 25 is that, where trustees try to resolve the triggering event, they have the opportunity to do so, so the scheme can continue and members continue to save with as little disruption as possible. Amendment 41 seeks to make the trustees notify the employers and members in the master trust that the Pensions Regulator is satisfied that the triggering event has been resolved, where the regulator has notified the trustees to this effect. The Bill already provides employers with sufficient sight of this under Clause 22. Once the implementation strategy is approved, the trustees have to pursue the continuity option identified in the strategy and take the necessary steps. If something dramatic happened that caused the choice of continuity option to be changed or if the implementation strategy was required to be altered for some other reason, the trustees would have to seek the regulator’s approval. In principle, we agree with the objective of this amendment. However, we consider that we achieve the same outcome as intended but through a different route.
I am conscious that this group of amendments is taking a long time.
Amendment 43 would require the trustees of a master trust that had had an implementation strategy approved by the Pensions Regulator to make that strategy available to the members of the scheme. Clause 28 requires the trustees to pursue the continuity option that they have set out in their implementation strategy once the regulator has approved the strategy, and it requires the trustees to undertake the steps they have identified as being needed in that strategy. Under Clause 28(2), the trustees have to make the strategy available to employers. Many master trusts have a large number of employers and members participating in the scheme, particularly when compared with more traditional types of occupational schemes. The high numbers using a single scheme are likely to make the closure of a master trust scheme more complex and long-winded. Also, employers tend to have less involvement with and oversight of a master trust than they would of a scheme they had set up and run themselves. That is also true of members, especially where they have been automatically enrolled into the scheme by their employer. This means that if a scheme experiences a triggering event, it needs to have an adequate plan for dealing with this, and the regulator needs to have closer supervision of the scheme.
The detailed strategy needs to set out the areas that need to be tackled and what needs to be done in each area. This should make it easier and more likely that the regulator will be able to hold the trustees to the strategy and monitor it effectively. The implementation strategy must set out which continuity option the trustees are pursuing and how they will do this. Without going into detail, I think that we have the balance right in notifying employers and employees about what is going on.
Amendment 44 would require the regulations in relation to the time period within which a scheme must make its implementation strategy available to the employers to be subject to the affirmative, rather than the negative, resolution procedure. I refer to what my noble friend said a few moments ago about the balance between the affirmative and negative procedures. We recognise the strong feeling that has been aroused. We have read the reports of the Constitution Committee and the Regulatory Reform Committee. We want to reflect on whether we have the balance right and come back at a later stage.
I apologise for the length of that contribution. I hope that I have explained why the Government are of the view that, while it is important for all pension schemes to communicate effectively with their members, these specific amendments would not be appropriate for inclusion in the Bill, and I hope that the noble Lord will consider withdrawing his amendment.
My Lords, I start by thanking all noble Lords who have spoken in this debate, most of whom have supported the amendments. My noble friend Lord Monks made reference to good practice for master trusts. He also asked about the pensions dashboard, but I do not know whether we have any further information on that. The noble Lord, Lord Stoneham, set down the three key reasons why he supported member engagement: the risk lies with the employee; there should not be sole reliance on the regulator; and some schemes, such as L&G, are already doing it. The noble Baroness, Lady Altmann, raised an interesting point, probably relating to an earlier debate, about the big injustice for low earners because of how the tax system works. That is something that we ought to return to before the Bill leaves this House, and we should be grateful for that intervention.
I thank the Minister for a very full reply. I would certainly like to go away and read the record on what he referred to as the balance that is struck in these provisions. That is an important point. I was slightly concerned about what he said in relation to Amendment 36. The implication seemed to be that you had to protect scheme members from this knowledge because they might go and do something adverse. There was a smack of paternalism there, but let me read the provisions in the round because we may well wish to return to that. I am certainly grateful for the offer to reflect on Amendment 44 and the nature of the process that will apply to the resolution. Having said all that, I beg leave to withdraw the amendment.
Amendment 10 withdrawn.
11: Clause 4, page 3, line 25, leave out first “the” and insert “any”
My Lords, this is a very simple amendment. The use of the word “the” assumes that a fee will apply and that, effectively, this legislation is laying that down. Should not it be best left to the Secretary of State or the regulator to determine whether or not a fee will apply? Hence, I suggest that “any” is substituted for “the”.
My Lords, we have Amendments 12 and 82 in this group. We are happy to support the amendment of the noble Lord, Lord Flight, on this occasion.
Amendment 12 requires a new clause to be inserted in the Bill requiring the Secretary of State to report to Parliament on the sufficiency of resources available to the Pensions Regulator for the purposes of the Bill. I think we can anticipate the specifics of the reply to that formulation but I stress that this is about trying to get something on the record today about resources, rather than it necessarily being dealt with on the basis of a clause in the Bill. We know from the impact assessment that there will be additional costs to business from funding the Pensions Regulator and an ongoing levy charge. However, like so much of this Bill, we have no further detail.
The Pensions Regulator has a very significant role in the new era of master trusts and it is vital that the regulator is resourced to play its part in full. When fully commenced, the Pensions Regulator will be responsible for applications for authorisation; judgments about fit and proper persons; decisions as to whether a scheme is financially sustainable, with all the calculations that that entails; a sound business strategy with sufficient financial resources; taking a view on whether the systems and processes used in running the scheme are sufficient to ensure that it is run effectively; and determining whether a master trust has an adequate continuity strategy. On an ongoing basis, the Pensions Regulator is the recipient of supervisory returns and scheme accounts, and must deal with significant events—whatever that may be, and we are going to come on to that—issue penalty notices where appropriate and withdraw authorisation where criteria are no longer met. Further, the Pensions Regulator has an important role as a consequence of a triggering event and winding-up. Not all these responsibilities will bite immediately. It looks as though it could be two years before the commencement of all the Bill takes effect. However, there are responsibilities before that under the transitional provisions of Schedule 2.
Currently, of course, the Pensions Regulator has a role in relation to master trusts, but it is more limited than that provided for in this legislation. The extent of resources required depends upon the volume of master trusts, now and in the future. Although aggregate amounts are expected to increase—that is both members and investments, largely through auto-enrolment—there is the prospect at least of some providers exiting the market. Clearly the workload of the Pensions Regulator is likely to be front-end loaded as the authorisation of existing master trusts is completed and the role becomes more one of supervision. Notwithstanding that, there is much detail still to be settled and we are entitled to seek comfort on the capability of the Pensions Regulator to play what is a central role in the new regime.
On funding, is it proposed that fees and levies will provide the totality of additional resources needed to meet the requirements of the Bill? What assessment has been made of any recruitment needs given the expanded role? In particular, what, if any, changes are considered necessary to the skills set of the Pensions Regulator employees and what planning is under way to meet this? This is inevitably a probing amendment, but one to focus on the operational position of the Pensions Regulator given the important additional tasks of the organisation, which we support, based on the Bill.
Amendment 82 reinforces the Government’s commitment in the impact assessment dated October 2016. This recites that the level of uncertainty currently is too great to provide a meaningful estimate of the net cost to business of the introduction of the authorisation and supervision regime. However, it promises a full assessment at the secondary legislation stage. Our amendment causes this to be before triggering the bringing into force of the main provisions of the Bill. We seek some further clarification on timing, as presumably all the secondary legislation will not arrive at the same time. Are we going to get the impact assessment piecemeal? The purpose of these amendments is to make sure that we get the information about the overall impact of these provisions.
My Lords, these amendments all concern the resources, financial or otherwise, which will be required to ensure that the Pensions Regulator can implement and operate the master trust authorisation regime.
Amendment 11, tabled by my noble friend Lord Flight, would change the wording of Clause 4 so that subsection (5)(b) reads:
“The Secretary of State may make regulations setting out … any application fee payable to the Pensions Regulator”,
instead of “the” application fee.
The current provision in the Bill does not require the Secretary of State to set an application fee but it is important for the Government to be clear to the industry about their intentions now—and the Government intend to make regulations that specify an application fee. It is also important for the Secretary of State to have the ability to change the application fee in the future. That is one reason for specifying this fee in regulations. The master trust industry is developing, and will continue to do so, as it adapts to the new requirements of this regime. As the industry changes, it is entirely feasible that the cost to the regulator of assessing applications for authorisation may change too.
The fee serves two key purposes. First, it ensures that the Pensions Regulator can recover the costs of processing applications from master trust authorisation without indirectly placing those costs on the wider pensions community it regulates. Without an authorisation fee it would have to recover these costs through the funding provided by the general levy, and this would not be fair given that a large number of the schemes which pay into this levy are not master trust schemes. Secondly, the fee ensures that schemes seeking to become authorised submit carefully considered applications by acting as a deterrent to submitting multiple applications.
As I hope I have explained, it is important to make provisions for regulations to specify an application fee and that the industry is clear that the Government intend to use this power. The Bill as it stands achieves this intent.
Both Amendments 12 and 82 require that a report on the subject of the Pensions Regulator’s resources is laid before the Houses of Parliament before the provisions within Part 1 of the Bill are commenced. Amendment 82 would additionally require that Parliament is presented with a report about the impacts of the master trust authorisation regime. The additional report required by Amendment 82 is described as,
“a comprehensive assessment of the impact of Part 1”.
The other report is,
“a report demonstrating that sufficient resources are available to the Pensions Regulator to carry out the requirements on the Regulator pursuant to”,
this Act. The focus of Amendment 12 is very similar, but it requires that the resources report should address the resources required to conduct the regulator’s functions under Clause 5.
I shall set out my thoughts on the matter of an impact assessment before putting forward my views on resourcing. The Government published a formal impact assessment alongside this Bill. This impact assessment was rated green and therefore fit for purpose by the Regulatory Policy Committee prior to its publication. We have already committed to submitting an updated impact assessment at the secondary legislation stage. This commitment can be found in the summary of the impact assessment published with the Bill. It is for this reason that we are satisfied that the impact of regulations will be properly considered going forward. I do not consider it necessary or appropriate to include further specific provision within the Bill which requires a report setting out the impacts to be produced.
I turn to the resources available to the Pensions Regulator. As an arm’s-length body, the regulator receives funding from the Department for Work and Pensions and the budget it is allocated follows an annual business planning review conducted by the regulator with input from the department. In brief, the way the review works is as follows. The regulator submits a draft business plan to the department, which includes an assessment of its priorities for the coming year and an estimate of the funding it will require to deliver its statutory functions. The department reviews this plan before agreeing the regulator’s priorities and funding for the coming year. Through this mechanism, the department always ensures that the regulator has the funding it requires to deliver its statutory obligations in any given year. In the interests of transparency, the agreed business plan is always published on the regulator’s website. Furthermore, the regulator’s annual report and accounts are laid before Parliament. The annual report and accounts outline how the regulator has performed and include a financial review. The process for ensuring that the regulator has the resources it requires to deliver the master trust authorisation regime will form part of the annual business planning process in the normal way. In addition, the Government recognise that there is likely to be a peak in activity when existing master trust schemes which choose to seek authorisation submit their applications.
I would like to conclude by saying that I absolutely agree with the points that noble Lords are making through these proposed amendments. The regulator must have the resources it requires to ensure that the authorisation regime is successful and the Government must ensure that the impacts of the regime are considered with appropriate scrutiny. With that assurance, I hope that my noble friend will see fit to withdraw his amendment.
My Lords, I thank the Minister for his response. I should say to the noble Lord, Lord Flight, that I accept that having this in the Bill in those terms would not be appropriate. The purpose of the amendment is to try to have a debate around the issue and thus have something on the record. I accept entirely the proposition around annual business planning and the assurance given that there is a need and recognition that the Pensions Regulator must be properly resourced to carry out these important functions.
Although there is an impact assessment, it is quite thin. It takes up lots of paper but it is thin in terms of the numbers that were on some of the schedules. The Minister has reiterated what was in that report about how there will be a further impact assessment at the secondary legislation stage. What precisely does that mean? Is it that when the regulations are in place and have been agreed there will be a comprehensive review, or that it is going be done piecemeal as each of the components of these regulations is put in place? If we tot up the number of regulations in the Bill—I have not done it—I am sure that they will run into the several tens. How is that actually going to work and when would the secondary legislation be laid for these purposes? Will there be an aggregate impact assessment at that stage?
One of the things I have committed to do is to go back and think about how we make these regulations in the context of the noble Lord’s own suggestion of perhaps looking at the balance between the affirmative and negative procedures. In that context, the exact way in which the Government decide to present the regulations would clearly change. Regulations made under the negative procedure tend to be less of a set piece, while affirmative regulations do tend to be more of a set piece for obvious reasons. The answer to the noble Lord’s question will depend on our reflections on what we do with his proposition.
Amendment 11 withdrawn.
Clause 4 agreed.
Clause 5 agreed.
Amendment 12 not moved.
Clause 6 agreed.