Clause 4: Application for authorisation
1: Clause 4, page 3, line 17, at end insert—
“( ) the scheme’s member engagement strategy.”
My Lords, this revisits an amendment debated in Committee and requires the scheme’s member-engagement strategy to be one of the pieces of information that must be submitted to the Pensions Regulator as part of the application for authorisation. As such, it would then sit alongside the scheme and the scheme funder’s latest accounts—incidentally, that assumes there are some. In a start-up situation there may not be. Perhaps the Minister will comment on that—the business plan and the continuity strategy. The latter, of course, addresses how the interests of members are to be protected if a triggering event occurs.
As was argued in Committee, understanding members’ views and needs is essential to designing investment strategies and to the assessment of value for members. Such engagement ought to be an essential component of designing a pension scheme and an integral part of its creation and continuance.
The DC guide sets out that 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 for them in retirement. As the code reminds us, there are a number of ways in which the views and needs of members can be determined. It recommends choosing methods that are appropriate and proportionate depending on the size of the scheme and available resources. Included in the techniques which might be employed are member surveys, running workshops, holding member AGMs—although we left that degree of flexibility out of this amendment—focus groups and forums, and regular member panels.
In Committee, my noble friend Lord Monks referred to the challenges of encouraging the member voice to be at the top of the agenda. He was speaking of his experience of a master trust with some 1 million members and 20,000 employers—a different proposition from engaging with perhaps just a few thousand members and a handful of employers. As the noble Lord, Lord Stoneham, has reminded us, we are dealing with schemes where the risk is with the members—the employees—which therefore necessitates their effective engagement.
On Second Reading, and repeated in Committee, the noble Lord, Lord Young—the Minister—expressed his support for the principle of member engagement. At col. 1758 of Hansard of 21 November, he expressed “a lot of sympathy” with the rationale behind the amendment then tabled. We hope that, on reflection, he might be moved a little further and is now able to accept it. The thrust of the noble Lord’s reason for rejecting the proposition appeared to be that there are comprehensive statutory requirements covering communications with members as well as guidance from the regulator and the Bill is not about stipulating how trustees should run an excellent scheme, and that they should have discretion about how they go about member engagement, provided, that is, that communications requirements which already apply are met.
This amendment does not seek to impose any particular approach to engagement on trustees, but it would mean that they would have the opportunity to lay out for the regulator how it is proposed to go about the task, and to demonstrate an understanding of the requirements and how in fact they are to be met in the particular circumstances of each master trust. It would be wrong to see engagement and communication as just a routine matter, especially given the scale of some of the existing master trust operations and given developing technologies. It seems a little odd that the regulator is required under the Bill to assess whether a range of persons are fit and proper; to take a view on whether any particular master trust scheme is financially sustainable and receive a business plan for this purpose; to decide on whether the systems and processes to be used are sufficient to be run effectively; and to determine whether a scheme has an adequate continuity strategy to address the interests of members in the event of a triggering event. However, it can look aside from whether a scheme has an effective member engagement strategy, as it can assume that statutory requirements and regulator guidance will be followed. Frankly, this seems a bit thin.
To accept this amendment would be a very clear demonstration to the sector of the importance placed upon member engagement. At the end of the day, the members are the very people the schemes are supposed to support. What is the downside in accepting this amendment? I beg to move.
My Lords, I strongly support the case made by the noble Lord, Lord McKenzie. In my experience, in a defined benefit situation the trustee is rightly prescriptive with regard to the steps that need to be taken to satisfy a reasonable test of an engagement and communication strategy. It is blindingly obvious that it is different with master trusts, because they deal with a number of employers. Some of them might be very different in the work they do and the way they do it, so the extra link in the chain justifies this. No sensible person wants to litter primary legislation with a lot of detail. However, at the very least, the master trust needs to be constrained in law by satisfying itself in some way that it is taking steps, not just to ensure that the employers within the scheme are acting properly but so that the members of those individual schemes get the benefit of a flow of information and data which is appropriate to support the important provision of their pensions in the future. The case is well made. As I say, I am not in favour of adding things for the sake of it, but the cause is just. If, as the noble Lord, Lord McKenzie, suggests, it is kept skeletal, as long as there is some duty in the primary legislation, the Committee would be much happier to consider the passage of this legislation.
My Lords, I begin by responding to the point that the noble Lord, Lord McKenzie, made in his introduction about whether, if one was dealing with a start-up, it would have to provide accounts. Of course, it does not, because it cannot, so that bit of Clause 4(2) would not apply.
A range of amendments relating to member engagement were put forward for consideration in Committee, and during that debate and at Second Reading I made it clear that I had sympathy with the principle behind them, as I have with the case that has just been made. Member engagement is important, and members should be encouraged to develop a strong sense of ownership of their pension saving. As the noble Lord, Lord Monks, noted when we last debated this issue, the money that the scheme is managing belongs to them. I also agree that it is important that schemes should keep their members well informed, especially—again, as the noble Lord, Lord McKenzie, noted in Committee—as a member approaches retirement.
That earlier debate focused largely on member communications. Communications are not quite the same as engagement, which is a somewhat broader notion including the idea of a two-way exchange. Effective communications certainly contribute to good levels of engagement but they are not the only factor that determines whether a member develops a sense of ownership of their savings. Noble Lords may also have drawn this distinction, which is why the amendment requires that broader “engagement” strategy. In practice, however, I believe that that strategy would inevitably contain significant detail on communications from a master trust, which is why I would like briefly to revisit some of the arguments on communications which I set out in Committee.
The purpose of this part of the Bill is to introduce robust minimum requirements which ensure that the interests of master trust scheme members are protected from the risks that arise in these types of schemes; it is not a Bill that seeks to prescribe every facet of running an excellent scheme. Some of those aspects, including how required outcomes may best be achieved in relation to an individual scheme, are matters for the trustees. That is why the documents listed in Clause 4 relate to the key risks and documents directly required under the authorisation criteria, rather than to wider documentation that the scheme may have.
I also noted that there is already a series of legal requirements setting out the minimum standards for communications in occupational pension schemes, which the noble Lord, Lord Kirkwood, may have referred to. It is worth briefly recapping those requirements. Trustees must provide members with basic information about the pension scheme within two months of their joining, and they are required to update them if this information changes. They must provide most members with a member-specific projected pension and an annual benefits statement. They must also provide a wide range of information upon request, including the annual report, the scheme rules, information about the investment principles and information about benefits and transfer values.
I re-emphasise that those are only minimum standards. The Pensions Regulator publishes codes of practice and detailed guidance for trustees to help them run their scheme according to good practice. This includes guidance on member communications. Our view remains that, provided the statutory requirements are met, it should be for trustees to decide how best to manage member communications. This is one area where a good scheme has an opportunity to distinguish itself. Once the regime commences, our assurance regarding the calibre of trustees of master trust schemes will be further enhanced because they will all have passed the new fit and proper persons requirement.
I also take this opportunity to respond to a specific point that was raised in Committee. The noble Lord, Lord McKenzie, argued:
“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”.—[Official Report, 21/11/16; col. 1754.]
I thank the noble Lord for that contribution, which I have considered further. Although I cannot go as far as he would like me to, I hope that I can go a little further than I did in Committee. I can confirm that the Bill as drafted allows the regulator to take into account the systems and processes relating to communications and engagement when assessing the adequacy of a scheme’s systems and processes more broadly. I can also confirm that the Government would intend—subject, of course, to consultation—to use the regulations under Clause 11 to ensure that the regulator specifically considers a scheme’s systems and processes in relation to these important communication matters when deciding whether the scheme is run effectively.
There is of course the wider point of the engagement of individuals with workplace pension savings, which we take seriously. As part of the review of automatic enrolment that we announced on 12 December, the Government specifically committed to consider member engagement. In a Written Statement, the Minster for Pensions confirmed that the review would include,
“how engagement with individuals can be improved so that savers have a stronger sense of personal ownership and are better enabled to maximise savings”.—[Official Report, Commons, 12/12/16; col. 38WS.]
This review will be supported by an external advisory board, which will include pension provider representation, and we will ensure that we engage closely with the industry as part of that review.
As to the timing of that review, in the early part of 2017 we will be engaging with stakeholders from across industry on the issues set out in the scope of the automatic enrolment review. Towards the end of 2017 we will publish a report setting out policy recommendations. We will also take into account these findings when considering the regulations under Clause 11, to which I referred a moment ago.
To reiterate my earlier comment, I agree that member engagement is important. I understand the good intentions and reasoning behind the amendment. However, this part of the Bill is about addressing key risks in master trust schemes rather than prescribing every aspect of good practice. Therefore, while sympathising with the case that has been made, I do not believe it demonstrates that there is a key risk to address in the area of member engagement.
Having said that, and given the assurances about the scope of the automatic enrolment review and the intention to use regulations under Clause 11 to assess the adequacy of the scheme’s systems and processes related to member communications and engagement, I hope noble Lords will feel reassured that the Government understand the importance of this matter. Against that background, I hope the noble Lord will withdraw his amendment.
My Lords, I am extremely grateful to the Minister for that response. It ended up a lot more positive than when it started and where it looked as though it was heading originally.
The noble Lord reiterated what he said at an earlier point in our deliberations about statutory guidance being met. My question was going to be: “How does the regulator know that that guidance is being met”? I think the answer is, from the processes under Clause 11 and what he said about systems and processes requirements. I am grateful for that.
I am grateful to the noble Lord, Lord Kirkwood, for his support. I look forward to further deliberations on the auto-enrolment consultation, which we will come to, presumably, in the new year. Having said that and noting what is just ahead, at this stage I beg leave to withdraw the amendment.
Amendment 1 withdrawn.
Clause 7: Fit and proper persons requirement
2: Clause 7, page 5, line 29, at end insert—
“( ) The first regulations that are made under subsection (4) are subject to affirmative resolution procedure.”
My Lords, these amendments put the noble Lord, Lord McKenzie, not just ahead but well ahead—because he and other noble Lords expressed concern in Committee about the Bill’s approach to regulation. With many regulations subject to negative resolution, they felt that they would not be subject to adequate scrutiny. Noble Lords will remember that I responded that I would reflect on that point, and the amendments before us now are a result of that reflection.
We accept that the first regulations made under several of the powers in the Bill could be made under the affirmative resolution procedure to allow for scrutiny via parliamentary debate. After the first set of regulations introducing the authorisation regime has been brought into force, subsequent amendments to those regulations are likely to be relatively minor and, as a result, we do not think that affirmative resolution at that stage would be appropriate. Parliament will, of course, have the opportunity under the negative resolution procedure to require a debate on any such regulations if there is concern.
The provisions that will be subject to affirmative resolution as a result of these amendments represent significant aspects of the authorisation regime, including the fit and proper person test, financial sustainability, systems and processes, continuity strategy and significant events.
I owe the noble Lord, Lord Kirkwood, a proper exposition of the process of how we get to these regulations. Currently there is an engagement process with stakeholders to develop the detailed policy. We anticipate that that and an initial consultation to inform the regulations will take place in the autumn of 2017. That will be followed by formal consultation on the draft regulations. Our intention is to lay the regulations over the summer period and commence them during October 2018.
I will now touch briefly on the actual provisions that are covered. Clause 7 relates to the need for individuals involved in the scheme to be fit and proper people. Subsection (4)(a) allows the Secretary of State to make regulations requiring the regulator to take into account certain matters when assessing whether a person is a fit and proper person to act in a particular capacity. Clauses 8 and 9 relate to the financial sustainability of a master trust. Clause 8 requires that the regulator must be satisfied that the business strategy relating to the scheme is sound and that the scheme has sufficient resources to meet certain costs. The power in Clause 8(4) is to enable regulations to set out matters that the regulator must take into account when deciding whether it is satisfied on these matters. Clause 9 relates to the requirement for a scheme strategist to produce a business plan, and the power in Clause 9(2) allows the Secretary of State to set out what information should be included.
Clause 11 makes provision for systems and processes. It includes a regulation-making power to require the Pensions Regulator to take into account specified matters when deciding whether it is satisfied that the systems and processes adopted by schemes are sufficient to ensure that they are run effectively. Clause 12 sets out the requirement for the scheme strategist to prepare the continuity strategy. The powers in subsections (5) and (6) allow the Secretary of State to determine the format in which the level of charges should be set out. Clause 16 puts a duty on specified persons involved in running an authorised master trust scheme to notify the regulator when they become aware that a “significant event” has occurred.
This group of amendments also includes one further amendment which inserts a power to make consequential amendments to other legislation, including primary legislation. I am grateful to the noble Lord, Lord McKenzie, with whom I have discussed this amendment, for allowing me to bring it forward at what I acknowledge is a late stage. It is a standard power that we have in other pensions legislation, and I really must repeat my apologies that it was not in place at the introduction. The power will be narrow in scope. It is limited to amendments that are consequential to allow for necessary technical fixes and will apply only to existing legislation and legislation passed in this Session.
While we have made every effort to identify and make the necessary consequential amendments in the Bill, pensions legislation, as I suspect noble Lords will acknowledge, is very complex and technical. Similar powers were included in the Pension Schemes Act 2015 and the Pensions Act 2014. The power is used to ensure that the legislation works as intended. For instance, the power in the Pensions Act 2014 was used to ensure that the new state pension was taken into account when setting the automatic enrolment earnings threshold. As was the case in these Acts, this power will also be subject to the affirmative resolution procedure when used to amend primary legislation.
After the concerns expressed in Committee, I hope that these proposed amendments have met noble Lords’ concerns that the crucial aspects of the regime will have appropriate scrutiny. I also hope that I have explained why the amendment to Clause 37 is necessary in order to ensure that the legislation works as it should. I will once again repeat my thanks to noble Lords for bearing with me in bringing forward these amendments at this stage, and I trust that I have explained the position properly and given the appropriate level of reassurance. I beg to move.
My Lords, obviously I welcome the Minister’s amendments, which are a very appropriate response to our discussions in Committee. The compromise that he has struck is useful—and not just in these circumstances. It is actually not a bad idea for legislation to start adopting some of these things because it might avoid some of the tensions we have seen in the past in social security legislation in terms of trying to get access to the secondary legislation. Taking the first regulations under the affirmative procedure is an excellent way out of the problem we saw in Committee.
The timetable that the Minister has laid out is very reassuring and gives people an idea of what to expect in terms of the consultation and the timeframe available. I understand Amendment 24. I know that such provision has been used previously in pensions legislation, but Ministers at the Dispatch Box will be well advised to note that this clause will be particularly carefully looked at not just by the House committees that scrutinise these matters but by the usual suspects on the Back Benches who crawl over the fine print of these things. If the use of such procedure is deemed to be inappropriate, the negative procedure is always available to us to make sure that there is no abuse of the powers taken under Amendment 24. Otherwise, the noble Lord, Lord McKenzie, and the rest of us are doing quite well so far. I hope that we can keep up this strike rate for the rest of Report.
My Lords, I thank the Minister for the introduction of these amendments, which are very welcome. He has been true to his word and we thank him for taking us through the process of dealing with the regulations. One of our criticisms of the Bill was the plethora of regulation-making powers therein contained without the prospect of sight of even drafts of such regulations by the time we had to conclude our deliberations.
It was for this reason that we sought to strengthen the parliamentary process for this secondary legislation by subjecting it to the affirmative regulation procedure. The Government are meeting us part way on this matter by requiring in some key areas that the affirmative procedure apply to the first regulations made under various provisions. As we have heard, the changes apply to fit and proper person requirements, financial sustainability, the business plan, systems and process, continuity strategies and significant events.
We have also had the benefit of briefings with the Minister and the Bill team, which have aided our understanding of the regime and how it is meant to operate in respect of a range of issues including non-money purchase benefits, significant events, tax and pause orders and connected employers. As our continuing amendments should signal, we are not in total accord with the Bill as it stands and consider further change desirable.
As to the Henry VIII clause introduced by Amendment 24, the Minister is right that we discussed it before it was laid and I was grateful for that opportunity to engage. We are not enamoured generally of such provisions, particularly when they emerge at the tail end of our deliberations. As originally explained to us, they will be constrained by being used only to make the implementation of the regulations effective. In the event, they seem to go further than that. I wonder whether the Minister might comment. We recognise also that these types of provision have been used by Governments of all persuasions.
We recognise the complexity of the provisions in the Bill as well as the agility of the sector in adapting to change and sometimes circumventing it. Our own scrutiny of the Bill has caused us to conclude that the primary legislation is not in perfect shape even after being improved by our amendments, but until the detail of the regulations has been consulted on, it is difficult to foresee in every respect ideally what changes might have been appropriate. This is notwithstanding the flexibility that the Government have already taken for themselves; for example, in Clause 39.
For us, the imperative is to see a fit-for-purpose Bill on the statute book as quickly as possible. We will therefore not oppose this amendment.
My Lords, I thank your Lordships for your understanding. I thank again the whole House and its committees, which made the point forcefully about making all these substantial regulations subject to the negative procedure. This was an occasion where we went back. There was a good suggestion—I am sure it was from the noble Lord, Lord McKenzie—that we should do it the first time via the affirmative procedure. I am with the noble Lord on this in thinking that that is a pretty smart way of doing this kind of legislation, because one can really clog up Parliament with affirmatives. I have to do quite a few of them and really, when one looks at them, it is overkill. This compromise may be something that we can look at becoming more of an institution in future. Let us just see on that.
On the power in Clause 37 and the pointed question put by the noble Lord, Lord McKenzie, about its use, I assure noble Lords that that power is narrow in scope. It will be limited to consequential amendments to allow for necessary technical fixes. It will apply only to existing legislation and legislation passed in this Session. Just to make it absolutely clear, it can be used to amend primary legislation but only in this consequential context to allow necessary amendments to make the Bill work.
I am grateful for the understanding of the House on all these amendments—the last of them in particular. I beg to move.
I do not want to prolong this but may I just check one point? The noble Lord said that the Henry VIII provisions would be used only in respect of Acts passed in this same Session of Parliament. The wording sent to me says,
“an Act passed before or in the same session as this Act”.
Could the Minister clarify that?
To make it clear, it incorporates legislation that now exists and the legislation that we will prospectively pass with this Bill.
Amendment 2 agreed.
3: Clause 7, page 5, line 30, leave out “Regulations under this section” and insert “Any subsequent regulations under subsection (4), and regulations under subsections (2) and (3),”
Amendment 3 agreed.
Clause 8: Financial sustainability requirement
Amendments 4 and 5
4: Clause 8, page 6, line 14, at end insert—
“( ) The first regulations that are made under this section are subject to affirmative resolution procedure.”
5: Clause 8, page 6, line 15, at beginning insert “Any subsequent”
Amendments 4 and 5 agreed.