Clause 27 — Requirement to wind up scheme in specified circumstances

Nature – in the House of Commons at 12:55 pm on 24th February 2015.

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Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

I believe that the Bill is in a better state as a result of the two groups of Lords amendments that we shall discuss today. Many of them are Government amendments, designed to tidy things up or deal with errors, and some reflect their lordships’ desire for the affirmative procedure to be used in the case of certain statutory instruments. The amendments are largely technical, but I shall of course be happy to deal with them in more detail if the House wishes me to do so.

Lords amendments 1 to 9, 49, and 59 to 65 deal with defined ambition and collectives. The Bill contains key reforms to private pensions; encouraging and enabling “defined ambition” or “shared risk” pension schemes and “collective benefits”. In the following amendments, their lordships sought to refine or build on the legislation since it had left the Commons.

Lords amendments 1, 2, 3 and 6 introduce minor changes to ensure drafting consistency. Clause 27 provides for regulations to require a scheme providing collective benefits to wind up the whole or part of the scheme, while clause 37 provides for regulations to impose a duty on managers of non-trust-based schemes to act in the best interests of the members when making certain decisions. Both clauses refer to different types of obligation that may apply in relation to the scheme, including those that are part of the scheme—that is, provisions of the scheme—and those contained in legislation that applies to the scheme. The amendments provide for descriptive consistency in the clauses in relation to those different types of obligation.

Lords amendments 4 and 5 clarify “publication of documents” provisions. Powers in part 2 of the Bill may require trustees or managers of schemes providing collective benefits to have policies in relation to a number of matters, including the factors used to calculate member benefits, the calculation of transfer values, and steps to deal with a deficit or surplus in relation to the target. Clause 32 allows regulations made under part 2, which require trustees or managers to prepare or obtain any document, to include requirements relating to the publication of those documents and the sending of copies to a specified person. Specified persons could include members and regulators.

The publication of various policies is a key feature of the regime that we are seeking to introduce in order to ensure that it is clear how members’ assets and benefits will be managed or calculated by the scheme. It ensures that there will be transparency in regard to the way in which how collective benefit assets are treated in certain circumstances, because there is a less direct relationship than there is in a money purchase benefit when it comes to a member’s entitlement in relation to contributions. We also have regulation-making powers to make certain requirements in relation to the policy. An amendment was required to put it beyond doubt that the provisions of clause 32 also apply to the policies specifically. The amendment ensures there is no possibility of a scheme’s “having” a policy that we cannot require to be published or sent to a specified person.

Lords amendment 7 puts the meaning of the amendment made by clause 45 beyond doubt. The change to section 67A of the Pensions Act in the clause makes any modification to an occupational pension scheme that would replace a member’s accrued rights with a right to a collective benefit a “protected modification”. Protected modifications can be made only if the member consents. Lords amendment 7 makes it clear that the provision applies only when the existing accrued right is not a right to a collective benefit.

Lords amendments 8, 9, 59, 60 address an omission in the current legislation. While the changes made by the Bill were being checked, omissions in the Pensions Act 2014 came to light. The amendments that were needed all relate to overriding legislation. When legislation overrides conflicting provision in the scheme rules, there are circumstances in which that legislation needs to be treated as if it were part of the scheme rules. The amendments ensure that overriding requirements made under regulations provided for by schedules 17 and 18 to the Pensions Act will be treated as part of the scheme rules for the purposes of the Pensions Act 2004, in the case of Lords amendments 64 and 65, and subsisting rights provisions in the 1995 Act, in the case of Lords amendments 8 and 9. The amendments provide for consistency and clarity in the way in which the overriding provisions are dealt with.

Amendment 49 changes the parliamentary procedure that applies to certain regulations under part 2 of the Bill. Part 2 defines the concept of collective benefits and makes provision for regulation-making powers in relation to them. Regulations made under clause 8(3)(b) and clauses 9 to 11 and 21 determine important aspects of the arrangements for “collective benefits”. These powers cover matters such as the exclusion of benefits from the definition of collective benefits, the setting of targets in relation to benefits, the factors to be used in the determination of benefits, and the policy for dealing with a deficit and surplus in relation to the target.

The effect of amendment 49 is that the regulation-making powers in clause 8(3)(b) and clauses 9 to 11 and 21 will be subject to the affirmative procedure the first time they are used, and will be subject to the negative procedure for subsequent uses. This amendment relates to recommendations made by the Delegated Powers and Regulatory Reform Committee about the powers for how collective benefits are defined, and how schemes that provide those benefits will operate.

Amendment 61 makes a minor correction, replacing a stray reference to “hybrid schemes” that was missed when the Bill was introduced, while amendments 62 to 65 amend the amendments to section 99 of the Pensions Act 2008. Section 99 lists the definitions used. Currently two separate provisions in paragraph 50 of schedule 2 relate to the definition of “defined benefits scheme”. One adds a new definition drawn from part 1 of this Bill; the other is intended to remove the existing definition. Lords Amendments 62, 64 and 65 replace two provisions with a single provision that substitutes the old definition with the new one. Lords amendment 63 also adds a definition of “collective benefit” to section 99.

Amendments 44 and 56 relate to public service pension schemes. New information suggests the pension schemes for the Secret Intelligence Service and the Security Service were misclassified when the Public Service Pensions Act 2013 was originally drafted. When the Act was drafted it was thought that agencies schemes were “public body schemes”, which must close and reform by 2018. The agencies have since been working to reform by April 2016, but we now believe the agencies may be “existing schemes” as defined in the Act. This would mean they have to close and put in place a new scheme by 1 April 2015, like the other main schemes such as for teachers. At this late stage it is not possible to put a new scheme in place by 2015. Without the amendment, the agencies’ staff could be left without lawful pension provision after 2015. Amendment 44 introduces a new clause after clause 77 that prevents this by ensuring the agencies schemes are not included as “existing schemes” in the Act. It ensures reform of the agencies schemes can proceed to the expected timetable of 2016. Amendment 56 to clause 84 enables the new clause to come into force on Royal Assent.

Amendments 57 and 58 provide general amendments to part 6 of the Bill, to include reference to the Bill in the definition of “pensions legislation” in the Pensions Act 2004, and they come into force from 6 April 2015.

Amendment 117 relates to pension schemes for fee-paid judges. This amendment is required to fulfil the recommendation of the Delegated Powers and Regulatory Reform Committee report proposal that regulations made under the new section 18A of the Judicial Pensions and Retirements Act 1993 should be subject to the affirmative resolution procedure.

These amendments are welcome, and as far as I can see are largely technical, and I commend them to the House.

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions) 1:00 pm, 24th February 2015

I thank the Minister for his explanation of amendment 1 and those with which it is grouped. Let me make a number of points. There are two parts of this Bill, and we will come to the second part regarding the way it interacts with the pension budget flexibilities announced in last year’s Budget in a moment. I would like to put on record my thanks to the other place and particularly those on the Opposition Front Bench who have done such a sterling job on what is often a rather technical Bill. I also want to put on record my appreciation for the work done by Baronesses Drake and Hollis who have done so much to make this a better piece of legislation.

Let me pick the Minister up on a couple of things, particularly around clause 8. He referred in his explanation to clause 8 and the delegated powers contained therein. He will be aware that the debates in the other place focused for some time on the implications of clause 8 because, of course, it is a key and critical provision setting the definition of what are collective benefits, on which the rest of the clauses in part 2, and many of the associated delegated powers, depend. That is why it is so critical in its construct and its definition of the delegated powers associated with it.

In the other place, Baroness Drake made it clear that in her view the power to set regulations under clause 8(3)(b) should be subject to the affirmative procedure because a definition of what is or is not a collective benefit is critical to the whole scope of part 2, which deals with collective benefits. Clause 8(3)(b) would allow the Government to use regulations to avoid schemes being subject to the expense of meeting the detailed requirements set out in clauses 9 to 35 if they are deemed not to be proper collective benefits, but the clause, in granting the Government power to significantly alter by regulation the constituent benefits that are not included in the definition of collective benefits, has the ability to potentially remove members of schemes from the protection of the requirements in the other clauses in part 2.

The Minister will know that this could have considerable implications for members and the scope of the whole of part 2. The potential of this regulation to remove members from the protections they may already have by being in a designated collective benefit scheme which subsequently a change of regulation deems they are no longer in makes it in our view compelling that this should remain a power that is subject to the affirmative procedure. The Government’s reply to the scrutiny from the Opposition in the other place was to say, “Well, the affirmative procedure will be used in first use, but subsequently not,” but surely this is worth considering. I will be interested to hear the Minister’s response.

In the other place, the Government gave a detailed response to this critique. As anyone who reads the debates will see, it revolved around the fact that the first use will be by affirmative procedure, but the affirmative procedure might be used in the first instance on something quite straightforward such as that an obvious with-profits policy arrangement is not to be included in collective benefits, but the subsequent use of the regulation under the negative procedure might go to the heart, to something much more fundamental such as an existing collective benefit scheme. We must be aware of the possibility that regulations could be used to weaken the protections scheme members have.

In response to this specific point, Lord Bourne said in the other place that the negative procedure will still provide a measure of protection, but we know that is not the level of protection that would be provided by the affirmative procedure. This is rather technical, but it does bear upon a very important aspect, which is that moving towards a negative position rather than a positive position through an affirmative vote could be a way in which the protections are weakened—I am sure against the Minister’s inclinations and desires. I would appreciate hearing his observations on that part of the debate in the other place.

More widely, much of the debate in the other place on this part of the Bill focused on clauses relating to the duties of fiduciaries or managers of the schemes. The Minister and I have had that debate a number of times, but given all the regulatory complication of setting up the independent governance committees and giving them fiduciary responsibilities to monitor the behaviour of private pension providers while exempting the private providers themselves, this just seems an unnecessary complication. Pensions are complex enough without making them that much more complex. The responsibility should be put directly on the decision makers in the pensions industry by applying a fiduciary obligation not to them themselves, but to trustees to do the job of governance throughout.

The Minister will be aware that Professor John Kay, reporting for the Government—and particularly for the yellow-tinged part of the Government, as the Minister will no doubt be aware—was clear that everyone managing someone else’s money or advising on investment should be subject to fiduciary standards of care. I have argued on a number of occasions—and if it is exhausting for me, it must be exhausting for those listening—for extending a clear fiduciary duty to those who have discretion over the management of other people’s money. The Australians have that principle at the heart of their system, and while that system is not perfect, that aspect of it makes it clear unequivocally that conflicts of interest must be resolved in favour of beneficiaries.

I am not expecting the Minister dramatically to change course at this stage, but I would just point out that the Financial Conduct Authority’s recent investigations into the pensions industry have provided substantial arguments in favour of the proposition that I and others have been advancing. We have now had numerous reports on how the market is not serving pension scheme savers well, whether they have legacy schemes or annuities, owing to a lack of transparency, charges and many other factors.

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

As the hon. Gentleman says, we have discussed these issues before. Will he just clarify which of the amendments he is referring to, so that I can respond helpfully to him?

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

I was referring to clause 8, to which the Minister has also referred, as well as referring to that part of the Bill more widely where it pertains to governance. I am sure that the Minister will be weary of the debates that we have had on these issues, and that he will be keen to set out his current thinking on this aspect of the Bill. He will be aware that this issue is central to his ambitions for collective defined contribution. If it were not, he would not have set out the Bill in this fashion.

I should like to put on record again my thanks to the other place and in particular those on the Opposition Front Bench, including the good Baroness Drake and the good Baroness Hollis. I am grateful, too, for the constructive spirit in which the Government in the other place have approached the Bill. I look forward to hearing the Minister’s observations on the issues relating to delegated powers and, more widely, on the governance of the pension schemes that he rightly wants to make permissible under the Bill.

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

I shall respond briefly to the issues that the hon. Gentleman has raised. I am grateful to him for his comments, and I should like to extend my thanks to our noble Friends in another place for bringing the Bill forward on our behalf. I also share his respect for his colleagues, Baroness Drake and Baroness Hollis, for their knowledge and their contribution to the debates.

As the hon. Gentleman says, the issue of whether the affirmative or negative procedure is used in regard to regulations in clause 8 was debated at length. He pointed out that Baroness Drake wanted the affirmative procedure to be used in all cases, while the Government originally planned always to use the negative procedure. The Government then responded to the views of the Delegated Powers and Regulatory Reform Committee and agreed that, on first use, the affirmative procedure would be used. Obviously we could say that everything should always be decided through the affirmative procedure, but there is a balance to be struck here. The Committee wanted that, but the Government do not consider that to be appropriate because we sometimes need the flexibility to act quickly if schemes are being inappropriately caught by the collective benefits definition.

There is always a trade-off in these circumstances. Sometimes in the world of pensions, things happen that we do not expect. People might be in the wrong place, for example, or their rights might be at risk or inappropriately protected, and the Government need to be able to move quickly rather than having to go through the rather lengthy parliamentary process that the affirmative procedure requires.

We accept, however, that clause 8 is a key provision and I can put on record that it is not our intention for members who are in schemes providing collective benefits, and subject to the provisions, suddenly to lose the important protection that the regulations made under part 2 of the Bill will provide. If the situation were to arise in which those protections were to be taken away, we would want to understand the situation and ensure that it was appropriate and necessary before taking action and laying regulations. As the hon. Gentleman said, even under the negative procedure there is scope for praying against the regulations if a particular concern should arise, and for a debate to take place.

Most of my experience has been from the Opposition Benches, and during the passage of primary legislation, the Opposition always seem desperate for everything to be conducted under the affirmative procedure while the Government want nothing, but many of the affirmative statutory instruments that the hon. Gentleman and I have dealt with, over the past however many years it has been, have been over in 10 minutes. We get very exercised about the need for affirmative scrutiny, but when we get to that scrutiny, it can occasionally border on the desultory. I hope that we are striking the right balance in recognising that these are important matters and providing affirmative protection on the first use and further parliamentary scrutiny on any subsequent use through the normal processes.

The hon. Gentleman raised certain wider issues, but I am not sure that it is appropriate for me to go into them in great detail now. I recognise that he wants to strengthen the fiduciary duties of those who oversee pension schemes, and I am sure that that debate will continue. I believe that the new independent governance committees will mark a big step forward from where we have been in the past, and that they will provide scrutiny. I have talked to most of the major insurance companies in the past few weeks, and they are setting up their IGCs now. It is clear that they will be organisations with teeth and with serious people heading them, and that they will be listened to. We will also continue to keep the situation under review. With that, I commend Lords amendment 1 to the House.

Lords amendment 1 agreed to.

Lords amendments 2 to 9 agreed to.