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Relevant document: 12th Report from the Delegated Powers Committee
Clauses 1 to 7 agreed.
Moved by Lord Bradley
1: After Clause 7, insert the following new Clause—
(1) A qualifying money purchase scheme may not sell annuities directly to anyone who has saved with the scheme unless this is the recommendation of an independent annuity broker.
(2) A relevant scheme may provide an independent brokerage service itself.
(3) A self-provided annuity brokerage service will be considered independent for the purposes of this Act if the provision of its services is subject to the direction of independent trustees.
(4) Pension schemes shall ensure that any brokerage service selected or provided meets best practice in terms of providing members with—
(a) an assisted path through the annuity process;
(b) ensuring access to most annuity providers; and
(c) minimising costs.
(5) The standards meeting best practice for annuity brokerage services shall be defined by the Pensions Regulator after public consultation.
(6) The standards set out in subsection (5) shall be reviewed every three years and, if required, updated.”
My Lords, decumulation is the process of converting pension savings into retirement income. I hope that, as we deliberate in Committee, we will try to avoid as much jargon on pensions as we possibly can to make it understandable not only to ourselves but to the public outside.
Our new clause on decumulation is aimed at protecting savers who default into an annuity with their same savings provider. At the start of Committee stage it is important to note that we are in a pretty dramatic and fast-changing environment for pensions. We must not forget those parts of the pensions market that are not currently working for consumers as well as they should. The amendment would provide safeguards for those who do not take advantage of the new flexibilities provided by the 2014 Budget changes, and for whom an annuity remains the best product. This may be the case for some who feel that they would still prefer the security of a product that guarantees them a set income for their entire lives, without the difficulty of making predictions about life expectancy. That can still be a very attractive option.
The ABI code of conduct requires members to encourage savers to use the open market option when choosing an annuity. However, 50% of savers still buy an annuity from the company they have already saved with. This situation could be further exacerbated by auto-enrolment, under which the majority will be enrolled by inertia. We know that, as a result of not shopping around, many get a much worse deal than they could have had, so this could have a serious effect on the size of their annuity. The National Association of Pension Funds estimates that those who do not shop around get up to 20% less in their annuity. The Financial Conduct Authority estimates that consumers could be missing out on up to £230 million in additional pension savings because they are not shopping around in the most effective way.
We know that this market has not served consumers well in recent years, and the process remains complex. The Financial Services Consumer Panel recognised this in December 2013, and said that a “‘good’ annuity outcome” might well require expert help. Our new clause would require the recommendation of an independent broker to sell an annuity to someone who has saved with the same scheme. This would protect consumers from getting a bad deal when taking a crucial decision in their lives. As was made clear in Committee in the other place, pension schemes should ensure that any brokerage service they employ on behalf of their members meets best practice in terms of providing members with an assisted pathway through the annuity process, ensuring access to most annuity providers and minimising the costs. Pension schemes have a duty to get the best possible deal for their members, or to do it themselves in-house. Such good practice can be found in pension schemes such as the Royal Mail and the National Employment Savings Trust.
That view flows partly from the significant evidence that the best way to get value for money on an annuity is to “bulk-buy” that annuity on behalf of the cohort of scheme members who are going to retire. For example, let us look further at the National Employment Savings Trust, which requires annuity providers to make sealed bids to provide annuities for those who have saved with NEST. It takes the cohort coming up to retirement and says to the providers, “We have X people. Given their personal circumstances, and taken together collectively, what offer of an annuity will you make?” This seems a sensible way to proceed. It has the advantage of scale, and the expertise of the same pension scheme that built up the pension pot is used to turn it into a retirement income.
This is a brief opening amendment in the form of a new clause, so I shall summarise the position now. Annuities as they are currently constituted have not been delivering value for money for the whole of the market. The fundamental reason is that half of those coming to the point of annuitisation—turning their pension pot into an income—do not shop around for the best deal because it can be a complex, confusing and difficult process. Because of that and because of the advantages of bulk-buying by a professional expert, it seems sensible, for the consumer to get it right for their retirement income, to empower pension schemes to undertake that responsibility. As the new clause draws on best practice, I hope that the Government will see its merits. I beg to move.
My Lords, I have some sympathy with the thrust of Amendment 1, under which my noble friend seeks to protect pension savers from purchasing an annuity which is not good value for money or appropriate to their needs. If there was any doubt about the nature of the problems in the annuities market, the recent FCA report has clearly put those to rest. It makes evident the need for assisted paths for consumers through the annuity process. Notwithstanding the new freedoms, annuities still have an important role to play in securing retirement income, and we need the FCA urgently to push ahead with tackling the conduct of providers in the market. With the new freedoms and the anticipated product innovations that will flow from that, the Government and the saver are still very dependent on the market to make them a success and mitigate consumer risk.
The issue of assisting the consumer through the annuity process—the role of the employer, the responsibility of the saver and the role of the provider—is complex. No doubt later in Committee—at least, I hope we will; I hope that an amendment is winging its way—we will debate a second line of defence provision to control the conduct of providers selling retirement income products, including annuities, trying to enhance consumers’ protection when they are in the purchasing process. I hope that we can pursue in more detail how the Government can mitigate the pension saver’s risk when purchasing an annuity, when, I hope, we can get into a wider debate on a second line of defence across all retirement income products.
My Lords, in opening for the Government on this, I welcome the comments of the noble Lord, Lord Bradley, regarding jargon. We certainly agree on that and I suspect that we will agree on much more as we proceed through the Bill. I, too, will try to avoid jargon and too many acronyms, which seem also to be a feature of the pensions landscape.
We fully appreciate the intention behind the amendment and agree that consumers must be given the necessary information and support on their retirement choices in this new flexible landscape, which I think we all welcome. As the Financial Conduct Authority’s Thematic Review of Annuities and recent published findings from its market study concluded, competition in the annuity market is not working effectively—as the noble Lord, Lord Bradley, said. That means that many consumers are not getting the most out of their hard-earned savings.
To be clear, annuities can be good value where the individual member selects a product that meets his or her needs. That is why the Government are legislating in the Bill to deliver a service providing the public with guidance. That will ensure that individuals can access the support that they need to understand and navigate their retirement choices—for example, to help them decide whether an annuity product is the right choice for them at all. Where they decide to purchase an annuity, they must be encouraged and supported to shop around for the best deal. Those are key objectives for the guidance and the Financial Conduct Authority’s rules will underpin it. I will come back to those issues shortly.
Turning to the specifics of the noble Lord’s amendment, I am not convinced that imposing additional costs on either some schemes or members is the best way to facilitate the increase in shopping around. The amendment would effectively require all schemes that offer an annuity to provide or source an independent annuity broker run by independent trustees and overseen by the Pensions Regulator. What is less clear from the amendment is who is to meet the extra costs of this provision. Although some 52% of schemes already offer an annuity broker service, requiring all schemes that provide annuities to their own members to offer or source such a service must come at an extra cost. These additional costs must either be met by all the members of the scheme, whether or not they use the service, or by those members who do so, on some kind of fee or commission basis. If it is the former, then clearly scheme costs increase for all members even if they were going to go and purchase their annuity or other product elsewhere. If it is the latter, then the effect would be to increase the costs of selecting annuities from certain schemes, making them less attractive, or requiring members to pay fees for a decision that they may have made in any event.
The changes proposed by the noble Lord could restrict members’ choice because members would not be able to secure a pension income from the scheme unless a recommendation from an independent annuity broker had been secured. It might also have the perverse effect of meaning that the pension saver did not look at their own annuity provider because they feared the additional cost and went elsewhere, deterred from going for what might have been their best option. This would create a real risk—and I agree with the noble Baroness, Lady Drake, that risk is inherent in this and we must do what we can to ensure that the risks are minimised—that members would stop considering internal annuity products, even though this might be the best choice for them. It would particularly impact those whose scheme or provider offers them a guaranteed internal annuity rate. This can often be a higher rate than available on the open market, yet individuals would be deterred from considering it by the extra costs of using the brokerage service.
There is also the question of the proposed role of the Pensions Regulator. The Pensions Regulator primarily oversees occupational pension schemes. Many of the annuities offered and bought by members using their defined contribution savings are provided by contract-based pension schemes. These contract-based schemes are then regulated by the Financial Conduct Authority, which also oversees the wider financial services industry, including annuity brokerage. It is therefore not clear how the requirement for the Pensions Regulator to set standards for best practice for annuity brokerage can ensure independence of all annuity brokerage firms offering this service, when they are all regulated by the Financial Conduct Authority.
Although we do not believe that imposing this brokerage requirement on all schemes is the correct approach, there is clearly a need for consumers to receive support in making retirement choices—I absolutely agree on that. This is why the Government and the Financial Conduct Authority are requiring pension providers to signpost customers approaching retirement to the guidance service and encouraging them to use that service, which, of course, is at no cost to the consumer. The guidance service will help consumers to understand their retirement choices, including the different kinds of annuity product available—for example, single or joint life or enhanced annuities for those with health problems. It will also provide consumers with information on how to proceed to the next step if they wish to purchase a product, for example by signposting them to the Money Advice Service’s impartial annuities comparison table.
The Financial Conduct Authority’s policy statement of
The Government are also working with industry, in particular through working groups convened by the Association of British Insurers and the National Association of Pension Funds, to ensure that material communicated to customers is genuinely effective in encouraging them to engage with their retirement choices. This includes ensuring providers supply information to customers about their pension pots in a simple and accessible format so that they can compare their provider’s offerings with that of market rivals. The Financial Conduct Authority has also made a series of recommendations including that providers should make clear to customers how their annuity quote compares to other providers in the market.
The Financial Conduct Authority is currently considering how best to build on its market study as part of wider operational objectives of promoting competition and protecting the interests of the consumer. The Government look forward to seeing how this work will progress. We believe that this approach, which will allow individuals to make choices supported by an independent guidance service with access to the right information, is the right way forward. On that basis, I urge the noble Lord to withdraw his amendment.
My Lords, can I probe the Minister on his response? It seemed that he was praying in aid the guidance service as an alternative to the proposition advanced in the amendment. We will obviously come on to discuss the guidance service more fully on Monday, but I understand that this is, effectively, an upfront and one-off sort of offer. With increased flexibility, are we not likely to be in an era where people will no longer necessarily make the cliff-edge decision on an annuity on day 1 of retirement but will wish to address that some time later during the course of their retirement? In those circumstances, if somebody was looking to purchase an annuity five years after retirement, and having had some income draw-down or other product in the interim, what would be in place to protect people in the annuity market at that point, as the Minister suggested, and not on day 1? Presumably, the guarantee will not be available to be provided on a free basis.
If I might first take the noble Lord up on one point, what is being proposed by the noble Lord, Lord Bradley, opposite is an alternative to the guidance service which is in the Bill. The guidance service will guide people and there will be a wake-up call via the literature provided before a member’s retirement telling them of the guidance service and with clear signposting to it, of the options that face them on retirement and afterwards. It will not just be explained what you can do on day 1 but later on. We anticipate that many people will take that up. Some will not choose to do that, but it is clear that that sets out the pathways for the future. It is only guidance; any advice taken, whether immediately or later on, will of course be subject to the market. We believe that the choice being offered here—supported, as I understand it, by the Opposition—is important and that we can depend on a developing market with innovative products, in which members will be able to shop around not just on retirement but afterwards. All this will be set out in the wake-up call and the guidance that will follow once a member retires.
If I may presume to comment on my noble friend’s amendment, the Minister made the comment that it was being proposed as an alternative to the guidance. I do not think that it is. It is basically saying that guidance is guidance; that is what you would receive but you then move into the purchase or decision activity which flows from that guidance. It is what happens at that stage—the relationship between the consumer and the person providing the annuity, whether it is a scheme or a retail provider of retirement products—which is causing a lot of people anxiety. Some refer to it as the second line of defence; this is another way of addressing that. It is trying to regulate the quality of the exchange between the provider of the product, be it an annuity or in some other form, and the consumer at that point. That is a post-guidance activity, not a substitute for guidance.
I take the point that the noble Baroness, Lady Drake, is making on this issue, but it is clear that the guidance will set out the options available on annuities and, where appropriate, signpost people to taking advice. If they want to compare the annuity product being offered by their own provider with that of somebody else, all that will be set out. Whether it is an adjunct to or a substitution for it is somewhat academic. There is a cost associated with this and we believe that the proposals in the Bill, setting out the opportunities for guidance which will come at no cost to the consumer, are the right way forward. They will set out the options available to the consumer on retirement.
If I may come back on that point, setting out the options available on retirement is one thing, but what happens if someone does not wish to annuitise on day 1? Five years down the track, their life circumstances may have changed dramatically—they may have married, there may have been a death in the family and all sorts of things may have happened to their life—which might mean that the original guidance is not as relevant as it might have been. What is going to protect people, as my noble friend Lady Drake said, from the issues of how the provider is acting at year 5 in those sorts of circumstances?
Clearly, any form of guidance is not going to be appropriate for ever on specific issues. The guidance is not intended to address the specific situations of every consumer; that is the purpose of advice. The guidance is indicating to people what they should do in their particular circumstance, at that stage, to look at the future. It is for those consumers to decide whether to take that option or not; that is the purpose of the guidance. It is not specific in the way that the noble Lord, Lord McKenzie, is suggesting.
My Lords, I am grateful to the Minister for his comprehensive reply on the new clause. The whole purpose of this and of many of the amendments we are tabling in Committee is to assure the public of their protections and to ensure that they have the information and that it is communicated effectively to them so that they can make proper choices at a crucial moment, or moments, in their retirement or post-retirement period. While we have immediately—probably quite rightly—started to discuss the guidance guarantee, I did not expect to start that process within 15 minutes of the start of the Committee stage. That will be an incredibly important part of our deliberations and, while it is very useful for the Minister to start to lay out the purpose and detail of that guidance, I know that we will have many opportunities to expand on that as we progress through the Bill.
The Minister has raised a number of fears about this new clause, which I will look at and reflect on carefully in order to ensure that the issues he has raised will be comprehensively covered by the range of activities to protect the consumer in the way that we want. I am grateful for the comments of my noble friend Lord McKenzie in support of the general thrust of this amendment, which is another attempt to get belt and braces around the advice and guidance to ensure that people are making sensible decisions.
As my noble friend Lady Drake said, we will be bringing forward the issue of a second line of defence, which is relevant to this general debate, again on the basis that we want to ensure that the public have confidence in the new arrangements that are being put in place and feel that there is protection for the decisions that they make. We will come back to whether guidance is sufficient to achieve that objective, but we need to look at these elements as a comprehensive package of attempts to achieve the objectives I have set out. However, in the light of the Minister’s comments and the opportunity to reflect on those for a later stage, I beg leave to withdraw the amendment.
Amendment 1 withdrawn.
Clause 8: Introduction and definition
Moved by Lord Bradley
2: Clause 8, page 4, line 43, at end insert—
“( ) A statutory instrument containing regulations under subsection (3)(b) may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament.”
My Lords, Amendment 2, which is in my name and that of my noble friend Lord McAvoy, flows from the recommendations of the Delegated Powers and Regulatory Reform Committee’s 12th report of Session 2014-15. It should be stated at the outset of our deliberations in Committee that the ability to scrutinise this incredibly important piece of legislation, affecting millions of people already in a pension scheme, about to retire or starting the process of accumulating a pension pot, has clearly been limited by a number of factors.
First, many new clauses and amendments were introduced at a very late stage in the other place, so hampering its ability to scrutinise those aspects of the Bill. Secondly, to date, no draft statutory instruments are available for scrutiny alongside this piece of primary legislation, when that legislation relies on secondary legislation to make meaning of many of the proposals in the Bill. Thirdly, there is an incredibly short timetable to get this legislation through Parliament—I understand that implementation is still due to begin at the start of April, barely three months away. Fourthly, this is one of a number of pension Bills and Acts—I think we are up to four, but I am thinking particularly of the Taxation of Pensions Act—that this Bill is inextricably linked to. It is important that we are able to ensure that there are no tensions between the different Bills and Acts and that the freedoms and flexibilities do not in any way contradict the ability to have security of retirement income in future.
I will balance those critical comments by saying that I thank the Minister for the courtesy he has shown in providing information to me and the Committee at the earliest opportunity and allowing discussion about it. However, it is still the case that a lot of information is still to flow on the Bill, which limits our ability for effective scrutiny. I must also make it clear that we are not fundamentally opposing the Bill; in fact, we are positively supporting it. However, we need to ensure that all the details of this legislation are in place so that the public, who will use their new freedoms and flexibilities, are fully aware of the consequences and do what is in their best interests in terms of lump sums or their retirement income.
In our view, the regulation-making powers conferred by Clause 8(3)(b) should be subject to the affirmative procedure rather than the negative. The Department for Work and Pensions’ delegated powers memorandum argues that the negative resolution procedure is appropriate because,
“the Department does not anticipate that there will be many situations in which benefits will need to be excluded from the definition of ‘collective benefits’”,
and gives the example of the with-profits arrangements that the Government may wish to exclude from the definition in this clause to avoid any potential for double regulation.
There is, however, the wider point that the powers conferred by this and other clauses to shape the regulatory environment for collective benefits leave the majority of the work in defining what these benefit schemes will look like to secondary legislation rather than primary. The Delegated Powers Committee said of the Bill that it is,
“remarkable for the number and density of the delegated powers it confers. For instance, Part 2 (which introduces the notion of ‘collective benefits’ in the context of private pension schemes) contains 28 clauses, all of which confer or amplify delegations of legislative power, and only two of which comprise any significant provision that does not confer powers”.
The committee also notes that the number of clauses introduced as the Bill progressed through the other place made it difficult to scrutinise them, as I said earlier. Taken together, those two points make scrutinising this important legislation very difficult. As a result, we will be seeking throughout Committee to get as many further details as possible about the shape of the regulations that are likely to follow. For instance, will the Government be able to produce any draft regulations ahead of Report?
While we support the provisions and want to see collective defined contribution schemes work, and have previously called for their introduction, we also want to be clear how they will work in practice. As I say, this relies on the secondary legislation. The House will be familiar with the potential benefits that can be provided by these schemes and I think it is worth reminding ourselves of them, as they provide tests for what we would like to see emerge as the market develops.
First, they can provide greater certainty to members as to the likely income they will receive in retirement when compared to individual defined contribution schemes. Secondly, they can lead to increased economies of scale when compared to individual defined contribution schemes. Thirdly, they can provide the opportunity for more efficient investment strategies that do not have to divest from relatively higher returning investments as the individual scheme members near retirement. Further, they could be popular with savers due to the fact that they can remove some of the complexity for the individual saver in assessing an income in retirement. Research from the IPPR has shown that the solidarity aspects of CDC schemes—the sharing of risk and reward—is also attractive.
According to historic data, a CDC scheme would have outperformed an individual DC pension scheme by 33% in 37 of the last 57 years. We see the benefits of many of those factors in Holland and Denmark with the large economies of scale and reduced fees and other costs. It is also clear, while we are currently looking for models capable of providing better income in retirement for savers, that less than half of adults are currently saving adequately for retirement, and as many as one in five has no retirement resources beyond the state pension. This is a challenge that lies ahead.
Relatively recent progress in alleviating pensioner poverty should not obscure the effects of this. Some are given the impression that most pension pots are of sufficient size to enable the holders to head into the luxury car market, but research in 2012 from Partnership showed that more than half of those surveyed spent the additional money from their “enhanced annuity” on food bills, heating and electricity, and generally on paying for their cost of living. We also know that the median pension pot used to purchase an annuity in 2013 was less than £30,000, an amount that does not get you much of the way towards a Lamborghini.
In a recent Parliamentary Question which I tabled I asked what percentage of individuals had accumulated different levels of DC wealth—that is, the amount of money in the pot. The Answer was that 26% had an income pot of between £0 and £4,999. Taken together, 58% had a pension pot below £19,999. We therefore have to be realistic in our expectations about these matters and the effects that changes to the schemes may have. We are not talking about a vast number of people having huge amounts of money to which they will have access without consequences for what income they may get in retirement from those pension pots.
The challenge of providing a good retirement income is clear, and CDC schemes are a good way of meeting it. It is just not yet clear what the Government are capable of providing in terms of detail so that we can be sure that the schemes will achieve the outcomes that we expect in supporting them. Although we support the provisions in Part 2, we want the ability to further scrutinise the details on which collective schemes are based so that we can have assurances that they will achieve the objective that has been set.
I recognise that the Government have now taken a view on that. We believe that the affirmative resolution of the regulations is the best way of ensuring scrutiny by this House. I look forward to hearing, first of all, why the Government did not feel it appropriate to provide for the affirmative resolution in the first instance, and what proposals they will now bring forward to ensure that that scrutiny can be achieved. I beg to move.
My Lords, I have considerable sympathy with the amendment before us, not least because the chair of the Delegated Powers and Regulatory Reform Committee of your Lordships’ House would be very upset if we did not make sure that the report was brought before your Lordships’ House.
Pension Bills in the past—the report quotes pension Bills from the 1990s—were frequently used, with very much of the detail coming in the following regulation.
However, as we know from the debates and discussions we have already had, there are no drafts available; we have had outlines and a sense of direction, but at the moment we do not have substantial amounts of supporting legislation drafts before us, as we might have had in much further primary legislation relating to welfare. The recommendation in paragraph 6 of the report of the Delegated Powers and Regulatory Reform Committee is clear. It says that,
“in view of the potential for the power to be exercised in a way that could significantly alter the constituent benefits included in the definition”,
of collected benefits,
“we are unpersuaded by the DWP’s explanation … why it considers the negative procedure to be an adequate level of Parliamentary control”.
Perhaps my noble friend the Minister in his response might tell us whether the Government will accept this report, and it might also help us if they say whether they would accept the other recommendations about the negative and affirmative resolution and first exercise recommendations which are in that report. That might save us a little time in the future.
My Lords, for the purposes of all of today’s business on the Bill I refer to the interests which I have registered as a remunerated trustee of both the Telefónica O2 and Santander pension schemes and the board of the Pensions Advisory Service, and as a non-remunerated member of the board of the Pensions Quality Mark and a governor of the Pensions Policy Institute. I am also a member of the Delegated Powers and Regulatory Reform Committee. That is like an act of cleansing; I hope that I have stated all possible interests that could appear to conflict with anything I might say today.
I support Amendment 2 and very much share the spirit of the contribution made by the noble Lord, Lord German, particularly his comments about the estimable chair of the Delegated Powers Committee. I accept that it will be a very significant challenge to get collective benefit schemes established in the first instance. As we heard from the NAPF and the ABI, there is little observed appetite from providers or employers, certainly at this stage, for engaging with such schemes.
There are other barriers and constraints to be overcome because collective benefit schemes require an assured flow of new members, excellent governance and full transparency, and the new freedoms with their emphasis on individual freedom rather than risk-sharing may well act as a further deterrent. None the less, for those of us who are genuinely interested in seeing the development of more efficient ways of risk sharing, the Bill provides the opportunity to set the founding legal framework and is therefore worthy of proper scrutiny. In fact, not to scrutinise would be a failure to engage with the work that has been done by the Minister for Pensions and the Department for Work and Pensions.
However, Clause 8 is a key and critical provision because it sets the definition for 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 my view, the power to set regulations under Clause 8(3)(b) should be subject to the affirmative procedure because the definition of what is or is not a collective benefit makes it so critical to the scope of the whole of Part 2, which deals with collective benefits.
Clause 8(2) defines what a collective benefit is but Clause 8(3)—the subject of this amendment—defines what it is not. It is not a collective benefit if it is a money purchase benefit or, more particularly, some other benefit of such a description to be specified in regulation.
I understand the Government’s reasoning when they indicate that with-profit arrangements, for example, provided by some insurers should not come within the definition of a collective benefit scheme. It is perfectly reasonable for the Secretary of State to want some flexibility to respond as the market develops and innovation occurs in scheme or benefit design.
Clause 8(3)(b) would allow the Government to use regulation 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 benefit schemes. 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 therefore to potentially remove members of schemes out of the protection of the requirements in the other clauses in Part 2.
This, of course, 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 that they are no longer in, makes it compelling that this remains a power that should be subject to the affirmative procedure. This should be as a general practice, not just in first use, because if collective benefits take off—one hopes that they do and we therefore have wide coverage and scale—any review or change to the definitions of the benefits embraced by such collective schemes will be of outstanding importance to the members.
My Lords, I confirm to the House and to the noble Lord, Lord Bradley, that the measures under the budget flexibilities are still intended to come into effect for April 2015. This is not the case for the measures relating to collective benefits.
The Bill is deliberately a framework Bill, which is generally the case with pensions legislation. As my noble friend Lord German indicated, it is not unusual to have significant delegated powers in pensions legislation; it is often the norm. The Delegated Powers and Regulatory Reform Committee has made recommendations concerning the powers in Part 2, and I will come on to look at those. I share the enormous respect in which the noble Baroness who chairs that committee is held by the House.
I confirm that the Government accept the views of the committee in respect of the powers in Clauses 9, 10, 11 and 21. We intend to table amendments on
Report which will make regulations under those clauses subject to the affirmative procedure the first time those powers are used, as the committee recommended.
This amendment relates to the committee’s recommendation about the power in Clause 8(3)(b). This power allows regulations to specify benefits that are not to be considered collective benefits and therefore exclude such benefits from the provisions of Part 2, as the noble Baroness, Lady Drake, just indicated. The committee recommended that this power be subject to the affirmative procedure. I will now explain how we are unable to accept that recommendation in full, although we recognise that there is a strong case for affirmative procedure on first use. We have therefore accepted that.
Let me first give some background on collective benefits. Collective benefits are provided on the basis of investing members’ assets on a pooled basis, in a way that shares risks across the scheme’s membership and has the effect of smoothing out fluctuations, to a degree at least. The collective asset pool is managed on behalf of the members by trustees, or, in non-trust based schemes, by managers. We intend to use powers under Clause 9 to require that there will always be a target attached to collective benefits and that initial targets need to be achievable within a specified probability range. We will ensure that schemes offering collective benefits operate in a transparent and accountable way using a range of powers we have taken in Part 2, together with regulation-making powers in existing pensions legislation. Decisions about the rate of benefit ultimately paid to the member will be for the trustees or managers to make in line with their policies. We will consult fully on how best we use the powers in Part 2 to provide the appropriate framework for these benefits and to ensure good governance.
As the Government set out in the memorandum to the Delegated Powers and Regulatory Reform Committee, there needs to be flexibility to respond to new developments in scheme and benefit design that result in benefits falling within the definition “contrary to policy intention”, as I believe the noble Baroness, Lady Drake, recognised. This power was included in the Bill to ensure that, from the outset, the definition of collective benefits would not catch any personal pension schemes set up by insurers that offer with-profits arrangements that might otherwise fall within the definition.
The Government recognise that the committee rightly considers this a key provision, as it frames all that follows in Part 2 and defines it scope, that should be subject to parliamentary scrutiny. However, there are circumstances where the Government may need to use the power at a later date if new developments in scheme and benefit design result in benefits falling within the definition “contrary to policy intention”. This latter use of the power might require a very quick response to avoid members’ benefits being affected and to avoid schemes being subject to expensive requirements around the setting of targets, actuarial valuations and so on, which are not appropriate. I trust that noble Lords can see that the affirmative procedure could result in delay, leading to significant distress for members, who would wish the matter to be resolved as quickly as possible. This is why we believe that the affirmative procedure is inappropriate across the board.
As I have indicated, the Government therefore propose that, as with the powers in Clauses 9 to 11 and 21, the power in Clause 8 should be subject to the affirmative procedure on first use, allowing Parliament the opportunity to debate the scope of the collective benefits provisions when the regulatory framework is first set up, but that subsequent use should be subject to the negative procedure so that the Government can act quickly if necessary.
Turning to the noble Lord’s amendment, I hope that I have clarified the Government’s position on the Delegated Powers and Regulatory Reform Committee recommendations and my commitment that the Government will return on Report with amendments that will implement its recommendations on Clauses 9 to 11 and 21 in full, and in Clause 8 in part. I hope that the noble Lord will feel able to withdraw his amendment.
I come back to the point on which I was seeking clarification. If the affirmative procedure is 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 went to the heart, such as saying there is an existing collective benefit scheme and we take the view that it should cease to be a collective benefit scheme therefore retrospectively those members would lose the protections under Part 2, could the regulations not be used to weaken the protections that scheme members had?
The noble Baroness will be aware that the negative procedure will still provide a measure of protection. We are concerned about the protection of members where there is a need to move quickly. In those circumstances, retaining the negative procedure is the appropriate protection for those members.
I push the point as a courtesy because I care about establishing collective benefit schemes. I am assured by the chair of the Delegated Powers Committee—I wish he were standing next to me—that even under the affirmative procedure there is a provision which allows us to move quite quickly.
That would be an exceptional procedure. It is important for the industry and pensioners that we can provide assurance now that, where there is a need, there is provision to move quickly to ensure that collective benefit schemes are successful. I share the noble Baroness’s feeling that it is important that we give this a fair wind. We therefore recognise that there will be circumstances where the negative procedure is appropriate because of the great need to move quickly.
I thank the Minister for his explanation, for his more wide-ranging response to the report of the Delegated Powers Committee and for explaining the Government’s intentions in regard to the range of issues discussed and the recommendations made by that committee. It may disappoint him that that does not necessarily mean that we will not debate the clauses to which these regulations apply. There are wider points around those clauses which are not only about whether the regulations should be affirmative or negative. I hope the Committee will show tolerance as we go forward on that matter.
As my noble friend Lady Drake clearly and concisely laid out, Clause 8(3)(b) goes to heart of the definitions of collective benefit schemes. We need to be absolutely sure that, through debating the regulations, we understand fully the consequences of the schemes and how they will apply to the public who might rely on them. I accept entirely the need for flexibility, but I remain to be convinced that moving towards a negative position rather than a positive position through an affirmative vote in this House is the way to achieve that. As my noble friend Lady Drake pointed out, where there is a need for quick action to apply, there are procedures within the House to enable that. We are trying to support collective benefit schemes, and we want to ensure that they are properly scrutinised on behalf of the public.
However, the Minister said that he will be bringing forward amendments on Report. We shall reflect on the comments he has made on the issue and on why the Government consider that the negative procedure is appropriate. We shall think further about whether that is an acceptable position or whether we want the opportunity for further scrutiny through the affirmative procedures of this House. In the light of the comments made and the opportunity for further debate at a later stage, I beg leave to withdraw the amendment.
Amendment 2 withdrawn.
Clause 8 agreed.
Clause 9: Duty to set targets for collective benefits
Moved by Lord Bradley
3: Clause 9, page 5, line 2, leave out “or managers”
My Lords, the three amendments in this group stand in my name and in the name of my noble friend Lord McAvoy. Amendment 3 would remove the words “or managers” for collective schemes. In doing so, trustees would be required to be in place. Amendment 20 to Clause 37 would require managers to act in the best interests of members of the scheme, which seems an absolute minimum if they are to be relied on. Our proposed new clause sets out that trustees shall have a,
“fiduciary duty towards members of the scheme”.
That is an issue which will be debated here and further, and we believe it is essential for the confidence of schemes going forward.
It is my contention that the Bill does not go far enough on governance. The highest standards of governance are needed for schemes that could be even more opaque to their members than DC schemes are now. They have to manage pooled assets and, within that, conduct smoothing arrangements for the benefit of all members. This silence in the Bill occurs despite the Government’s consultation entitled,
P ensions for
. Paragraph 22 states:
“Collective schemes are complex and can be opaque—because of the indirect relationship between contributions and benefits. This necessitates strong standards of communication and governance. We intend collective schemes to be overseen by experienced fiduciaries acting on behalf of members, taking decisions at scheme level and removing the need for individuals to make difficult choices over fund allocations and retirement income products”.
Failure to require all schemes to have high-quality trustees means that we potentially have some collective DC schemes run by trustees and others where private firms offer them. They could seek to maximise short-term returns that are not necessarily in the best interests of all members. We have consistently argued that all workplace pension schemes must be run by trustees and have a legal duty to prioritise the savers’ interests.
Our proposed new clause would require pension schemes to appoint a “board of independent trustees”. Those trustees would have a fiduciary duty to pension holders that would take preference over any duty owed to shareholders. This change in governance is designed to ensure that members of pension schemes get far better value for money. For example, in its market study, the Office of Fair Trading said that savers were not getting value for money in a contract-based market. A significant reason for that was shareholder interest in contract-based schemes predominating over the interests of savers. Not enough information is available on how schemes are operating and what is available. As has been said, it can be complex and difficult to understand, which is what stops this market functioning in order to bring down those costs.
International evidence, such as that laid out by Chris Curry, director of the Pensions Policy Institute, during the evidence sessions, suggests that a trust-based approach to schemes is preferable and leads to better governance. It would not require a large number of trustees to implement. Of the 200,000 schemes currently estimated to be in place, many are under the management of four or five insurance companies and therefore would be covered by governance boards made up of trustees attached to those boards. Of the remaining pension schemes, progress to trusteeship might be slower. Equally, it might be aided by the amendment to be discussed later when we will encourage scale in terms of pension schemes.
Through these amendments we want to ensure that there is strong and effective governance, that the trustees have a fiduciary duty to look after the interests of members as a priority, and that customers are treated fairly to ensure that their interests are prioritised over those of shareholders where there may be a conflict. The new clause that we have suggested would help to rectify the current shortcomings in governorship and, with the ability to appoint high-quality trustees in whom the members can have absolute faith, strengthen the whole process. I beg to move.
My Lords, I rise to support and speak to Amendment 10 in particular. I expressed the view at Second Reading that at some point, unfortunately probably later rather than sooner, the Government will inevitably have to place in statute a clear fiduciary duty on pension providers and asset managers to put savers’ interests first.
Why one goes through all the regulatory complication of setting up independent governance committees, giving them fiduciary responsibilities to monitor the behaviour of private pension providers, while exempting the private providers themselves—the people who make and implement the decisions—from such responsibility is a little beyond me. If the responsibility of the independent governance committees is an attempt to align scheme governance with the interests of savers, why should that responsibility not be put directly on to the decision-makers in the pensions industry? But we are where we are.
John Kay, in his review commissioned by BIS, also concluded that all those looking after someone else’s money or advising on investment should be subject to fiduciary standards of care. Many times from these Benches I have argued the case for extending a clear fiduciary duty to those who have discretion over the management of other people’s money. It is a principle that the Australian financial regulatory system has embraced and applies to retail pension providers, including an unequivocal requirement that conflicts of interest must be resolved in the beneficiaries’ interests.
Each time I try to present the arguments in a slightly different or novel way but increasingly the FCA appears to be providing the arguments for the proposition. We have had numerous reports on how the market is not serving pension scheme savers well, be it legacy schemes, annuities, lack of transparency on charges, and many other examples. The new FCA study, which examined how market conditions may evolve from April 2015, found that greater choice and potentially more complex products will weaken the competitive pressures on providers to offer good value. The chair of the FCA has said that the increase in regulatory rules has failed to prevent misconduct and does not seem to “prevent further problems arising”. The FCA director of enforcement and financial crime, Tracey McDermott, speaking at the FCA’s recent enforcement conference in London, referred to the need for a cultural shift among firms similar to the change in public attitudes whereby drink- driving was, in the past, avoided through fear of being fined, but is now seen as a moral issue.
It is clear from the flow of pronouncements from the FCA that the behavioural and cultural challenge within the pensions industry remains a major issue. They are telling us and demonstrating to us that regulatory rules have failed to deliver the cultures that embrace the ethic of care towards the customer. Time after time, reports, reviews and investigations confirm that the private pensions market is dysfunctional, with a weak demand side that cannot be expected or fails to self-remedy, and where the process of trying to provide for the savers’ interest in a competitive fashion does not work well. One is tempted to ask: how many reports of market failure in the pensions market do we have to receive before it is accepted that writing yet another set of rules will not solve the problem? What is needed is a game-changer to force the pace of change in providers’ behaviour by strengthening in law the principle that they must act in pension savers’ interests.
The advent of auto-enrolment raises the bar. At the heart of the governance structure for the private pension system must be the interests of the pension saver, and the law must require that providers identify and manage conflicts in favour of the saver. An alignment of interests is not sufficient. The saver’s interests must come first. It will be a major regulatory failure of public policy if millions of citizens are auto-enrolled into pension schemes but Parliament has not ensured that sound governance is in place.
Turning specifically to collective benefit schemes, which Amendment 10 targets, the case for the oversight of the management of such schemes resting with trustees with a clear fiduciary duty to the members of the scheme that takes precedence over other interests is even more compelling. Collective DC schemes are more complex in that they are designed to smooth income and manage intra- and intergenerational risk-sharing between members. The individual does not have a well defined pot over which they have individual ownership. Consequently, transparency is a key challenge and provides a potential breeding ground for conflicts of interest. Collective benefit schemes do not automatically guarantee higher retirement incomes. In order to be sustainable, collective DC schemes need scale, an assured flow of new members, full transparency and, in particular, excellent governance. If these schemes are not well run or if risks are unfairly shifted—for example, across different age cohorts—young savers could be subject to lower payouts.
The Bill has a significant number of delegated powers so there is much still to be understood. On governance for collective DC schemes particularly, the Bill is largely silent. But the complexity of what needs to be addressed is captured in Clauses 9 to 18. The Government appear to recognise the particular nature of the governance challenge in collective benefit schemes and the possibility that things could go wrong because they have added Clause 37 to enable the Secretary of State to impose a duty on managers of collective benefit schemes to act in members’ best interests. But that is not sufficient. If the Government are serious about encouraging and building collective benefit pension provision, the governance rules have to be robust right from the very beginning. The risks are too great to do otherwise and that means requiring a body of independent trustees with a clear fiduciary duty to the members of the scheme, which takes precedence over any other duty, to oversee the running of such collective benefit schemes.
I thank noble Lords who have participated in the debate on these amendments. The amendments in this group all relate to governance, and the Government recognise and agree that governance is key to effective choice in the pensions arrangements that are being brought forward. The amendments relate to governance in relation to various types of pension schemes in some way, shape or form, and, as I say, the Government recognise and agree that this is important. However, we believe that the new measures that we are delivering under the Bill, under the
Under powers in the Pensions Act 2014, this Government are introducing a new approach to governance standards for all workplace occupational pension schemes. These will come into force from April 2015. The Government’s commitment to improving the governance of workplace pension schemes was demonstrated in the Pensions Act 2014 and in the subsequent publication Better Workplace Pensions: Putting Savers’ Interests First, which was launched on
The Financial Conduct Authority has also completed a consultation on draft rules for independent governance committees for workplace personal pension schemes, to ensure oversight of these schemes in members’ interests from April this year. These proposals are built on an earlier agreement between the Association of British Insurers and the Office of Fair Trading to establish independent governance committees, and go further by introducing these on a mandatory footing.
The October command paper also included a consultation on draft regulations to place minimum governance standards on occupational pension schemes which are money purchase or have money purchase elements to them. This consultation ended on
I want to make it clear that the Government believe that the right way is to build on the current landscape. It is critical that legislation acts to support the market to flourish and also to ensure appropriate protection for members. However, the amendment—as we read it—could mean a radical and expensive reformulation of the ownership of funds which are not currently held under trust.
I am grateful to the Minister for giving way. I want to be absolutely clear on the point that he was making about the regulations that have been brought forward for implementation from April 2015. They will apply to the new arrangements in the workplace schemes and the board of managers or trustees who will be responsible for them. First, will they be comprehensive in their coverage at that point, including any new collective benefit schemes that come forward soon after April? Secondly, will there be a fiduciary duty on that body to act in the best interests of members, as opposed to other interests?
I shall deal with the second point first. As the Minister knows, there will be a contractual obligation with contract-based schemes, but there will not be a fiduciary duty. This is because the essence of a fiduciary scheme with trustees is that fiduciary duties are held by those trustees. A contract-based scheme will have contractual duties which may be greater or lesser than the fiduciary duties, but they are somewhat different. Perhaps I could come back later to the noble Lord with a detailed answer on his point about collective schemes, because I am not quite sure of the scope of that particular aspect.
Coming back to the serious point that I was making, this reformulation of ownership of funds could result in significant obligations. We need to be clear that, if this is the approach of the Official Opposition, then those are radical changes that will require quite an upheaval in the ownership of the way that the market is organised at the moment. I am not quite clear whether the Government have got it right that that is the basis of the amendment and the Opposition are going that far.
Turning to the point that I think the noble Lord, Lord Bradley, was making, we do not want to dictate that non-trust based schemes should no longer have a part to play in pension provision in the workplace. I am not sure whether I have understood that correctly and that is indeed the position of the Opposition. We want to make sure that there is appropriate protection in occupational and personal pensions, trust and contract-based schemes. We want to encourage innovation and not necessarily restrict to a single structure, because we think we can provide appropriate protections across the piece. Similarly, under the provisions of this Bill, schemes offering collective benefits and defined ambition schemes can be trust or contract-based, and can be occupational or personal pensions. It has been suggested in discussions outside this House that such schemes should be restricted to trusts—I do not know whether that is the Opposition’s position. Again, we recognise and respect the concern about and focus on governance—that is quite right—in respect of these provisions, but we do not wish unnecessarily to close down options for how such schemes must be set up in terms of trustees. We have already made separate governance provisions for these benefits and schemes, recognising the new types of risk that they bring. Instead, we want to encourage providers to consider entering this space with innovative products that consumers want, and we have separate, parallel governance provisions for this which we will come on to later.
On the point raised by the noble Lord, Lord Bradley, independent governance committees apply to money purchase benefits. We have other requirements for collective benefits under clauses in Part 2 and in Clause 37, to which we will come later.
It is important to be clear that a requirement to have trustees is not a panacea for the myriad of governance issues that we are debating today. Let us not assume that all trust-based schemes are always better governed than contract-based workplace pension schemes. While we value the role of the many good, indeed excellent, trustees running occupational schemes, we recognise that schemes are variable and the presence of trustees is no panacea for poor governance. There is no evidence that one governance structure necessarily or always delivers better outcomes than another. We consider that factors such as scale—which we will consider later—good governance and charge levels are among the key determinants of member outcomes, not whether a scheme is contract or trust based.
The governance of contract-based schemes has grown significantly stronger in recent years, led by the FCA with the “treating customers fairly” principles which have formalised firms’ responsibilities to their customers. The introduction from April 2015 of independent governance committees with a duty to act in members’ interests will further strengthen the governance of contract-based schemes. These points taken together are why we strongly believe that current measures and independent governance committees, rather than trustees, are the right response to money purchase contract-based or personal pensions.
The proposed new clause would also be a significant cost and burden for workplace personal pension schemes. Data from the National Association of Pension Funds show that just under half of the 1,200 schemes that it surveyed in 2013 had independent trustees and that trustee salaries range from about £10,000 to £35,000 a year, although it is true to say that not all trustees or trustee chairs are paid. Therefore, as your Lordships can appreciate, there would be considerable cost involved in increasing this figure particularly over the short term. It could even mean that trust-based schemes had to replace their existing trustees.
We have made separate provision for governance measures for collective benefit and defined ambition schemes, so we do not need independent trustee committees as well. The independent governance committee measures will apply to money purchase benefits, but we have made separate provision for the other schemes. Generally, provisions under Part 2 set out a number of regulation-making powers to make requirements in respect of key governance features: investment, factors affecting benefits, policies for dealing with deficit and surpluses, transfer values and so on.
More specifically, under Clause 37, referred to by the noble Baroness, Lady Drake, we have a regulation-making power that may require managers in non-trust based schemes to have a duty to act in the best interests of members when taking specified decisions in shared risk schemes and schemes offering collective benefits. This is because of the new types of risks that may arise in these new types of shared risk schemes and schemes offering collective benefits, which are different from money purchase benefits or defined contribution schemes. Therefore, Clause 37 takes a regulation-making power to impose a duty on managers of non-trust based schemes to act in the best interests of members when taking specified decisions.
This is probably the main difference between the approaches of the Government and of the Opposition. I do not think that we are miles apart on our desired outcome, but we believe that working with the industry, consumer groups and pension groups to achieve the best interests is the right way forward. If we can achieve the same end without making it mandatory, we believe that that is the right approach. It is probably at the root of the difference between the two parties that we believe that we are achieving the result without having to make it mandatory.
I recognise the spirit behind the amendment that has been brought forward and the Government accept the need for the appropriate corporate governance. Whether it is in relation to trust-based schemes or to contract-based schemes, we want the similar result of the managers or the trustees acting in the best interests of the pensioners. I want to reassure noble Lords that the matter that this clause deals with is of great importance to the Government, and we are working with the industry and the Financial Conduct Authority to ensure that we get the approach right.
On Amendment 3, which would change Clause 9, let me set out some context on Clause 9 and why we think that the amendment would undermine a key governance provision. Clause 9 sets out a regulation-making power which may require trustees or managers of schemes offering collective benefits to set targets in relation to any collective benefits that may be provided by the scheme. Ensuring that there is a target in relation to collective benefits offered by the scheme should enable the member to have a realistic picture of the benefits that they are likely to receive. This is important, as the member is handing over control of their investments to those running the scheme. A target will also help those who wish to plan for their retirement income to do so meaningfully.
Removing the ability to require managers to set targets, which is what the amendment would do, would undermine a key provision which provides additional governance and transparency about members’ collective benefits. The requirement to set targets in relation to collective benefits in Clause 9 works closely with the other aspects of the governance regime set out in Part 2 of the Bill. For example, it is our intention that the probability of meeting the targets will be assessed annually in a valuation report to identify whether it falls within a specified probability range. If it falls outside this range, this will trigger the scheme’s policy for dealing with a “deficit” or “surplus”.
I think that we all agree that good governance of pension schemes is essential. That is why the Government’s new governance standards, applying across all workplace pension schemes in respect of money purchase benefits, will protect members by ensuing that schemes are run in their interests. It is also why we have introduced Clause 37: to ensure that there is extra protection for members’ interests.
However, the Government are taking a proportionate approach and seeking to allow constructive forms of innovation by pension providers, as well as retaining flexibility to ensure that regulation remains up to date with changing requirements. On that basis, I respectfully ask noble Lords not to press their amendments.
Once again, I am grateful to the Minister for the comprehensive nature of his reply. I am sure that Hansard will correct that I am not the
Our purpose throughout is to ensure that members’ interests are protected, as the noble Baroness, Lady Drake, has clearly and effectively outlined. We are trying to ensure sound governance. The Minister has given assurances that the proposals being brought forward will achieve the same objective as our amendment. I will reflect on the issues that the Minister has raised and his sense that our views about trustees are not as soundly based as we believe they are. There will be an opportunity for that reflection before Report. In the light of those comments and the strong feelings on this side of House regarding trustees, at this stage I beg leave to withdraw the amendment.
Amendment 3 withdrawn.
Moved by Lord Bradley
4: Clause 9, page 5, line 23, at end insert—
“( ) A statutory instrument containing regulations under this section which is the first exercise of such a power may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament.”
Amendment 4 stands in my name and in that of my noble friend Lord McAvoy. Again, it flows from the recommendations of the Delegated Powers Committee. We have already had a response from the Minister about how the Government are handling this, but in the light of his preliminary comments about targets I think it is still worth our having a brief debate on this amendment.
The Delegated Powers Committee suggested that because of the nature of the powers in clause 9, which may require the trustees or managers of a pension scheme to set targets in relation to collective benefits, the affirmative procedure on first use would be most appropriate.
This clause is particularly important, as it raises many of the key areas that we wish to discuss around CDC schemes; indeed, we have already started to discuss them. These are issues such as the balance of intergenerational risk-sharing, the communication of the “risks of risk-sharing”, the importance of good governance in these schemes so that they can command sufficient trust from their members—a subject about which we have already had some discussion—and the role that actuaries are likely to play in the process.
The Secretary of State is here given the power to require a target that meets a set probability. For instance, if the probability was set at 98%, the target would have to take that into account and be set at such a level that there was only a 2% chance that it would be missed. To reflect on the most controversial aspect of CDC schemes—as I have made clear, the Opposition support these schemes—we have to look at what happened in
Holland, where because of the financial crisis, pension payments had to be reduced. It is therefore important for us to look at targets and ranges, so as to give assurance to the schemes.
The Minister in the other place said that the regulations produced under the powers conferred by Clause 9 were to be subject to consultation. Can the Minister provide any further detail on when the consultation is likely to begin, and say whether the Government will be expressing a preferred option and asking for comment on that—and if so, what the preferred option is likely to be?
Because of the reasons that I have set out, communication to scheme members about how the target level is set and what factors could lead to it being altered is particularly important for these schemes. Can the Minister provide us with any more details on how the Government believe this can best be expressed to give scheme members confidence in the decisions being made?
This issue also takes us into the area of governance. The kinds of decisions that have to be made about targets and probabilities, and about how all this translates into the level of pensions paid out in a CDC scheme, require a high level of trust in the process—the kind of trust that is more easily established through a scheme being overseen by trustees rather than managers. But we have already rehearsed that argument, and I shall not go over it again.
Can the Minister provide us with any more detail on the interaction between the actuaries and the trustees or scheme managers under this provision? For instance, if the actuary gives advice that the probability of meeting a target falls outside the probability level set by the regulations, what options will be available to the trustees, in terms both of the action they can take and of how they communicate this to the scheme members? I acknowledge that this is a complex area, and the challenge of adequately communicating why a certain decision has been made is often considerable.
We understand that the Government cannot pre-empt a consultation that has not begun, and also that this Bill is not unique in being a piece of pensions legislation that confers a wide degree of delegated powers. However, it is still unsatisfactory if those powers are not before the House to be debated alongside the primary legislation. The huge range of options left open by this clause means not only that it should be subject to the affirmative resolution when the Government produce regulations on the matters within it, but that it would be useful if the committee were able to piece together the picture that the Government expect and hope will be in the regulations tied to the primary legislation, and see how they would impact on the important issues identified in Clause 9. I beg to move.
My Lords, I thank the noble Lord, Lord Bradley, for his comprehensive coverage of Clause 9. I shall deal first with the recommendations of the Delegated Powers and Regulatory Reform Committee, because that is the specific issue raised by the amendment. I shall then come back to some of the issues that the noble Lord raised in relation to the consultation process.
Clause 9 sets out a regulation-making power, which is a key aspect of our approach to collective benefits. The issue of parliamentary scrutiny was considered by the Delegated Powers and Regulatory Reform Committee, and as I said before, we accept its recommendation on this matter, and we intend to come back to it on Report and table amendments to ensure that the first time the powers are used, this will be subject to the affirmative procedure.
I confirm that the Government intend to have full open consultation on the regulations, which is expected to include discussions before the formal consultation takes place. Timelines will need to be agreed in due course. I suggest to the House that we come back to this subject in more detail on Report, so that we can consider the position in the round. Given the undertaking that we will table an amendment on Report on the specific issue addressed by Amendment 4, I invite the noble Lord to withdraw it.
Again,I am grateful to the Minister for his comments, and I welcome the fact that before Report stage we will get the detail that I sought through the amendment. It is important that we have that timeline for the consultation, so that there is clarity, both in the House and outside it, about what the process will involve. As the Minister has recognised, Clause 9 is crucial to this part of the Bill, and we need as much information as possible, and the opportunity to debate it, before the Bill passes through all its stages in this House. In the light of the Minister’s assurances, I beg leave to withdraw the amendment.
Amendment 4 withdrawn.
Clause 9 agreed.
Clause 10: Policy about factors used to determine each benefit
Moved by Lord McAvoy
5: Clause 10, page 5, line 36, at end insert—
“( ) A statutory instrument containing regulations under this section which is the first exercise of such a power may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament.”
My Lords, I shall speak to Amendments 5 and 6. They follow recommendations made by the Delegated Powers and Regulatory Reform Committee, which suggested that, on first use, the affirmative rather than the negative resolution process should be used. We agree. Despite the Government’s claim in the delegated powers memorandum that Clause 10 does not require affirmative resolution as the amendments would be “technical” and “procedural”, it would be good to hear further detail about the circumstances in which it could be used. Does the Minister see the power as a backstop that can be relied on in the event that a scheme manager is not considered to be acting in the best interests of the scheme members or has taken a decision that is likely to disadvantage them?
Clauses 10 and 11 are part of a larger group of clauses introduced on Report in the other place. As a result, on that and other points it is up to this Committee to ensure adequate scrutiny and ensure that there are no flaws in the drafting. In debating the provision, the Minister in another place said:
“We cannot do an impact assessment because we have not yet written the regulations”.—[Hansard, Commons, 25/11/14; col. 805.]
That is a slightly unsatisfactory way to legislate. Likewise, in explaining why so many amendments were produced late on, the Minister relied on the need to alter the Bill dramatically following the introduction of pension freedoms in Budget 2014. The fact that that was not anticipated suggests that something was left to be desired when it came to joined-up government thinking. We want parliamentary debate and scrutiny of the regulations published under the clauses following the conclusion of the Government’s consultation. On that basis, I beg to move.
My Lords, I thank the noble Lord, Lord McAvoy, for introducing the amendment. First, I confirm that the Government agree with the recommendations of the Delegated Powers and Regulatory Reform Committee. We will be tabling amendments on Report to make the powers in Clauses 10 and 11 subject to the affirmative procedure the first time that they are used. Regulations made under Clause 10 will require trustees or managers to set out and follow their policy for how the collective pool will provide collective benefits to individual members.
There is another high-level requirement on which we may wish to regulate for that we have set out powers in Clause 10, and that is the matter of how each benefit is determined. The effect of regulations under Clause 24, which we will come to later, will be that trustees or managers must use the funds held for the provision of collective benefits—less any specified scheme expenses—to provide collective benefits. How the amount paid to a member is determined is the issue to be addressed. We expect the scheme to set out the rules as to how it will operate. The way that the scheme manages certain matters will need to be clear.
Regulations made under Clause 10 will therefore require trustees or managers to set out and follow their policy for how the collective pool will provide collective benefits to members. That is because, although with a collective benefit there is no certainty about what a member will receive, we want to ensure that decisions about how benefits are calculated are transparent. Transparency is of the essence. That is not to determine benefit design but to recognise that with a collective benefit there may be redistribution of assets between members, smoothing of returns and so on, and we want that to be an open process.
The specific clause, however, focuses on policies applied to determine each benefit. Regulations made under the clause may set out matters that the trustees or managers must take into account, or principles they must follow, in formulating the policy. We might want to use this power, for example, to require that trustees or managers have regard to the level of contributions paid to the scheme by members. Although the level of contributions towards collective benefits made by an individual member is not the only factor that will determine what the level or amount of that member’s benefits will be once they come into payment, it is important that there is some link between the level of contributions made by or on behalf of the member and the level or amount of benefit that the member receives from the scheme. That is how we hope to address that point.
As with the other requirements for scheme policies outlined in Part 2, the regulations made under the clause may also require the trustees or managers to consult about the policy and make provision about the content of the policy and about reviewing and revising the policy. I hope that I have explained how the powers in Clause 10 will help to ensure consistency in how the scheme will operate and give clarity to members and prospective members about how their share of the collective pool will be calculated.
Meanwhile, the regulation-making power in Clause 11 provides a power to make provision about the factors to be used to determine each benefit. That will allow us to set some parameters within which a policy required under regulations under Clause 10 operates. As I have explained, the principle underpinning a collective benefit is that all members should be able to expect their benefits, which are paid from the collective pool, to be calculated in a consistent and fair way. Clause 10 provides for regulations to require trustees or managers to have a policy about the factors used when calculating the level or amount of collective benefits to be paid and makes certain provisions around that. Clause 11 is linked to that. The regulation-making power in Clause 11 provides a power to make provision about the factors to be used to determine the amount available for the provision of each benefit. That will allow us to set some parameters within which a policy required under regulations made under Clause 10 operates.
The requirements about the factors used to determine the benefit could therefore include: contributions paid by or in respect of the member, including amounts paid in by way of transfers into the scheme; the value and types of assets held by the scheme, actuarial factors, such as estimated investment returns and longevity; the potential impact of paying benefits at that level on members in different cohorts; and the target and position in relation to probability requirements. The list of factors to be prescribed in regulations will be developed following consultation with the pensions industry and members’ groups.
The Government agree with the recommendations of the Delegated Powers and Regulatory Reform Committee, as I said to the noble Lord. I hope that I have covered the points that he raised. In the light of that, I respectfully ask him to withdraw the amendment.
My Lords, I thank the Minister for his lucid explanation of the clause and his response to my amendment. I very much welcome the pledge to move amendments at a later stage that will keep the spirit of these amendments.
This is the first time that I have moved an amendment to legislation from the Dispatch Box, and I feel that I should now just pack up and go home—I have done enough to escape without criticism. I appreciate the Minister’s attitude and flexibility on this and beg leave to withdraw the amendment.
Amendment 5 withdrawn.
Clause 10 agreed.
Clause 11: Power to impose requirements about factors used to determine each benefit
Amendment 6 not moved.
Clause 11 agreed.
Moved by Lord Bradley
7: After Clause 11, insert the following new Clause—
“Scale of pension schemes
(1) The fiduciary duty of pension scheme trustees shall include a duty to consider whether the scheme has sufficient scale to deliver good value for members.
(2) Where trustees take the view that the scheme has insufficient scale, they must consider whether merger with another scheme would be in the members’ interests.
(3) The Pensions Regulator shall have power to direct merger of pensions schemes where it would be in the interests of the members of each of the relevant schemes for merger to take place.
(4) The Pensions Regulator shall exercise this power in accordance with a methodology on which it has publicly consulted and which has been agreed with the Secretary of State.
(5) The methodology set out in subsection (4) shall be kept under regular review and revised when necessary, subject to further consultation and agreement from the Secretary of State.”
The amendment is in my name and that of my good colleague, my noble friend Lord McAvoy, who will continue to support me through the process of the Bill. This is also the first day that I have been at the Dispatch Box moving amendments, though we are a double act that flowed through the other place for many years.
The amendment is encapsulated in its first line:
“The fiduciary duty of pension scheme trustees shall include a duty to consider whether the scheme has sufficient scale to deliver good value for members”.
Our proposed new clause would give the Pensions Regulator, along with the trustees of such pension schemes, the power to consolidate pension schemes.
The Pensions Regulator has been clear that scale is to be encouraged as it enables schemes to achieve better value for money, higher quality governance and economies of scale. Scale is very important in reducing the cost of intermediation. The key report by John Kay for the Department for Business, Innovation and Skills recommended a reduction in intermediation. He made it clear that there were far too many intermediations and scale could be a trigger for in-house asset management. Evidence from abroad supports this view.
For example, in Canada, scale means that schemes do not necessarily have to pay private equity houses and agents in order to buy private equity.
There is a general view that there are currently too many schemes—around 200,000, it is estimated—and the proposed new clause would enable this to be reduced by giving trustees the power under their fiduciary duty to recommend merger if it is in the best interest of the scheme, and enables the Pensions Regulator to take action if it believes small schemes are not obtaining value for money. Currently, the Bill contains no measures which would help promote scale, which most independent observers believe is necessary for collective DC schemes and work-based pensions in general to do the best for their employees. We have long argued that measures to promote scale are vital to ensure the best outcomes for savers, and those measures deal with the important issue of finding high-quality trustees. If there are fewer schemes, there is less need for a large number of trustees and we therefore address the quality as well as the quantity in schemes that are currently in place. The Government could, for example, require that automatic transfers default into aggregators, and the criteria necessary for qualifying as an aggregator could include scale.
The House of Commons briefing note on the Bill states:
“However, certain conditions such as large scale and strong governance appear necessary for DC schemes to operate successfully”.
Further, three-quarters of respondents to the consultation prior to the Bill thought there was a need for government intervention to create the scale necessary for schemes to offer proper guarantees.
To sum up, it is our view and the view of the Pensions Regulator—which was set out in evidence—that there has to be a scaling up of the UK pensions industry. At the moment there are far too many schemes. We want a process in place to try and reduce that and build up scale. Our proposed new clause would not by any means reduce the number to a handful but it would make a start by giving powers to trustees and the regulator to promote scale. It would be a sensible addition to the powers of trustees and the regulator. Given the widespread consensus in the pensions industry that scaling up will have to happen, and that in so doing costs would be reduced and there would be a better outcome for savers, I believe that the Government will wish to support this amendment and therefore I beg to move.
Perhaps I might pose a number of questions about this amendment. My noble friend the Minister or the noble Lord, Lord Bradley, might like to reflect on them and give me an answer. First, the trend towards larger scale pension funds is growing. I understand that the number of smaller schemes is declining. I wonder if one or other of the noble Lords could tell me what the pace of that change has been and whether forcing mergers is necessarily the right thing if that pace of change is already accelerating. Secondly, when mergers are forced, the question is who that merger is with. Who will be found as a necessary partner to move in that direction? If that partner were a smaller scale operation as well, forcing those two to move together might not necessarily provide the right output. Finally, scale does have merit and is worthy, but that does not mean that small scale is always bad. I wonder whether we should always look for quality rather than scale or the force to make companies move together. Those are fundamental questions which I hope one or other of the noble Lords will be able to answer.
If I might comment briefly, as the amendment says, any merger has to be in the best interests of the members. It is not being forced if that is not in their best interests. I am not aware of the pace of change; what I am saying is that the industry is looking at those measures. The fundamental point is that it is in the interest of the members, not the scheme itself.
My Lords, I have sympathy with the thrust of my noble friend’s Amendment 7. Scale can be very important in influencing efficiency of pension provision and value for money for the pension saver. We also know that there is a significant tail of small DC and DB schemes which could actually increase if we begin to see an accelerated closure of trust-based DC schemes in response to the new freedoms. That is a problem to be monitored and addressed as part of protecting savers’ interests.
In principle, putting small inefficient schemes into large efficient schemes is a good thing but as the noble Lord, Lord German, flagged, the path to achieving that can sometimes reveal some real difficulties. As a trustee I have experienced this. The problem arises when considering what a small scheme is transferred into. In real life, some real pressures come to bear. For example, an employer may be keen to see members of a closed, small trust-based DC scheme bulk transfer into a contract-based product, but if that product is a personal pension which falls outside the scope of the new charges cap or the quality standards, the value for money and governance benefits on transfer may not be so clear-cut. Equally, the trust scheme rules of small schemes, even in DC, may have some beneficial provisions. For example, the employer may meet the administration costs, so some of the costs of that DC provision are met by the employer. What happens to that protection on transfer?
Certainly, the principle of promoting scale consequentially to promote value for money is a good one. However, if there is to be a provision to require trustees to transfer their schemes in certain circumstances, there needs to be regulatory clarity about the standards of schemes into which schemes can be transferred or directed by the regulator—whether there are nominated aggregators or whatever into which a regulator could so direct if it felt that something was quite small and unsustainable. The principle is sound but, like any principle, the path of getting there sometimes needs some additional support. I flag those up as issues that would need to be captured in making any regulatory provision about forcing the pace on scale.
I can speak only from an anecdotal basis to the point made by the noble Lord, Lord German, about evidence. I cannot provide any evidence. I can provide only experience. As employers have tackled their big
DB benefits and addressed auto-enrolment, I think they are looking to consolidate or transfer out small schemes, so I expect this to be a growing issue—but I express that view on an anecdotal basis.
My Lords, I thank noble Lords who have participated in the debate and I welcome the opening remarks of the noble Lord, Lord Bradley, who is part of a dream team with the noble Lord, Lord McAvoy—a dream team for the Opposition, if I may correct my earlier slip of the tongue. In response to the point that was dealt with by the noble Baroness, Lady Drake, and raised by my noble friend Lord German, I am told that there are no published figures on mergers but, anecdotally, it certainly seems the case that there is a trend. Whether that would continue with the new reforms is another issue but I think that there is, anecdotally, such a trend at the moment.
The amendment would impose a fiduciary duty on trustees of pension schemes to consider whether the scheme is of a scale to deliver good value to members and, if not, to consider a merger with another scheme. The Government are interested in scale, in so far as it may help schemes to improve quality and lower charges, and to be fair, I am sure that that is what inspired Amendment 7. However, we are not interested in scale as an aim in itself. The Government believe that forcing scale does not necessarily drive good governance, investment expertise or low costs. Big is not necessarily beautiful, as my noble friend Lord German correctly suggested. On occasion, many small schemes are delivering very effectively.
Our analysis of the current defined contribution landscape shows that there are already effective benefits of scale operating within the marketplace, including significant consolidation of schemes. We have no precise figures on that but we expect this to continue and probably to accelerate as smaller employers are brought into automatic enrolment. Indeed, we have already seen smaller employers moving towards larger arrangements such as group personal pensions, master trusts and the National Employment Savings Trust. They can also access the benefits of scale by purchasing investment or administration services from a large provider, falling short of a full merger.
Noble Lords may find it helpful if I try to explain to the House why we believe this amendment to be unnecessary and why the matter is not as straightforward as it may at first appear. A significant push to force consolidation would come at a financial cost which would be borne by members—at least the initial cost. Agreeing what “sufficient scale” means and policing it would be difficult. The amendment would create some inconsistency across the regulatory landscape as it would bite on trustees of trust-based defined contribution schemes but not on the managers of non-trust based schemes that are either a shared risk scheme or a defined contribution scheme. Significantly, and certainly from my point of view most importantly, it also cuts across trustees’ existing fiduciary duties to act in members’ best interests.
Trustees are already required to pay particular attention to governance standards—for example, internal controls —investment governance and decision-making, administration practice in record-keeping, and preventing fraud and so on. As part of that, they may well consider the benefits of scale. Some employers may prefer a smaller scheme that can deliver bespoke investments and communications to their workforce which a larger scheme might not be able to do.
The Government believe that their flagship reforms of introducing, for the first time, minimum governance standards to ensure that schemes are well governed with low and fair charges for members is the correct approach to drive better member outcomes. We do not believe that it would be right to interfere with how the marketplace is evolving, bearing in mind the existing fiduciary duties that trustees are acting under. It would be strange if trustees were not already considering the viability of the trust and the benefits of scale as they assess its workability.
Finally, the amendment would give the Pensions Regulator a new power to compel a merger, if it would be in members’ interests to do so, and for the Pensions Regulator to use this power in accordance with methodology on which it has publicly consulted and which is agreed with the Secretary of State. The amendment requires this methodology to be kept under regular review. This, too, would impose new burdens and is unnecessary. Agreeing what “sufficient scale” means in members’ best interests, and measuring and policing it, would be very difficult. We believe that new governance standards from April 2015 will mean that trustees and managers will have a general legal responsibility to ensure that the schemes are well governed in members’ interests. As I say, it would be unusual if they did not consider, as part of this, the possibility of merger and the benefits of scale. In addition, the Pension Regulator’s existing regulatory strategy and activities include providing guidance and e-learning resources, and helping trustees to demonstrate that they meet the required standards of their defined contribution quality features. The regulator will also take enforcement action where necessary, under existing powers. This ranges from advice letters, warning letters, statutory compliance notices and monetary penalties to criminal prosecution.
We believe that our focus on ensuring that schemes are well governed and deliver good quality and low charges to their members, regardless of size, is the correct approach to drive better member outcomes, while recognising that on occasion scale is of importance and that trustees should be considering that, as should managers. On that basis, I urge the noble Lord to withdraw the amendment.
I thank the Minister for his response to the amendment and I welcome the comments made by the noble Lord, Lord German, and my noble friend Lady Drake on the issue of scale. There is no intention in the amendment to force anything. Subsection (2) of the proposed new clause is clear. It states:
“Where trustees take the view that the scheme has insufficient scale, they must consider whether merger with another scheme would be in the members’ interests”.
That is the crucial point. It is not forcing it but looking at what is in the members' interests. The relationship between the trustees and members on governance is very important. This is about a mechanism to ensure that it is considered and that it is in the best interests of the members. We are not saying that big is necessarily beautiful but that, in certain circumstances, bigger might be better—better value for money for the members of the scheme.
There is clearly some difference between the Government and the Opposition on this issue. I do not want to caricature the Minister’s response but he was basically saying that the market will decide and that mergers will happen because the market will determine that they happen.
I appreciate that the noble Lord was not intending to caricature my response and that I have cut in before he finished but I said that although we believe that the market is driving things in the direction of scale, it is the case that managers and trustees should be considering this as part of their duties. We are not simply saying that it is all about the market; we believe that the framework is already there.
I am grateful to the Minister for that clarification and I certainly was not intending to misquote what he was saying. However, there seems to be a difference between the active consideration of mergers and the more passive position from the Government in that determination “may” be governed by the influence of the market rather than through what we are saying in this amendment. Again, it is absolutely crucial to us on this side of the House—whether it be on governance, transparency or the way in which duties are imposed on trustees—that while being mindful of previous situations regarding pensions and difficulties in the market, we are always looking to get best value and protect the interests of the public throughout this process. However, in the light of the comments that the Minister has made and the opportunity for further consideration at a later stage, I beg leave to withdraw the amendment.
Amendment 7 withdrawn.
Clauses 12 and 13 agreed.
Clause 14: Statement of investment strategy
Moved by Lord McAvoy
8: Clause 14, page 6, line 29, leave out “may” and insert “must”
My Lords, I shall also speak to Amendment 9. I do not have the reputation of having an unlimited supply of charm, so I shall use what I have left to try to work the oracle on these two amendments.
Clause 14 allows for regulations to be made requiring scheme trustees or managers to prepare an investment strategy. Specifically, the regulations may include requirements on the content of the statement and on the reviewing and revising of the statement. Clause 15 allows for regulations to be made requiring the trustees or managers of a pension scheme to prepare a report about the performance of collective benefit investments. The regulations may include how often these reports need to be obtained and who the reports should be obtained from.
The amendments to each of the clauses simply change the stipulation that the regulations “may” require this to a stipulation that the regulations “must” require this. In doing this, we inevitably return to the nature of the delegated powers in Part 2. The question is whether the Government can imagine leaving some of these powers unused when they come to issue regulations under this part of the Bill and, if so, which ones.
The investment strategy for collective benefits is obviously a crucial part of these schemes. We have already discussed the fact that collective defined contribution schemes have the potential to offer investment strategies that perform better than individual defined contribution schemes. It is also important because research on the subject by the Institute for Public Policy Research showed that the feeling that contributions might be invested badly on savers’ behalf, leaving savers with relatively smaller rewards than they were expecting, can serve to disincentivise savers. As with other aspects of governance, trust in investment strategies is essential.
Will the Minister say, first, whether the Government can imagine a circumstance under which they would not issue regulations requiring a statement of investment strategy to be prepared? Will he provide the Committee with any more detail on what the trustees or managers are likely to be required to do with the statement of investment strategy? Will it need to be made available to scheme members, for instance? The amendment to Clause 15 is in a similar vein. Can the Government imagine any reason why the regulations issued under this clause would not require an investment performance report to be produced by a trustee or scheme manager?
There is also considerable concern about the wider question of what kind of information is made available in investment reports. For instance, the Minister in the other place was usefully able to say that information was likely to be available on transaction costs, but, less usefully, was unable to give any details as to which transaction costs would be laid out in an investment report. Ideally, we would like trustees to have access to enough information to be able to judge whether the investment is being managed as efficiently as it should be. I hope the Minister is able to shed a bit more light on that aspect of the clause. I beg to move.
My Lords, I support Amendment 8, which would require trustees or managers of a collective benefits pension to prepare a statement of their investment strategy in connection with any of their investments. The issue here is not that they “may” be required but that they “must” be required—that is the straightforward proposition in the amendment.
The reason I came in when I read the amendment is that it seems to me pretty inconceivable that a collective benefits scheme would be allowed to operate without the preparation of such a statement, particularly given the way in which such a scheme is managing risk on a collective basis across and between different generations of savers, and where the individuals in the scheme do not have a well defined pot over which they have clear and individual ownership. I have to ask the Minister: when would one ever conceive of a situation where a statement of investment strategy was not required in a collective benefits scheme? An increased return on savings is not an automatic product of collective benefits schemes. Sound governance is the essential ingredient, which must include transparency and clarity on investment strategy.
These schemes have to function very efficiently over the very long term for successive generations. Saving for retirement is typically a 30-year to 40-year project. Pension savings can become vulnerable, for example, to the irrational exuberances of a given set of trustees or managers at any one point in time as to how certain asset classes may perform. It was, after all, the exceptional equity returns of the 1980s and 1990s that led to the fool’s paradise of irrational exuberance about equity returns, which, when it came to an end because those returns were not sustainable, contributed to the closure of so many defined benefit schemes as the true cost of funding the pension promise was laid bare.
Taking that theme, I think that it would be difficult to have confidence in the targeted benefits required of a collective benefits scheme and the sufficiency of the assets to meet those targets unless there is a clear statement and transparency on the investment strategy being pursued. In a collective benefits scheme it is important to have visibility of the investment beliefs, principles and strategy underpinning the decisions of the trustees or management, of the level of risk and volatility being tolerated and of how those views relate to the characteristics of the membership of the scheme and the obligations to the different age cohorts of members.
The direction of travel of public policy on pension regulation, now that investment risk is increasingly transferred to the individual, is for greater transparency, clarity and accountability on investment decisions taken. With the sharing of risk between ordinary pension savers and across the generations in collective benefit schemes, the case for requiring trustees and managers to make clear statements on their investment strategy is even more compelling. I come back to my point that it is pretty inconceivable that a collective benefits scheme would not be required to prepare and publish such a statement. When could one ever conceive of a situation that would be different?
My Lords, I thank noble Lords who participated in the debate on this amendment. The Bill sets out a regulatory framework for collective benefits. Part 2 defines collective benefits and provides for a number of regulation-making powers. The Government’s intention is to produce a comprehensive set of regulations governing the day-to-day running and decision-making in schemes that provide collective benefits. This will include detailed provision around the statement of investment strategy and the investment performance reports that are the subjects of these amendments.
The powers in Part 2 generally have been developed in consultation with the industry. While the Government have laid out an overarching regulatory structure for collective benefits, the consultation process will not stop with the introduction of primary legislation. The Government will continue to listen to industry views and the views of pensioners and take into account the experience of European pension systems. We have heard mention of the Netherlands and Denmark as well as other systems—Canada, for example—where collective arrangements are already in place.
Members will be handing over control of their assets to the trustees or managers running the scheme in a way which differs from individual defined contribution schemes, where the members will usually have some direct choice and options. Also, because members collectively, rather than individually, bear the investment risk, there is a less direct relationship, compared to individual defined contribution schemes, about how the returns are attributed to individual members. It is therefore important that key requirements about investment are applied appropriately. It is important that there is clarity about what the investment strategy is, so that members can be clear about how their money will be invested collectively.
That is why Clause 14 may require the trustees or managers of a pension scheme to prepare a statement of their investment strategy. This clarity is important, as those running the scheme will need to decide on the appropriate balance to be struck between risk where the returns are uncertain and assets that deliver a reliable income. I shall clarify the point that was raised about whether the Government could foresee a situation where we did not provide for regulations in a particular area: no, we cannot.
The difference here is between “may” and “must”. We believe that driving this forward in the way that we are, in conjunction with the industry, is appropriate and that this is likely to deliver—indeed, will deliver—the best result. We are also conscious of the fact that on occasion we need to act quickly to make appropriate changes. I assure the Committee that it is our intention to ensure that there are regulations in relation to both the points raised in these amendments.
I should also say that this is related to trust schemes. Further work and conversations are required with the Financial Conduct Authority to establish how it will regulate non-trust-based schemes offering collective benefits. It may be that it is more effective and appropriate for some of the regulation-making powers under Part 2 to be used in relation to occupational schemes only, and for the FCA to make parallel provision in relation to personal pension schemes. That is one reason, because of the two schemes going forward together, why we believe that the Government’s permissive approach is right, but of course we could always revisit that if we felt it necessary to do so. On that basis, I respectfully ask the noble Lord to withdraw the amendment, while acknowledging his continuing charm, which he referred to earlier.
It is probably just a bit run down, but there we are. I am grateful to the Minister for that very full explanation. However, his response struck a chord in me and a note of concern when he indicated that he did not want the word “must” but rather wanted “may” after consultation with the industry. Assuming that they were asked whether the word should be “must” or “may”, they would say “may”, would they not? So there is a bit of concern that the Government have perhaps listened too much.
I am grateful to the Minister for giving way. As I indicated, the consultation is not just with the industry; it will also be with consumers, pensioner groups and so on. It is not limited to the industry.
I am grateful for that clarification, but I still think that, although obviously I do not know how much weight was given to the industry’s point of view, the fact that the Minister kept some opinions in reserve and indicated that the Government would act at some point in future to change that suggests that there just might be something there. With that clarification, though, especially the clarification that the Government would be prepared to look at this again in the light of experience and circumstances, I beg leave to withdraw the amendment.
Amendment 8 withdrawn.
Clause 14 agreed.
Clause 15: Investment performance reports
Amendment 9 not moved.
Clause 15 agreed.
Clauses 16 to 18 agreed.
Amendment 10 not moved.
Clauses 19 and 20 agreed.
Clause 21: Policy for dealing with a deficit or surplus
Moved by Lord Bradley
11: Clause 21, page 9, line 3, leave out “may” and insert “must”
My Lords, I will not labour the points that we have already made regarding affirmative resolutions of regulations, but I shall speak briefly to Clause 21 because it is another key clause in shaping the structure and policies of pension schemes that are to be developed under Part 2. This is another area that, as we know, the Delegated Power Committee picked out when it said that,
“the likely ingredients of regulations will be so significant to the working of Part 2 as a whole that the negative procedure will not afford the House an appropriate opportunity to debate the provision that will determine the shape of the arrangements”.
I am aware that the Minister is going to bring forward an amendment on that so we will have that opportunity, but it is always worth putting on the record the views of the excellent Delegated Powers Committee on these matters, and obviously we welcome the Government’s response to it.
We have another amendment in this group, along with the delegated powers amendment, which again turns—I will not labour this point—on the issue of “may” and “must”. The first part of Clause 21, which is entitled, “Policy for dealing with a deficit or surplus”, says:
“Regulations may require the trustees or managers of a pension scheme … to have a policy for dealing with a deficit or surplus in respect of any collective benefits that may be provided by the scheme, and … to follow that policy if a valuation report shows a deficit or surplus”.
In our view, it is extremely important that they have a policy around deficit or surplus; it is inconceivable, as my noble friend Lady Drake pointed out in the previous comparable amendment, that there would not be such a policy.
I ask again, similarly to the previous set of amendments, whether the Minister sees any circumstances in which there would not be a policy for trustees in applying and dealing with deficits or surpluses. In order to ensure that the members have confidence in the policies, it is crucial that they are consulted on those policies, so there must be a policy that is available for them to have that assurance. For the members of the scheme there must be a policy, so the regulations should be saying that the trustees must produce a policy around deficit and surpluses within the scheme, which are crucial to the members within the scheme. I feel sure that the Minister will be able to give us the necessary assurances on that, which is why I shall be brief and beg to move.
My Lords, I am grateful to the noble Lord. I apologise that I keep referring to noble Lords opposite as “Ministers”; I am afraid that it is my background in the Welsh Assembly, where I am used to asking questions rather than answering them. They should not jump the gun.
I reassure the Committee about the recommendations of the Delegated Powers and Regulatory Reform Committee. I confirm again that we are content with its recommendation and will therefore bring forward amendments on Report to reflect that. As the noble Lord has said, the power in Clause 21 allows us to ensure that schemes have appropriately transparent policies for how they will handle a situation where the scheme is outside the probability range for paying the target benefits, and that it is a permissive power, not a mandatory obligation.
I shall share some of our thinking around how and why we will use the powers in Clause 21, which deals with what happens in schemes with collective benefits when the required probability range in relation to the target benefits is not being met. In our drafting approach we have used the term “deficit or surplus” to refer to the situation where the scheme is above or below the required probability range. However, I remind the Committee that there is no promise in relation to a collective benefit that an employer would need to stand behind.
The first question to ask is why we require trustees or managers of schemes providing collective benefits to draft a policy on deficit and surplus in the first place. We believe that this is essential because schemes providing collective benefits function in an open and transparent way. It is vital to engender confidence in the way that these schemes are managed and are seen to be managed. Indeed, the lack of a policy set out in advance about how schemes would adjust members’ benefits if required has led to heated public debate in the Netherlands, where some schemes had to reduce benefits when members were not expecting that to happen. I hope that we have learnt lessons from experience elsewhere, as I indicated earlier; this is very much central to the Government’s approach.
We would certainly not want that situation to happen here. So, to address any potential concerns or confusion about how over or underperformance against the probability range will be dealt with, we have introduced Clause 21. Using these powers we may require trustees or managers to schemes providing collective benefits to set out a policy in advance in which they explain clearly how they will deal with such situations and the different options they may take depending on the situation. Trustees or managers will be required to follow that policy where a valuation report under Clause 19 shows there is a deficit or surplus in meeting the target. The aim here is to ensure that by following this policy the scheme is able to return to a position where the probability of being able to pay target benefits falls within the required probability range. This policy will set out a clear set of options or actions that will reassure members that the scheme will be brought back on course and will inform them about how this will occur.
Trustees or managers will have flexibility to draft the policy to fit within their own scheme design. It is not our intention to place unnecessary restrictions on trustees or managers as we recognise schemes that provide collective benefits will be different from one another. However, we want to make sure that they have appropriate mechanisms in place to ensure good governance.
I am sure that we all recognise the importance of that and I do not think there is a great difference of approach between the Front Benches. Perhaps there is a difference in approach, but certainly not in terms of desired outcome. I am sure that noble Lords will understand the need for some flexibility within policy design. It is equally important to have parameters in place—I accept that entirely. We have taken power to set out matters that the trustees or managers must take into account or principles they must follow when formulating the policy. For example, it might be appropriate to put some principles in place about the extent to which any intergenerational transfers can take place. I know that that is an issue that Members are rightly concerned about. We will consult on how these powers may be used.
The core of the difference is that the powers in Part 2 are intentionally permissive, not prescriptive. We want to regulate only where necessary and appropriate.
Turning to the noble Lords’ amendments, therefore, we believe that the right approach is the permissive one. As I mentioned, further work and conversations are required with the Financial Conduct Authority to establish how it will regulate for non-trust based schemes, because we want to go forward in a parallel way to make sure that both sets of schemes—contractual and trust—are taken forward in a similar fashion. Amendment 11, if accepted, would oblige us to make regulations for personal pension schemes where we may not actually need to do so, with the unwelcome prospect of double regulation. As for Amendment 12, this is another case of the DPRRC recommending that the power should be subject to the affirmative procedure. As I set out right at the start of my response to the amendment, we are content with accepting that recommendation.
I am slightly confused. The Minister seems to be saying that there would never be a circumstance where there would not be a policy and therefore it can be permissive because there would be no exception to it. There would always be a policy in place. Can he confirm that that is the case?
I am happy to confirm that. I believe that I indicated in response to an earlier amendment that there would not be any of these powers where we would not anticipate regulation. We do not see a vacuum in any sense in any of these matters. As I said, I think that the difference is a difference of approach rather than a difference of outcome. We believe that we will reach the goal—achieve it—on a permissive basis. We do not believe that the mandatory approach, which I believe is what the noble Lord is pursuing in relation to at least some of these amendments, is the correct one. The difference is a difference of approach rather than a difference of outcome. I hope that that deals with the point that the noble Lord was making. On that basis, I respectfully ask the noble Lord to withdraw the amendment.
Again, I am grateful to the Minister for his response and clarification. From this side of the Committee we could not envisage a situation where something as important as deficit and surplus within funds and providing policies about which the members are clear and on which they have been consulted would not be addressed and in place. The Minister assures the Committee that, through a permissive regime, there will always be such a policy in place. With that assurance, I beg leave to withdraw the amendment.
Amendment 11 withdrawn.
Amendment 12 not moved.
Clauses 21 to 24 agreed.
Clause 25: Policy for calculating cash equivalent of benefits
Moved by Lord McAvoy
13: Clause 25, page 10, line 35, at end insert—
“( ) A statutory instrument containing regulations under this section may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament.”
My Lords, Clause 25 gives the Secretary of State the power to require the trustees or managers of a pension scheme to have a policy concerning the cash equivalent of a pension within a collective scheme. It also requires the trustees or managers to consult on the matters and principles they need to follow when calculating and verifying the cash equivalent of a pension in a CDC scheme. This amendment would require the regulations issued under this section to be subject to the affirmative procedure. This clause was also a part of a very large group of amendments which the Government introduced at Report in the other place.
There remains a tension at the heart of this Bill. The Government have been forced—I do not think there is anything wrong in that—into making so many amendments in large part because of the introduction of freedoms and flexibility in the Budget of 2014. We support those freedoms as long as they can be introduced without harming middle and low earners and do not end up leaving people reliant on the state. But really, more should have been done to work out the effect that these policies would have on how the others would operate. As we have already shown, a large part of the benefit from a CDC scheme can lie in the intergenerational risk sharing that it makes possible. This is how the schemes operate elsewhere. However, if a large proportion of people opt out at 55 by choosing to get a product that enables them to access their money straight away, then that risk-sharing element ceases to be there to the same degree.
This raises the possibility of having knock-on effects on the probabilities of achieving certain targets within the scheme. My concern here is that further work needs to be done on the interaction between the changes in the Taxation of Pensions Bill—which being a money Bill has passed through its remaining stages here—and the changes in this Bill to enable collective schemes and risk sharing. A good start would be to require the affirmative procedure to be used for the regulations on cash equivalents. I therefore ask the Minister to respond to that point in as much detail as possible so that we can grasp the thinking behind the Government’s proposals. I beg to move.
My Lords, I thank the noble Lord for moving this amendment. Clause 25 contains a power to require in regulations that trustees or managers of schemes providing collective benefits must have, and follow, a policy for calculating and verifying the cash equivalents of a member’s collective benefits. Cash equivalents may be needed when a member transfers to another scheme or for the purpose of sharing a pension on divorce, for example. Clause 25 allows for regulations to be made requiring the trustees or managers of a scheme offering collective benefits to set up and follow a policy for the calculation and verification of cash equivalents for collective benefits. The regulations can, among other things, require the trustees or managers to consult about the policy, require that the policy is consistent with regulations about calculating transfer values and other relevant legislation, make provision about the content of the policy, set out matters that have to be taken into account when putting the policy together, and make provision about reviewing and revising the policy.
Delegating to secondary legislation will allow the department to consult on the views of the pension industry, in the wider sense of involving pension groups as well, to ensure that the provisions set out in regulations will capture potential future varieties of collective benefits. The regulations will need to include a fair amount of technical detail, and some of the requirements will be largely procedural in nature. We therefore consider that the negative resolution procedure is the most appropriate form of parliamentary scrutiny here. In the process of parliamentary scrutiny there needs to be a balance between legislative scrutiny and the need to produce secondary legislation in a responsive and speedy way when needed. The requirement for the affirmative procedure in every case as required by this amendment would make it harder to deliver and maintain the regulations that the industry and members need, and would not in our view be an appropriate use of parliamentary time.
It is significant that the 12th report of the Delegated Powers and Regulatory Reform Committee, which considered the Bill, did not make recommendations as regards Clause 25. I am not convinced that the arguments made elsewhere by the Delegated Powers and Regulatory Reform Committee—which we have largely, although admittedly not totally, accepted—apply in the same way here. The committee was rightly concerned about regulations that have shaped collective benefits. Regulations about policies on calculating cash equivalents are not about shaping collective benefits but about how to put a cash equivalent value on a collective benefit when a member asks for a transfer or, as I said, on such an issue as divorce. Those are important matters, but they are largely technical and procedural, and we believe that they are more appropriate for the negative procedure. On that basis, I hope I have dealt with the issues raised by the noble Lord, and I respectfully ask him to withdraw his amendment.
My Lords, once again I thank the Minister for a very full exposition of what was envisaged in the Government’s approach to that. We have at least raised a cautionary note, which the Minister has responded to, and there is not much point in pursuing it further. I beg leave to withdraw the amendment.
Amendment 13 withdrawn.
Clause 25 agreed.
Clause 26 agreed.
Clause 27: Requirement to wind up scheme in specified circumstances
Moved by Lord Bourne of Aberystwyth
14: Clause 27, page 11, line 20, leave out first “or”
My Lords, the package of amendments in this group falls neatly—I hope—into the category of minor and technical. Inevitably we discover bits of drafting that can be improved or things that need to be clarified, and these amendments do just that. They cover a number of specific issues that relate to clauses in Parts 1 and 2, and with noble Lords’ permission I will explain a little more about what each of them does.
The first group of amendments is about consistent drafting. Clause 27 makes provision for regulations to require a scheme or part of a scheme providing collective benefits to wind up. Separately, Clause 37 makes provision for regulations to impose duties on managers of non-trust-based schemes to act in the best interests of the members when taking certain decisions. Both provisions make reference to different types of requirement that may apply in relation to the scheme, including scheme rules, and any relevant legislation that applies to the scheme. The amendments do nothing more than ensure that the same things are described in the same way in both clauses.
Moving on, the amendment to Clause 32 puts beyond doubt that any requirement to publish documents may also apply to policies required by regulations under Part 2 of the Bill. Regulations made under powers in Part 2 can require trustees or managers of schemes that provide collective benefits to have policies regarding a number of matters, including the factors used to calculate members’ benefits, the calculation of transfer values and the steps that may be taken to deal with a deficit or surplus.
Clause 32 makes provision for regulations in Part 2 which require trustees or managers to prepare or obtain any document, to include requirements about publication of those documents and about sending copies to a specified person. It was always the intention that any requirement imposed by regulations under Clause 32 could apply to policies about the operation of collective benefits, and these amendments put that beyond doubt.
The amendment to Clause 45 is about making the drafting clearer. The changes to Section 67A of the Pensions Act 1995 made by Clause 45 make any modification to an occupational pensions scheme that would replace a member’s accrued rights with a right to a collective benefit a protected modification, which can be made only if the member consents. This amendment makes clear that this provision applies only where the existing accrued right is not a right to a collective benefit.
I turn to a few minor amendments to Schedule 2, which amends existing legislation as a result of the changes in Parts 1 and 2. Paragraph 47 makes changes to Section 30 of the Pensions Act 2008. Section 30 deals with automatic enrolment and the transitional period that employers have to meet their automatic enrolment duties for defined benefits and hybrid schemes. The changes in paragraph 47 reflect the changes to scheme categories in Part 1 and replace references to “hybrid schemes” with “shared risk schemes”.
Amendment 49 simply replaces a stray reference to hybrid schemes that was missed when the Bill was introduced. Amendments to paragraph 50 of Schedule 2 remove an ambiguity in the drafting. Paragraph 50 makes changes to Section 99 of the Pensions Act 2008. Section 99 lists definitions used for the purposes of that Act. There are currently two separate provisions in paragraph 50 of Schedule 2 which relate to the definition of “defined benefit scheme”. One adds a new definition drawn from Part 1; the other is intended to remove the existing definition. The existing drafting is ambiguous and needs to be corrected. These amendments remove the ambiguity by replacing the two provisions with a single provision that simply substitutes the old definition with the new one. As collective benefits are now mentioned in the Pensions Act 2008, the definition needs to be added to Section 99, so Amendment 51 also adds a definition of collective benefit to that section.
I hope that noble Lords will agree that this package of amendments represents a necessary improvement to the clarity and accuracy of the Bill, and on that basis I beg to move.
I am grateful to the Minister again for his explanation of the government amendments, which I accept are minor and technical. However, they clarify the position on certain aspects of the Bill, which is welcome, and remove any ambiguity that may have transpired from the original drafting. In that light, the Opposition are happy to accept them.
I am most grateful to the noble Lord, and I commend the amendments to the House.
Amendment 14 agreed.
Amendments 15 and 16
Moved by Lord Bourne of Aberystwyth
15: Clause 27, page 11, line 20, leave out “any scheme rule” and insert “provision of a scheme”
16: Clause 27, page 11, line 23, leave out “scheme rule” and insert “provision of a scheme”
Amendments 15 and 16 agreed.
Clause 27, as amended, agreed.
Clauses 28 to 31 agreed.
Clause 32: Publication etc of documents
Amendments 17 and 18
Moved by Lord Bourne of Aberystwyth
17: Clause 32, page 12, line 35, after “document” insert “or have a policy”
18: Clause 32, page 12, line 36, after “document” insert “or policy”
Amendments 17 and 18 agreed.
Clause 32, as amended, agreed.
Clauses 33 to 35 agreed.
Moved by Lord Bradley
19: After Clause 35, insert the following new Clause—
“Collective benefits: annual review
The Secretary of State must each year produce a report on the operation of this Part and the report must include the number of collective benefit schemes that have been set up under its provisions.”
My Lords, I draw attention to the wording of this amendment because I am sure that it will be welcomed by the Government and that they will wish to produce and deliver such an annual review to Parliament.
When the press release that accompanied the Bill was issued, it gave me the impression that the Government envisaged that Part 2 would lead to a number of new combined collective defined benefit schemes coming into operation. However, as we have seen the Bill being considered in this House and in the other place, the number of schemes coming into operation has been cooling and the Government have been more reticent to be clear about how many new schemes they anticipate will be set up.
This is why, among other things, the number of schemes should be included in an annual review to see whether provisions in the Bill adequately enable collective defined contribution schemes to be set up. That cannot and should not be the only measure. We do not wish such an annual report to cover only quality, but it would be useful for Parliament and the public more broadly to be kept aware of how the policy is unfolding.
There is also the wider point that a number of issues that have been raised in Committee today have centred on the speed with which the Bill is passing through both Houses of Parliament, the number of changes to the Bill in that process and the ability to scrutinise secondary legislation alongside primary legislation. All this leads to the conclusion that an annual report to Parliament would be a very effective way of giving assurances that all is well with the implementation of the Bill and indicating specifically the consequences around CDCs.
I accept that the first annual review—if, or when, this amendment is accepted—might be rather thin because, as we heard earlier, the regulations for Part 2 will not come into force until later in the year. However, I do not think that undermines the basic point that legislation of this type should be reviewed and presented to Parliament on an annual basis. I believe that the Government will welcome the publication of such a report, principally because these new schemes are part of the overall package of changes which have been hailed by Ministers as a pensions revolution. It will enable the Government to communicate to Parliament, and more importantly to the public, how these packages of reforms are rolling out, how they are working in practice and how they are achieving the policy objectives which the Government have laid out, not only with the Pension Schemes Bill but with the Taxation of Pensions Act and the other pensions provisions that have been put through Parliament. I accept that this amendment only applies to collective schemes, but it establishes a principle about reporting to Parliament on the pensions changes more broadly. It is a peg on which to hang a package of reporting and a way in which we can continue to have the ability to question and scrutinise a very important area of policy for millions of people in this country. I beg to move.
My Lords, I thank the noble Lord, Lord Bradley, for moving this amendment. I will say a little about our approach. As I think noble Lords are aware, our approach is about enabling choice. While the number of schemes is important, it is not the only measure of success.
The Bill enables schemes providing collective benefits to be set up where employers and providers wish to do so. We believe that this Bill will stimulate greater innovation and choice, allowing employers to adopt the sort of arrangements available in other countries—we have spoken previously of the Netherlands, Denmark and Canada—if it is right for them and for their employees. The number of schemes is an important issue, but it is certainly not the only issue.
We believe that the development of schemes offering collective benefits could be more appropriately monitored in other ways than a bespoke annual review, which may become something of a tick-box approach. We envisage that this could be done through existing access through the Office for National Statistics, which conducts surveys and collects data, for example.
Perhaps more importantly and across the piece, the noble Lord indicated that this review is on only one small aspect of the legislation. There is much else in the legislation. The Cabinet Office Guide to Making Legislation already requires the relevant government department within three to five years after Royal Assent to submit to the relevant Commons departmental Select Committee a memorandum, to be published as a Command Paper, containing a preliminary assessment of how an Act is working in practice. No doubt, our House can pick up on that too.
I recognise that there is a genuine concern about providing information on how this aspect of the legislation is operating in practice and perhaps more widely than the noble Lord indicated in his contribution. There is a wider issue about how the rest of the legislation is operating. I will have a look at this to see what we can do. However, we believe that an annual review is somewhat bespoke and tick-box. We have a provision for a review within three to five years of the Bill passing, but if there is anything that we can do supplementary to that, and should be doing, I will come back on that on Report. I say that without any firm promise that we believe there is anything to do, but I am happy to look at it. On that basis, I hope that the noble Lord will withdraw the amendment.
I welcome the Minister’s response to the request for an annual review. It was certainly not my intention—I hope it was clear in my opening remarks—to see this as a tick-box exercise. I see it as a very effective document that would be presented to Parliament and allow us to have proper scrutiny of a very important new proposal that has been brought forward. The Minister is right that it was in the context of looking at the wider pension reforms that are going through.
While I do not believe that we need to wait three or five years to get such an annual report, I accept the Minister’s offer to at least consider how information can be provided to the House, specifically on collective defined contribution schemes, and then more widely in the context of pension reform. I welcome the Minister’s response to that at a later stage in our deliberations. With that assurance, I beg leave to withdraw the amendment.
Amendment 19 withdrawn.
Clause 36 agreed.
Clause 37: Duty to act in the best interests of members
Amendment 20 not moved.
Moved by Lord Bourne of Aberystwyth
21: Clause 37, page 14, line 40, leave out “instrument, enactment or rule of law” and insert “legislative provision, rule of law or provision of a scheme or other instrument”
Amendment 21 agreed.
Clause 37, as amended, agreed.
Clause 38 agreed.
House resumed. Committee to begin again not before 8.29 pm.