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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.