Pension Schemes Bill — Committee (1st Day)

Part of the debate – in the House of Lords at 5:45 pm on 7th January 2015.

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Photo of Lord Bourne of Aberystwyth Lord Bourne of Aberystwyth Lord in Waiting (HM Household) (Whip) 5:45 pm, 7th January 2015

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.