Pension Schemes Bill — Committee (1st Day)

Part of the debate – in the House of Lords at 6:00 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) 6:00 pm, 7th January 2015

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.