Pension Schemes Bill — Committee (1st Day)

Part of the debate – in the House of Lords at 6:45 pm on 7th January 2015.

Alert me about debates like this

Photo of Lord Bourne of Aberystwyth Lord Bourne of Aberystwyth Lord in Waiting (HM Household) (Whip) 6:45 pm, 7th January 2015

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.