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Pension Schemes Bill – in the House of Lords at 3:09 pm on 27th January 2015.

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Amendment 1

Moved by Lord McAvoy

1: After Clause 18, insert the following new Clause—

“Fiduciary duty of trustees

(1) The Secretary of State may by regulations—

(a) require any pension scheme, which is not already overseen by independent trustees, to appoint a board of independent trustees; and

(b) set out the powers and duties of a board appointed under paragraph (a).

(2) Regulations under this section—

(a) shall be made by statutory instrument, and

(b) may not be made unless a draft of the instrument has been laid before, and approved by resolution of, each House of Parliament.

(3) The board of independent trustees shall have a fiduciary duty towards members of the scheme overseen by them.

(4) The fiduciary duty set out in subsection (3) shall take precedence over any duty to—

(a) the shareholders in, or

(b) other owners of,

the operators of the scheme.

(5) In relation to any matters of member interest, decisions of the board of independent trustees shall be binding on the board of directors or other analogous bodies.”

Photo of Lord McAvoy Lord McAvoy Opposition Whip (Lords), Shadow Spokesperson (Northern Ireland), Shadow Spokesperson (Scotland)

My Lords, the amendment stands in my name and that of my noble friend Lord Bradley. It is our contention that the Bill does not go far enough to address the governance of defined contribution pension schemes. We have consistently argued on the Bill and the previous Bill that all workplace pension schemes must be run by independent boards of trustees. Those trustees would have a fiduciary duty that would take precedence over any duty owed to shareholders. In proposing the amendment, we are setting out a clear responsibility that all those looking after someone else’s money or advising on investments should be subject to fiduciary standards of care. That will mean that conflicts of interest must be resolved in the beneficiaries’ interest. That omission from the Bill is perhaps surprising given the findings of the government consultation document entitled, Reshaping Workplace Pensions for Future Generations. 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”.

The Bill sets up a new model of collective pensions. This will have a form of independence within the governance arrangements, with an alignment of interests. It falls short of our proposal for independent trustees with a clear fiduciary duty to act in savers’ interests, but is an acknowledgement of the principles underpinning good governance. The Government have failed to take the opportunity to require that independence in the governance of all pension schemes.

In Committee, the noble Lord, Lord Bourne of Aberystwyth, said:

“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”.—[Hansard, 7/1/15; cols. 381-2.]

In response, we say to the Minister: how long should we give the industry to change? How much evidence do we need to prove that government action is needed and that it is our responsibility to act? Enough is enough.

During the past three years alone, the failures of the pension industry have been well documented. Market studies have been produced by the Office of Fair Trading and the Financial Conduct Authority and reports produced by the Pensions Institute and the Centre for Policy Studies, among others, as well as by journalists from the Times, the Telegraph, the Mail and the Guardian, through to Channel 4 documentaries, to name but a few. There can hardly be a literate adult in the UK who does not understand that there is something seriously amiss without pension industry. Nor should we ignore the fact that many of those commentators and financial experts have called on the Government to take action because of the failure of regulation, the failure of parts of the market to follow ABI codes of practice or adopt best practice. It has been given a chance to improve for the past decade or more, and even the mis-selling scandals that have cost the industry dear have not been enough to prompt the change that we all believe is necessary.

One further matter should be considered: the success of auto-enrolment. Auto-enrolment has proved attractive and more people have remained in the schemes to date than we had dared hope. We have helped people to do the sensible thing, but that will not be sustained if we do not protect savers from excessive charges, poor returns, poor management practices, mis-selling scandals and the like. People need to trust the private sector pensions industry. As my noble friend Lady Drake said in Committee:

“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.—[Hansard, 7/1/15; col. 378.]

I beg to move.

Photo of Lord German Lord German Liberal Democrat 3:15 pm, 27th January 2015

My Lords, before I listen to answers from the Benches opposite, I shall ask the Minister a few questions. If he feels that it is not appropriate for him to reply, perhaps members of the Labour Front Bench might give me the answers.

My understanding is that the number of schemes without trustees—those referred to in this amendment—is of the order of 40,000 to 47,000. I have no problem with independent trustees or trust-based pension schemes: my question is about the scale of the impact of this amendment. If 46,000 or 47,000 schemes—if that is the number of schemes required by this amendment to set up boards of independent trustees—are required to find trustees, there would, first, be a drag on finding that number of suitably-qualified people to fulfil those roles. I wonder where such people might be found.

Secondly, is there a cost to such a change? Changing these schemes is bound to cost them money. Given that the Government have put in place the 0.75 per cent cap, which means that more than 99 pence in the pound of every pension contribution goes towards the benefit—the pension that comes out at the other end—is there any way that that cost would have to fall on the member benefits? In other words, would the need to pay the costs of so many changes to a large number of schemes reduce people’s pensions?

My final question relates to the role of the independent governance committees that are set up. My understanding —perhaps my noble friend could confirm it—is that these committees were set up as a result of the report of the Office of Fair Trading and are a government response to that request. If that is so, perhaps my noble friend could tell me what the role and responsibilities of the IGCs are which can be fulfilled, and which would perhaps fill the trustee role in the schemes where there is no trust-based system as required by this amendment?

Photo of Lord Bourne of Aberystwyth Lord Bourne of Aberystwyth Lord in Waiting (HM Household) (Whip)

My Lords, I first thank the noble Lord, Lord McAvoy, for his contribution. I will do my best to answer his points and those of my noble friend Lord German.

I welcome the opportunity to debate this amendment again, having discussed it at length in Committee. It is fair to say—as the noble Lord said in opening—that, in philosophical terms, there are differences between the Government and the Opposition on this issue. However, we certainly want the freedoms that the new system contained in the Pension Schemes Bill offers. To that extent, we are united. However, we are certainly coming at it from different angles.

The noble Lord, Lord Bradley, suggested in Committee that all workplace pension schemes should be run by trustees and have a legal duty to prioritise members’ interests. In the same debate the noble Baroness, Lady Drake, made a broader case for extending a fiduciary duty to all who have the discretion to manage other people’s money. The Government share the concerns of the noble Lord and the noble Baroness that pension schemes should be well run. As I said in Committee, the Government are committed to ensuring that all workplace pension schemes are well governed, with members’ interests at the heart of everything they do. That is why, in March last year, we set out our proposals for strengthening the governance of occupational pension schemes that are money purchase schemes, and to the money purchase benefits provided by other schemes, in the Command Paper, Better Workplace Pensions: Further Measures for Savers. I should add that the majority of stakeholders supported these proposals by saying that they represented a positive change, intended to drive the right behaviours.

As noble Lords will be aware, in that publication last October we put these proposals on a sure footing by consulting on draft regulations to place minimum governance standards on, broadly, all occupational pension schemes which are money purchase or have money purchase elements to them. That consultation has now ended; we will shortly be publishing the Government’s response and laying the final draft regulations before Parliament, to come into force this April. For workplace personal pension schemes, the FCA has also completed its consultation on draft rules for independent governance committees, which were referred to by my noble friend Lord German and which will ensure oversight of these schemes in members’ interests from April 2015, and aims to publish its policy statement by early February of this year. That probably answers my noble friend’s point: these committees are essentially supervisory rather than day-to-day, which would be the role of trustees.

In respect of the governance of collective benefits, I can reassure noble Lords that we have a number of provisions in Part 2 that enable us to make requirements in regulations about some of the key aspects of running a scheme offering collective benefits. These are specifically tailored to such schemes and reflect key differences in the rights that members have in collective benefits, compared to money purchase benefits. We may also make regulations under a power in Part 3 to require certain decisions in respect of collective benefits, and in relation to defined ambition schemes, to be made in the best interests of members to ensure appropriate safeguarding of members’ interests. This reflects the different nature of the decisions being made on behalf of members in these types of pensions, compared to money purchase pensions.

I will refer now to another point made by the noble Lord, Lord Bradley, in Committee. He proposed that a trust-based approach is preferable to a contract-based one. I emphasise again that we must not assume that trust-based schemes are always better governed than contract-based workplace pension schemes. There is no evidence that one governance structure necessarily delivers better outcomes than the others. As I said in Committee, we consider that scale, good governance and charge levels are among the key determinants of member outcomes, not whether a scheme is contract or trust-based. But as I also emphasised, while we are interested in scale inasmuch as it may help schemes to improve quality and lower charges, it is not an aim in itself and bigger does not always mean better. 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 of independent governance committees with a duty to act in members’ interests, from April 2015, will further strengthen the governance of contract-based schemes. Also from April of this year, the Government and the FCA are intending to introduce measures so that certain savers in, broadly, all occupational and contract- based schemes providing money purchase benefits which are used for automatic enrolment will not be subject to high or inappropriate charges. The positioning in the Bill of this amendment limits the powers to schemes with collective benefits. However, it is not clear whether this is the intention behind the amendment.

We would not want to single out collective schemes here and, as I have mentioned, there are powers in Part 3 covering the interests of members of collective schemes. If the noble Lord, Lord McAvoy, intended the amendment to apply to all schemes, I am not sure whether it would achieve this. As I explained in Committee, if this amendment were exercised across all schemes, it would require independent trustees to be recruited for tens of thousands of pension schemes. I believe that this answers a point raised by my noble friend Lord German. Data from the Pensions Regulator show that there are at least 47,680 private workplace schemes alone, although I accept that not all those will need to recruit independent trustees. My noble friend Lord German put a powerful case for not passing this amendment, as it is not clear whether it is intended to cover just collective benefit schemes or schemes more widely. Clearly, there will be a cost associated with it.

Photo of Lord McAvoy Lord McAvoy Opposition Whip (Lords), Shadow Spokesperson (Northern Ireland), Shadow Spokesperson (Scotland)

I thank the Minister for giving way. The Minister has raised some objections that are less extreme than those of the noble Lord, Lord German—so there is a difference in fairness here. Our new Clause 13 was initially a response to the problem of having so many trustees. Let us not forget this direct quote from my honourable friend Gregg McClymont:

“Our new clause 13 would initiate a response to that problem, but let us not forget that of the 200,000 pension schemes in the

UK the vast majority are group personal pensions under the management of four or five—no more than half a dozen—insurance companies. A governance board properly constituted of trustees attached to each one of those major insurance companies would deal with the vast majority of pension schemes in the UK. That is a very important point”.—[ Official Report , Commons, Pension Schemes Bill Committee, 4/11/14; col. 324.]

Photo of Lord Bourne of Aberystwyth Lord Bourne of Aberystwyth Lord in Waiting (HM Household) (Whip)

I am grateful for the noble Lord opposite for that intervention, but the case remains there is clearly going to be a cost associated with this. This is an objection to it, but the prime objection is that we do not accept the principle that contract-based schemes need such a fundamental change. Though different in essence from the fiduciary nature of trustees’ duties and trust schemes, there are of course obligations placed on contract-based schemes, as I have tried to set out.

We all agree that good governance of pension schemes is essential. This is why the Government’s proposed new governance standards, applying across broadly all workplace pension schemes in respect of money purchase benefits will further protect members by ensuring that schemes are run in their interests. It is also why this Bill makes provision for targeted regulation-making powers in respect to the running and good governance of collective benefits and certain decisions in defined ambition schemes and in relation to collective benefits.

I accordingly and respectfully ask the noble Lord to withdraw this amendment.

Photo of Lord McAvoy Lord McAvoy Opposition Whip (Lords), Shadow Spokesperson (Northern Ireland), Shadow Spokesperson (Scotland)

My Lords, maybe I am paranoid or maybe I just have a suspicious mind or maybe my mother knew what she was doing when she called me “Thomas”, but I do not believe that it is entirely coincidental that what someone called the Welsh mafia are in operation here, with certain facts—in inverted commas—being produced. Cost has been mentioned by the noble Lord, Lord German, and the Minister. Can anyone in this House give an exact figure for the cost to the members of pension schemes where there has not been proper fiduciary guarantees of independent governance? Can anyone give me a quote? Plenty of folk can quote instances where money has been lost through pension funds. I do not think that the principle that we are putting forward here is as unreasonable as has been portrayed, particularly by the noble Lord, Lord German. We will return to scale at a later stage. In the meantime, we will try to find an estimate of how much has been lost to ordinary members of pension schemes through a lack of governance.

In the meantime, however, I beg leave to withdraw the amendment.

Amendment 1 withdrawn.

Clause 45: Rules about modification of schemes

Amendment 2

Moved by Lord Bourne of Aberystwyth

2: Clause 45, page 19, line 24, at end insert—

““( ) regulations made under Schedule 17 to the Pensions Act 2014;

( ) regulations made under Schedule 18 to the Pensions Act 2014;”

Photo of Lord Bourne of Aberystwyth Lord Bourne of Aberystwyth Lord in Waiting (HM Household) (Whip)

My Lords, I address the House as one half of the Welsh mafia or the Taffia—a charge I reject totally of course.

These amendments are consequential in nature. They address an omission in the current legislation. In the course of checking through the changes made as a result of the Bill, omissions in the Pensions Act 2014 came to light. The amendments needed all relate to overriding legislation—that is, when legislation overrides provision in the scheme rules such that the legislation is treated as if it were part of the scheme rules.

Without these amendments, any overriding requirements made under regulations under Schedules 17 and 18 to the Pensions Act 2014 would not be treated as part of the scheme rules for the purposes of the Pensions Act 2004 and subsisting rights provisions in the 1995 Act, leading to inconsistency in the way in which overriding provisions are dealt with and a potential lack of clarity.

I beg to move.

Photo of Lord Bradley Lord Bradley Shadow Spokesperson (Work and Pensions), Shadow Spokesperson (Health)

I shall briefly respond as this is the first set of government amendments. I thank the Minister for the courtesy of writing to me with his proposals around these amendments; it is very helpful to have that in advance, as it limits the need for further debate on these matters. Maybe I should declare an interest in that my great-uncle was Welsh, but I do not claim to be part of the Welsh mafia. With those remarks, I am supportive of the amendments.

Amendment 2 agreed.

Amendment 3

Moved by Lord Bourne of Aberystwyth

3: Clause 45, page 19, line 27, at end insert—

““( ) regulations made under paragraph 17 of Schedule 17 to the Pensions Act 2014;

( ) regulations made under paragraph 6 of Schedule 18 to the Pensions Act 2014;”

Amendment 3 agreed.

Clause 47: Pensions guidance

Amendment 3A

Moved by Lord Bradley

3A: Clause 47, page 20, line 9, at end insert—

“( ) The FCA must discharge its functions in relation to pensions with a view to securing an appropriate degree of protection for consumers with a right or entitlement to flexible benefits whether they have used pensions guidance or otherwise throughout the decision-making and purchasing process, including safeguards actively to inform consumers of key risks and benefits.”

Photo of Lord Bradley Lord Bradley Shadow Spokesperson (Work and Pensions), Shadow Spokesperson (Health) 3:30 pm, 27th January 2015

My Lords, this amendment is connected to Amendment 22. We had an extremely interesting debate in Committee on the merits of what is known as the second line of defence, and I am pleased that we are able to return to it today as a result of our amendment.

I preface my brief remarks on this matter with our general approach to the Bill throughout its passage in the House. While we broadly support the new freedoms and flexibilities in the Bill and its related Bill on taxation, we have sought throughout to ensure that the interests of pensioners—customers—are protected in what has often been a very dysfunctional annuities market. Our overriding aim has been to ensure that those protections for the public are in place before the Bill is enacted at the beginning of April.

To return to this specific amendment, we argued in Committee that a second line of defence was vital. We discussed evidence from two reports from the Financial Conduct Authority, quoted in Committee, that the market is often not functioning as it should and is letting consumers down. We believed that action was needed immediately to protect savers when making possibly the most complex financial decision that they will ever have to make.

In Committee, the Minister did not seem to accept that action for a second line of defence should be in place by April this year, when the new freedoms and flexibilities are implemented. Instead, he suggested that, because the FCA is a relatively new body with new powers, and has committed to reviewing all its rules in the first half of this year, we should in effect await the outcome of its deliberations before any further action was taken. In response to the Minister, I said that while I would reflect on what he had said, I believed that the public sought reassurance and the confidence that a second line of defence would give them. That is why we have continued to champion a second line of defence throughout the passage of the Bill in both Houses, as have many pension groups and organisations outside this House.

I and my noble friends therefore welcome the Government’s apparent change of heart today, and the fact that they have recognised the strength of the arguments to protect pensioners that we have been making. It is with pleasure we received, and read, the very welcome letter from the Financial Conduct Authority, dated 26 January, saying that it would ensure the,

“appropriate protection of consumers, accessing their pension saving”.

This is extremely welcome, and starts to put together a proper second line of defence.

At this stage of the debate, though, I have three questions for the Minister. First, as the letter says,

“Subject to agreement of the Board, we are minded that it is appropriate to bring these rules into force on a temporary basis from 6 April, and prior to consultation, to provide important additional protection for consumers”.

Will the Minister confirm that the Board will agree to putting this second line of defence in place and that, at a future stage, the Board may decide that it is not necessary?

Secondly, the letter goes on to say,

“As part of that consultation we will also consult on whether to retain or modify the temporary rules that we are proposing to introduce in April”.

Will the Minister assure the House that, after the temporary period that the Financial Conduct Authority is proposing, there are no circumstances in which it would then remove the second line of defence?

Thirdly, in relation to trust-based schemes, it is my understanding that the Pensions Regulator is responsible for these schemes, not the Financial Conduct Authority. Will the Minister assure the House that similar protections for trust-based defined contribution schemes will be made by the Pensions Regulator, in parallel with the FCA?

The merits for a second line of defence seem now to be accepted. I look forward to the Minister’s responses.

Photo of Baroness Drake Baroness Drake Labour

My Lords, I had a lengthy and impassioned speech prepared on the need for a second line of defence to address the risks that pension savers might make detrimental and irreversible choices when they access their savings. However, this has been tempered by the letter from the FCA, so my contribution is shorter and less passionate as a consequence.

This amendment sets out a duty on the Financial Conduct Authority to protect savers accessing their pension savings when they are engaging with providers during the decision-making and purchasing process. This is distinct from the duty on the FCA to protect savers receiving guidance from designated guidance providers.

The guidance guarantee, now referred to as Pension Wise, is a key measure for helping people navigate the complex retirement options arena from April 2015. There are people working hard to make its delivery a success, as it will provide a very important service to savers. The FCA will expect providers to check whether a customer has used the guidance service and, if not, to encourage them to do so. In popular parlance, this is the first line of defence.

Beyond the guidance stage, the saver has to move to the process of making a decision, and of selecting or purchasing a retirement income route. It is what happens at this stage—the exchange between the consumer and the provider—that is causing so much anxiety and to which the amendment is directed. It puts a duty on the FCA to secure an appropriate degree of protection for the consumer at that stage. This is what is popularly referred to as the second line of defence.

As my noble friend has said, we have now received the letter from Mr Woolard, Director, Strategy and Competition at the FCA, advising that FCA board approval is being sought for this second line of defence. It is minded to bring these rules into force on 6 April 2015, pending a review of all the current regulatory requirements around the customer’s interaction with the providers. The CEO and chair of the FCA have made some thoughtful and welcome speeches that have set the framework for debate in addressing the challenge of poorly functioning financial services markets.

The recent FCA reports on retirement income markets have been hard-hitting and on the nail. It is worth reminding ourselves what they observed: annuity sales practices were contributing to consumers missing out on a potentially higher income; consumers’ tendency to buy from their existing provider lowered the potential for higher income; consumers will be poorly placed to drive effective competition; the retirement income market is not working well; and the introduction of greater choice and potentially more complex products will reduce consumer confidence and weaken the competitive pressures on providers to offer good value. The anxiety was that that analysis and the heightened risk of consumer detriment with the advent of the new freedoms would not translate into sufficient regulatory protection. Against that background, the FCA letter is most appreciated, although I await with interest the answers to my noble friend Lord Bradley’s three questions.

The second line of defence is not a total solution to the risk that consumers will make decisions that are not in their interest, but it will make a very important contribution to what we know is a poorly performing market. I therefore welcome the FCA letter and thank the Minister for facilitating its publication.

Photo of Lord Hutton of Furness Lord Hutton of Furness Labour

My Lords, it has been clear to everyone following this debate about the latest tranche of pension reforms brought forward by the coalition Government that if we were to mitigate some of the obvious risks that are created by this new world of choice and flexibility at the point of retirement for people saving in DC schemes, it would be necessary to put into place something that we have now called the second line of defence.

The need for the so-called second line of defence was crystal clear quite early on. It is important that we do not treat people at the point of their retirement like children; they have saved all their lives for that point. However, the lack of a requirement to take guidance, because it is a choice or option, certainly creates a substantial risk that the benefits of the Government’s reforms—the greater freedoms—which I think most of us would welcome, could create some very unfortunate outcomes. We know from the failure of the open market option, and from previous attempts to get this right, that the real risk we need to mitigate here is that people will make the wrong decision, and in the later years of their retirement they will find that they just do not have enough money to pay their bills, and will present themselves and seek benefits. That would be a terrible outcome.

Therefore, the decision to put in place the second line of defence, which we heard recently from the FCA, is to be enormously welcomed. We do not know what this second line of defence will actually be; we do not know what will prompt them—what questions consumers will be asked by their pension provider before they take any final decisions. But at least we now have something in place that holds out the prospect that these reforms will work. There was a very real danger that if we did not put this second line of defence in place, the reforms would fail, and that the failure would live with us and haunt us for decades—people who had saved and worked hard all their lives would find themselves running out of money during their retirement. That would represent policy failure on a grand scale.

Today, therefore, we have an opportunity to make these reforms work. I suspect that means that probably we will not need a vote on my noble friend’s amendment, which, like my noble friend Lady Drake, I was very keen to support today. I hope that we would have had a majority in this House for the amendment. This prudent step is not about wrapping up these new freedoms with overly regulatory responses, and so on, but about taking the right course of action to mitigate the obvious risk of policy failure while preserving at the same time the essence of the new freedoms, which is to choose and to make personal financial decisions at the point of retirement.

So I, too, would welcome some further clarification from the Minister today about exactly how this so-called second line of defence will work. We do not know very much about it, but it has to be in place pretty quickly, and there will be lots of concerns out there about exactly what it will mean and who will effectively have the responsibility to enforce it and oversee it.

The whole world is now much more complicated for people saving in DC schemes. Previously, one had to purchase an annuity at the point of retirement. We know that that market was not working, and the Government brought forward reforms to deal with that failure. We will have to wait and see whether these reforms are going to work. It is absolutely clear from all the consumer research that people are saying that they want to have secure, reliable income in retirement so that they can pay their bills and do the other things that they want to do with their remaining years. There is an absolutely overwhelming need for people to get proper advice about what to do with their pension pots at the point of retirement. This is not one of those areas where we can shrug our shoulders and say that laissez-faire will get us through. Doing nothing will almost certainly ensure that there will be a colossal scandal in a few years’ time when people will turn round to this House, and another place, and say: “What on earth were you thinking of? What on earth were you doing?”.

We have the chance today to make these reforms succeed. By succeed, I mean that we will help people when they are approaching retirement to make the right choices about what to do with their pension pots so they can live a secure, comfortable life and not face the terrible consequence of having to turn round at some point in their retirement years and seek benefits.

Photo of Baroness Greengross Baroness Greengross Crossbench 3:45 pm, 27th January 2015

My Lords, I put my name to this amendment. I thank the Ministers, with whom I have had the pleasure of discussing it, for the work they have done in making sure that the FCA has come to its extremely welcome conclusion. I echo what the noble Lord, Lord Hutton, has just said. We want to know a bit more about exactly how this will work and whether it is sufficient. In the mean time, I have nothing more to add except that, with a great deal of pleasure, there is no longer the need for an amendment, so far as I am concerned—so I will leave other noble Lords to speak to it.

A noble Lord:

Shame!

Photo of Lord Newby Lord Newby Lords Spokesperson (HM Treasury) (Whip), Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

In Committee, the issue of the second line of defence was the subject of more debate than anything else. I, and other noble Lords, received a lot of lobbying from all sides of the industry and consumer groups about the need for a second line of defence. So I am pleased that other noble Lords are as pleased as I was when I heard, at the end of last week, that the FCA was planning to announce yesterday that it would make new rules by April to protect consumers as they make decisions on how to access and use their pension savings in later life. The Government share the aspirations of the noble Lords, Lord Bradley and Lord Hutton, that we should put in place a new system which gives the maximum opportunity for people to take informed decisions, because we accept that these decisions are, very often, for life and have very significant consequences.

Yesterday evening, I circulated the FCA announcement to noble Lords who had taken part in earlier debates. In short, the rules will introduce a second line of defence. Pension providers will be required to ask consumers seeking to access their pension savings about key aspects of their circumstances relating to the choice that they are making and give relevant risk warnings in response to the answers. This is a very important element: we are keen not simply to have another tick-box exercise, which we could have done at this point. Providers will also have to highlight that guidance from the Pension Wise service, or regulated advice, can help them to avoid making a poorly informed decision. The FCA will also require that messages should be delivered to consumers in direct and simple language.

The FCA announcement illustrates precisely why the amendments we are considering are not needed. The FCA already has a duty to ensure that the retirement income market is working for consumers captured under its statutory objectives, including its objective to secure an appropriate degree of protection for consumers. The announcement demonstrates just how seriously the FCA is taking this duty. It would also be unusual to legislate to give the FCA a specific objective in relation to one sort of investment—pensions—and to do so outside the Financial Services and Markets Act.

I was asked a number of specific questions. The first related to the board agreeing the proposals. It is notable that the press release does not refer to the board. I suspect that this is not an unusual way of dealing with announcements that the FCA wishes to make between board meetings. I believe that there will be a board meeting next month at which the decisions announced yesterday will be ratified. It would be extremely unusual if the board were to go against the advice of its officials on a matter such as this. I am not on the board; its members are independent. However, if I were a betting man, I would be prepared to put my shirt on the likelihood of these new rules being ratified.

The second question was whether these are temporary or permanent rules. The temporary element of them relates to the fact that there has been no consultation. In order to get them in place in time, they have to be introduced quickly under a fast-track procedure. Again, while I cannot formally commit the board or the FCA, I think it is fair to say that there is no intention in anyone’s mind that this should be a temporary provision. The new rules have a long-term purpose; there is no temporary element. It is certainly the intention that there will be permanent rules—but, as I say, the transition from temporary to permanent involves the consultation process which they would normally undertake.

The third question related to whether trust-based schemes would also be covered. As the noble Lord, Lord Bradley, pointed out, the FCA will not cover trust-based schemes, but the DWP, which writes the regulations for trust-based schemes, is working with the Pensions Regulator to consider how this can best be dealt with for trust-based schemes on the same basis, so we have it in hand. This is a very recent development so far as the FCA is concerned; it was announced only yesterday.

Photo of Lord Bradley Lord Bradley Shadow Spokesperson (Work and Pensions), Shadow Spokesperson (Health)

I am grateful to the Minister. As the DWP is working on the issue with the Pensions Regulator, will it be on the same timetable for introducing such a second line of defence from 6 or 7 April?

Photo of Lord Newby Lord Newby Lords Spokesperson (HM Treasury) (Whip), Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

My Lords, that is what we are hoping to achieve, so that everybody is working on the same basis. In making the announcement yesterday, the FCA demonstrated that it has listened to the many representations it has received directly, and to debates in your Lordships’ House. I am pleased that it has. In the light of that announcement, I hope that the noble Lord will feel able to withdraw the amendment.

Photo of Lord Bradley Lord Bradley Shadow Spokesperson (Work and Pensions), Shadow Spokesperson (Health)

I am very grateful to the Minister for that reply. I thank my noble friends Lady Drake and Lord Hutton, and the noble Baroness, Lady Greengross, for their support for this amendment.

The Minister responded well to the three questions I raised. While I accept that he is not a betting man, I also accept that his assurances that the board will approve these proposals, that they are not temporary, and that the DWP will bring in a similar, parallel policy for trust-based schemes are all welcome and reassuring to the House. I believe that this is a real victory for all those who have campaigned, both inside this House and outside Parliament, for a second line of defence to give added protection to people making decisions about the pension pots and retirement income. As we said, that is perhaps the most important financial decision they will make in their lives.

Photo of Lord German Lord German Liberal Democrat

I also support the letter from the FCA. It is very welcome. The bottom of the first page of the letter says, in absolute terms, that,

“the FCA has also decided to bring the ABI retirement code into our rules”.

Would the noble Lord agree that that is very welcome, given that the ABI retirement code lays out in great detail the journey through which the customer will travel? The letter makes very clear that that will happen.

Photo of Lord Bradley Lord Bradley Shadow Spokesperson (Work and Pensions), Shadow Spokesperson (Health)

I am grateful to the noble Lord, Lord German. That is in the letter and, as I said, we welcome its contents. It reinforces the points that we made about the second line of defence and the future adequacy of that provision. That is clearly welcome.

In conclusion, we will closely monitor the way that the policy and the implementation fall, to ensure that consumer rights are properly protected in the way that everyone in this House expects. With that, I beg to ask leave of the House to withdraw the amendment.

Amendment 3A withdrawn.

Clause 48: Independent advice in respect of conversions and transfers: Great Britain

Amendment 4

Moved by Lord Newby

4: Clause 48, page 20, line 30, leave out “create exceptions to subsection (1)” and insert—

“(a) create an exception to subsection (1) in the case of a member or survivor whose subsisting rights in respect of safeguarded benefits under the scheme, or safeguarded benefits under the scheme and any other schemes, are worth less than a specified amount;

(b) create other exceptions to subsection (1).

( ) Regulations under subsection (3)(a) may, in particular, make provision about—

(a) the valuation of the subsisting rights;

(b) the process for determining whether the exception applies.”

Photo of Lord Newby Lord Newby Lords Spokesperson (HM Treasury) (Whip), Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

My Lords, these amendments are those that we indicated, in Committee, that we would lay on Report. They respond to the recommendations of the Delegated Powers and Regulatory Reform Committee. The committee was concerned that Clause 48(3) was too broad. That subsection provides a power to create exemptions to the requirement to check that advice has been received under the advice safeguard. In Committee we explained that, as set out in the consultation response document Freedom and Choice in Pensions, we intended to exempt those with pensions wealth below £30,000 from having to obtain advice. This remains our only intended use of the exemption. However, it may prove necessary, once the new flexibilities come into force, to create an exemption that applies in other circumstances.

Amendment 4 divides the original power, creating a specific power to exempt from the safeguard those who have rights to safeguarded benefits that are worth less than an amount specified in the regulations. This relates to the exemption we intend to make in regulations for those with safeguarded wealth of £30,000 or less. Amendment 6 makes the same change for Northern Ireland. Amendment 14 changes the procedure that applies to regulations made under these powers, so that only regulations that make an exception for those whose safeguarded wealth is below the specified amount are subject to the negative procedure. These regulations will need to be in place by 6 April, so it will not be possible to make them subject to the affirmative procedure. However, regulations that create any other sort of exception will be subject to the affirmative procedure. Amendments 15 and 16 make the same change of procedure for regulations made by the Northern Ireland Department for Social Development.

The final part of Amendment 4 allows the regulations to specify exactly how this £30,000 threshold will be calculated. In response to feedback from stakeholders, we have decided that this should apply only to safeguarded benefits in the scheme from which the member intends to transfer, and be calculated on the basis of the cash equivalent transfer value, which is the standard measure in the industry.

The Delegated Powers and Regulatory Reform Committee was also concerned that Clause 48(7) was too broad. Subsection (7) currently provides a power to give the meaning of the phrase “appropriate independent advice” in regulations. In Committee, we explained that in the response document to the consultation on freedom and choice in pensions, the Government set out that the advice which schemes would have to check had been received would be given by an adviser authorised by the FCA. We also explained that our intention is to define “appropriate independent advice” in regulations by reference to an activity regulated by the FCA, and that in parallel to this Bill the Government will seek to legislate to add a new activity to the FCA’s regulated activity order. This will be done by means of a statutory instrument amending the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, which will be subject to the affirmative procedure. The Treasury will lay a draft of this statutory instrument before the end of the month, and ahead of Third Reading.

Amendment 5 draws upon Amendment 44A, tabled in Committee by the noble Lords, Lord Bradley and Lord McAvoy, which suggested that advice should relate to the characteristics of the adviser providing it, as opposed to the nature of the advice itself. The amendment provides that, “appropriate independent advice” must be,

“given by an authorised independent adviser”, and goes on to set out that this means someone who,

“has permission under … the Financial Services and Markets Act 2000 … to carry on a regulated activity specified in regulations”.

This pertains to the link we intend to draw from regulations between the definition of “authorised independent adviser” and the new regulated activity that the Treasury will seek to legislate to create.

The clause, as amended, retains the power to specify the nature of the advice. This is being done as a precautionary measure to allow the Government to respond to practice emerging after April, which may require aspects of the definition of “appropriate independent advice” to go beyond that which can be expressed purely by the link to the FCA’s regulated activity.

Amendment 7 makes parallel amendments for Northern Ireland. I hope the House will agree that these amendments satisfy our commitment to seek to address the concerns of the Delegated Powers and Regulatory Reform Committee. I beg to move.

Photo of Lord Bradley Lord Bradley Shadow Spokesperson (Work and Pensions), Shadow Spokesperson (Health) 4:00 pm, 27th January 2015

I am grateful to the Minister for the explanation of the amendments, which are fine for the Bill, particularly the clarification around the amendment that we moved in Committee on the issues of appropriate independent advice and authorised independent adviser. That is very helpful, and I am pleased that the amendments are now being made.

Amendment 4 agreed.

Amendment 5

Moved by Lord Newby

5: Clause 48, page 21, leave out lines 1 and 2 and insert—

““appropriate independent advice” means advice that—

(a) is given by an authorised independent adviser, and

(b) meets any other requirements specified in regulations made by the Secretary of State;

“authorised independent adviser” means a person who—

(a) has permission under Part 4A of the Financial Services and Markets Act 2000, or resulting from any other provision of that Act, to carry on a regulated activity specified in regulations made by the Secretary of State, and

(b) meets such other requirements as may be specified in regulations made by the Secretary of State for the purpose of ensuring that the person is independent;”

Amendment 5 agreed.

Clause 51: Independent advice in respect of conversions and transfers: Northern Ireland

Amendments 6 and 7

Moved by Lord Newby

6: Clause 51, page 22, line 21, leave out “create exceptions to subsection (1)” and insert—

“(a) create an exception to subsection (1) in the case of a member or survivor whose subsisting rights in respect of safeguarded benefits under the scheme, or safeguarded benefits under the scheme and any other schemes, are worth less than a specified amount;

(b) create other exceptions to subsection (1).

( ) Regulations under subsection (3)(a) may, in particular, make provision about—

(a) the valuation of the subsisting rights;

(b) the process for determining whether the exception applies.”

7: Clause 51, page 22, leave out lines 31 and 32 and insert—

““appropriate independent advice” means advice that—

(a) is given by an authorised independent adviser, and

(b) meets any other requirements specified in regulations made by the Department for Social Development in Northern Ireland;

“authorised independent adviser” means a person who—

(a) has permission under Part 4A of the Financial Services and Markets Act 2000, or resulting from any other provision of that Act, to carry on a regulated activity specified in regulations made by the Department for Social Development in Northern Ireland, and

(b) meets such other requirements as may be specified in regulations made by the Department for Social Development in Northern Ireland for the purpose of ensuring that the person is independent;”

Amendments 6 and 7 agreed.

House resumed.