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My Lords, over the past 10 years the Government have delivered a number of radical changes to the pensions system that have transformed the way that people can save and access their pension savings.
Among the changes that we have made, we have removed the default retirement age, facilitating fuller working lives, we have made it easier for people to understand their state pension by introducing the new state pension, and by setting the full level at £155.65 and raising the state pension age we have lifted more pensioners out of means testing and put the state pension on a sustainable footing. We have increased private long-term savings by introducing automatic enrolment, and 6.7 million people have already been automatically enrolled into a workplace pension by 257,000 employers. By 2018, we estimate that 10 million workers will be newly saving or saving more into a workplace pension as a result of this change, generating around £17 billion in additional pension saving by 2020. In the summary of its report on automatic enrolment, published in May of this year, the Work and Pensions Select Committee said that so far, automatic enrolment had been a great success and that it had,
“been declared a success by pension providers, employers, trade unions and Government”.
We have also given people greater flexibility in relation to their pensions. The pension freedoms, which came into effect in April 2015, allow over-55 year-olds to access their pension savings more flexibly. HMRC reports that in the first year of pension freedoms, 232,000 individuals accessed a flexible payment. Since April 2016, it has been compulsory for providers to report this information. In the first six months since compulsory reporting was introduced, 243,000 individuals received a flexible payment, with 619,000 payments made in total. The total value of all flexible payments since the introduction of the freedoms is £7.65 billion.
The Bill builds on these changes. Automatic enrolment means that more people are saving into a private pension. The new freedoms mean they have more choice about what they do with their savings than ever before. We need to ensure that the legislative framework is appropriate in the light of these developments. The measures in the Bill will help to protect savers and maintain their confidence in pension savings.
The majority of the Bill focuses on master trust occupational pension schemes, which have become a most popular vehicle into which workers are automatically enrolled, particularly among small and micro-employers. Although these schemes can offer great value for members and employers, we need to act now to make sure they are regulated in the right way.
The schemes are regulated by the Pensions Regulator and occupational pension legislation. However, that legislation was developed mainly with single-employer pension schemes in mind. Master trust schemes have different structures and dynamics, so the Bill introduces a new authorisation regime for them and new powers for the Pensions Regulator to intervene where schemes are at risk of failing.
Master trusts will now have to satisfy the regulator that they meet certain criteria before operating, and schemes must continue to meet the criteria to remain authorised. The criteria respond to specific key risks identified in master trust schemes. They were developed in discussion with the industry and include the kinds of risks that the Financial Conduct Authority regulation addresses in group personal pensions, with which master trust schemes have some similarities.
Trusts will now be required to demonstrate that the persons involved in the scheme are fit and proper, that the scheme is financially sustainable, that the scheme funder meets certain requirements, that the systems and processes relating to the governance and administration of the scheme are sufficient to ensure its effective running, and that the scheme has an adequate continuity strategy.
The Bill covers more detail on each of these criteria, and additional details will be set out in regulations following further consultation with the industry. The authorisation and supervision regime is likely to be commenced in full in 2018. However, the Bill also contains provisions which, on enactment, will have effect back to the day on which this Bill was published,
These provisions relate to requirements to notify key events to the Pensions Regulator and constraints on charges levied on, or in respect of, members in circumstances related to key risk events or scheme failure. This is vital for protecting members in the short term and will ensure a backstop is in place until the full regime commences.
We have worked closely with the Pensions Regulator and engaged with the pension industry to see what essential protections are needed, and we believe that the measures in the Bill will provide those protections. The Pensions Regulator, along with many pension providers, has welcomed the introduction of the Bill and these measures, saying that it,
“will drive up standards and give us tough new supervisory powers … ensuring members are better protected and ultimately receive the benefits they expect”.
The Bill will also make a necessary change in relation to the existing legislation on charges. Information gathered by the Financial Conduct Authority and the Pensions Regulator indicates that a significant number of people have pensions in respect of which an early exit charge is applied. Clause 40 will give us the power to override contractual terms which conflict with the regulations. For example, the Government intend to use this, alongside existing powers, to make regulations to introduce a cap that will prevent early exit charges creating a barrier for members of occupational pension schemes wanting to access their pension savings. The FCA is introducing a corresponding cap on early exit charges in personal and stakeholder pension schemes.
The Government also intend to use this power, together with existing legislation, to make regulations preventing commission charges being imposed on members of certain occupational pension schemes where these arise under existing contracts entered into before
We are introducing the Bill now because it will, from the day it becomes law, protect consumers by preventing providers winding up an existing master trust while raising charges to cover the costs of doing so.
We are very conscious of the views expressed by this House that the delegated powers in previous Bills have been too wide or there has been a lack of clarity about how the policy will work. I therefore want to explain the approach we have taken to the use of delegated powers in this Bill.
The Bill sets out the key criteria for a master trust to become authorised. It requires that a master trust must satisfy the regulator that it meets these criteria and that it continues to do so on an ongoing basis. It also sets out how the regime itself will operate. However, there are matters more appropriate for secondary legislation that will address the detail of these requirements. We want to make sure that this level of detail caters for different structures and arrangements within existing master trusts, so that the burden of the regime has no disproportionate or unintended effect.
A one-size-fits-all set of requirements could have a disproportionate effect on the market. We believe that the level of detail needed to implement the main requirements, together with the need to make different provision for different cases, is more suitable for secondary legislation. It may be necessary for these detailed requirements to be adapted over time in response to market developments. To that end, we are not seeking a few broad powers; rather, we have woven specific powers into the Bill, targeted on the matters for which they are appropriate, so that it is clear where and for what they will be used.
We have not prepared draft regulations because we intend to consult the industry before making them. The Bill provides sufficient detail to allow your Lordships to scrutinise how the new authorisation and supervision regime will work and for the market to anticipate what the new regime will mean for it. The market has already proved dynamic and we expect that to continue. Therefore, having the appropriate detail in secondary legislation will enable us to adapt to changes and respond to market developments within the constraints of specific regulation-making powers.
The Bill is focused on areas where we believe we need to take immediate action to protect savers, but I know that there is considerable interest and concern about wider pension issues, so I shall touch briefly on why they are not included in the Bill.
I know that some noble Lords had expected to see in the Bill measures relating to guidance bodies. I reassure them that the Government remain committed to ensuring that consumers can access the help they need to make effective financial decisions. The recent consultation on a new delivery model for government-sponsored financial guidance proposed a two-model body, replacing the Money Advice Service with a new, streamlined money guidance body, and bringing together the Pensions Advisory Service and Pension Wise into a new, single pension guidance body. However, several stakeholders questioned, both in formal responses to the consultation and in the wider public debate that the review has provoked, how the two bodies might work together effectively and whether a single delivery body might be more cost effective and provide an improved offer to consumers. After careful consideration, we have agreed to create a single financial guidance body, but we need to do further work to ensure that the right model is delivered, that it works for consumers, and that it has the full support of the financial services, pensions and charity sectors. Reform in this area has not been shelved and we remain committed to restructuring and improving the offer on government-sponsored financial guidance.
A lot of understandable concern has been expressed in many quarters about the impact on employers of defined benefit pension schemes, and the sustainability and security of the defined benefit system. Noble Lords will be aware of high-profile cases in the news, and the ongoing Work and Pensions Select Committee inquiry into the powers of the Pensions Regulator and the Pension Protection Fund to act in cases where schemes are facing difficulty. In addition, the Pensions and Lifetime Savings Association, one of the main industry bodies for pension schemes, has set up its own taskforce looking into the sustainability of the defined benefit pensions system.
While we are aware of the many options for change that are being discussed and debated, there is no simple solution on which we are ready to legislate. Despite what noble Lords may read in certain papers, our pensions system is not in imminent danger. None the less, some employers and some schemes are in difficulty, and there are a number of issues on which we want to gather data and consider further. We intend to present a Green Paper on the challenges facing defined benefit pensions in the winter. We should not seek to address those issues ahead of that vital consultation.
Finally, I touch briefly on the changes to the state pension age. While all state pension issues will be outside of the Bill, I know that there is considerable interest and concern about this issue. We have to acknowledge that people are living longer and if we want to carry on having an affordable and sustainable pensions system, it is right that we continue to look at the state pension age. But I reassure noble Lords that we have put arrangements in place. We committed £1 billion to lessen the impact of the state pension changes on those who were affected, so that no one would experience a change of more than 18 months. In fact, 81% of women’s state pension ages will increase by no more than 12 months compared with the previous timetable. Many will benefit from an increase in the new state pension. But let me be quite clear on the Government’s position. Unwinding past decisions would involve younger people having to bear an even greater share of the burden of getting this country back to living within its means. That is not a burden we are prepared to place on them.
The Bill is an important legislative step in ensuring that we provide essential protections for people saving in master trust pension schemes, and in maintaining confidence in pension savings. The market has grown quickly and it is important that we now respond to ensure that this part of the pension market evolves in the right way. We are committed to ensuring that members are protected equally, whatever type of scheme they are in, and the measures proposed in this Bill will provide that protection. I beg to move.