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My Lords, I declare an interest as a trustee of the Parliamentary Contributory Pension Fund, which is in sound condition. I welcome the Bill immensely. I pay tribute to my noble friend on the Front Bench for all he has done in this field over the years, and what it seems he still has to do in the future.
More important than my welcome is that I read that last week a panel of master trust providers at the conference of the Pensions and Lifetime Savings Association also welcomed the Bill. That seems to be a good start. The providers also said at that conference that it should ensure that those schemes that are not sufficiently robust will have to leave the market—quite rightly so—but they even volunteered that maybe the industry should be the catalyst to look after those members who find themselves belonging to such a trust. I hope very much that by mentioning this here publicly they will do what they said they were thinking about doing.
I was also pleased to see that the Pension and Lifetime Savings Association has set up a committee solely for master trusts to help them have strategies, to move them forward and to support them in more difficult times. That can only be in the interests of the pensioners themselves, for they are the people we are most concerned about.
Looking at the Bill, of course one looks at the role of the Pensions Regulator—TPR. Will he be given real powers under the Bill to authorise and to de-authorise? Authorisation will, as I understand it, examine every aspect of a master trust, because those master trusts will become the key providers for the development of a defined contribution pension market. There is a question of whether TPR will have adequate resources for the work that is defined for it in the Bill. I hope that there will be a thorough assessment. One recognises that it is the pensioner who will pay the bill. Nevertheless, let us at least start with an analysis of whether those who are charged with these important responsibilities are to be given sufficient resources to do them.
I have a number of questions to ask of my noble friend. First, why is there no de minimis capital requirement for any master trust entering the market? Secondly, why under the licensing scheme is it not compulsory to use the master trust assurance framework? Thirdly, your Lordships will know of my deep interest in and support for the mutuals sector. There are many schemes out there today for groups of employers in the not-for-profit sector—for Churches, charities, unions, universities, credit unions and a number of others. They usually have a defined benefit scheme and as far as I can see, having been involved with the movement for many years now, almost all of those are in reasonable shape. Surely it is questionable whether it is really sensible, or indeed necessary, to include them in the master trust legislation, for they are pretty safe schemes. It seems to me that the regulations will be unnecessarily onerous, complex and really quite expensive for some of these small operations. If we demand that they have to comply with them, it will create great difficulty for a sector that, as I understand it, society wants to see promoted.
My fourth question will not find much favour with my noble friend. It is on that section of Part 2 of the Bill regarding which my noble friend reiterated the Government’s intention to introduce a cap on early exit charges. As far as the media are concerned, that is a highly emotive area. However, for the poor people who are running a pension fund and doing their calculations based on the income of that fund over 20, 25 or 30 years, or whatever it may be, making it easy for the individual member to exit the fund will make it even more difficult to plan in relation to yields in the market. Are the Government absolutely sure that they want to dig away here? We certainly cannot have a situation where the early exit charge is what one might call de minimis. There has to be a disincentive against people going in and then pulling out; otherwise—as someone who has been involved with pension fund management for 25 years—my judgment is that it will be quite a challenge, and not one that I would personally wish to take on.
So much for the questioning. I think the House will know and need to recognise that we have a long way to go in the pensions market in this nation. Today, it is estimated that just one in seven of the members of DC schemes are saving enough to maintain in retirement the lifestyle that they have got used to. There is a huge challenge for all of us—for the Government of the day, the media and the industry—to explain and convince pensioners that they must do more saving for their future life as pensioners. In my judgment, that has considerable implications for Her Majesty’s Treasury in providing some incentives to make this happen.
As this is the Second Reading of a pensions Bill I would like to comment on a couple of wider aspects. First, as I understand it, there are currently 5,945 defined benefit schemes. Your Lordships will have read, as have I, that most of those defined benefit schemes are in a negative situation. The deficits amount to billions of pounds. To make it even worse, or more lurid, the Pensions Institute at the London Cass Business School has forecast that 1,000 more pension funds will enter the Pension Protection Fund. Your Lordships will know that the level of the deficit is calculated using traditional gilts plus or corporate bond yields to calculate the discount rate. As we all know, those yields are at a very depressed level and have been for a while now.
I was interested to read something that I believe reflects the situation. First Actuarial has just done an analysis of the expected returns from underlying assets held by schemes as opposed to the theoretical system using traditional gilts plus and corporate bond yields. The net result was completely different. There turns out to be a surplus of £358 billion. We need to think long and hard about whether we will stick in the longer term with the totally unrealistic discount rate that we have had over the last decades.
My second and more general point is about when schemes face a wind-up situation. The time has come to look at changing the law. Today, it is not in the best interests of members. If they cannot afford to meet their pension promises, the only option left to the trustees and the company is to go bankrupt. The net result is that the poor pensioners get a very meagre—certainly a substantially reduced—pension from the PPF, so they lose out, and the equity shareholders in the company lose out because they lose all their equity. Why cannot trustees be allowed to renegotiate? It would result in a reduction in benefits to the members, but not as big a reduction as they get when they have to be put in the last chance saloon of the PPF. Perhaps some combination of cutting benefits and a modified new DC scheme on top of that would be a better way forward for a number of those companies—possibly not all of them, but certainly a significant element of the thousands that the Cass Business School forecasts will be in really deep trouble. A significant element of them would be saved, and that would help pensioners.
I greatly welcome the Bill. We face many new challenges in this market. I am sure the Bill will be given a Second Reading, and I look forward to playing some role in the Committee stage as we move it forward.