Only a few days to go: We’re raising £25,000 to keep TheyWorkForYou running and make sure people across the UK can hold their elected representatives to account.Donate to our crowdfunder
My Lords, I begin by drawing attention to certain of my interests. I am a trustee of the Santander and Telefónica pension schemes. I am on the board of the Pensions Advisory Service, on the board of Pension Quality Mark, a trustee of Byhiras and a member of the Delegated Powers Committee.
Like everyone else, I, too, welcome this Bill. The Explanatory Notes are excellent and the impact assessment helpful, albeit unfinished given the substantive policy decisions still to be made. My focus is whether the authorisation, supervision and wind-up regime is sufficiently robust to deliver the Bill’s focus to protect savers.
The master trust model is an important part of a sustainable workplace pension system. If regulated well, it should allow trustees with a fiduciary duty to look after members’ interests, create scale and provide access to pension savings and products at low cost. But master trusts have grown rapidly while inadequately regulated, from 0.2 million members in 2010 to well over 4 million in 2016 and rising to 6.6 million by 2030—billions of pounds from millions of workers. I doubt that anyone anticipated just how quickly the structure of master trusts would evolve.
Low barriers meant that market entrants set up trusts on minimal requirements, into which people were auto-enrolled before an optimal DC proposition and market structure were put in place. The NOW pensions master trust CEO, Morten Nilsson, was shocked at how easy it was to set up a master trust—it involved only sending a form to HMRC and to the Pensions Regulator.
Debate on competition focuses on freedom for providers to enter a market created by harnessing inertia. But that competition cannot deliver an effective market because the demand side—the saver—is too weak. The worker does not choose the product, and complexity and conflicts of interest weaken their position.
As the impact assessment acknowledged, master trusts expose members to specific areas of risk. Master trusts can introduce a profit motive into a trust arrangement, but they fall outside FCA regulation. A master trust is set up by a provider raising concerns about the independence of trustees. In a traditional trust, trustees can replace their administrators or investment managers, but in a master trust they may not have that power. Currently, if a master trust fails, as the noble Baroness, Lady Altmann, spelled out, the costs are crystallised and met from members’ savings. There is no Pension Protection Fund for defined contribution savings.
Their multi-employer nature means lower individual employer engagement. They are growing in part because employers want to outsource pensions or discharge legacy DC trusts. They can increase complexity, exacerbate the principal-agent problem and when operating at scale mean a greater shock on failure—all compelling reasons for why the Government are right to introduce the Bill.
But I have concerns about the robustness of this regime. Many of those will be pursued in Committee, but I shall make some overview comments. Pension pots are a 30 to 40-year project for the individual, so ongoing supervision has to be robust. Yet paragraph 59 of the impact assessment concedes that,
“substantive policy decisions will not be taken until the secondary legislation stage”,
the timetable for which is unknown. So the House is blindsided on how robust certain key provisions will be.
In his opening speech, the Minister referred to the Government’s approach to the use of delegated powers, stressing that the detail needs to accommodate different structures, not one size fits all. That argument has merit, but only in part. Why is the negative procedure needed so often? There are major policy issues to be determined. We are not sufficiently clear about the Government’s thinking on: the robustness of capital adequacy and what happens if it fails; how profit motive and fiduciary duty are resolved; the sufficiency of the systems; member engagement; and how those charges which it will be prohibited to exceed will be set in the first instance.
The last 10 years have revealed that once highly regarded institutions tumbled from their esteemed positions as a result of weak governance and inadequate scrutiny. The most highly respected names on a master trust list need ongoing assessment for long-term quality of governance. Recent debates prompted by corporate behaviour at BHS raised concerns about the adequacy of the Pensions Regulator’s powers and its willingness to deploy them. We await the Government’s response to those debates to understand how the lessons learned may inform master trust regulation.
Master trusts can introduce a profit motive and the scheme founder can limit the powers of the trustees, yet there is no explicit requirement on those trustees to put in place processes for identifying and listing conflicts of interest and how they are to be resolved.
In the Bill, the capital buffer is the last line of defence to protect members’ money from being drained when a master trust exits the market, but no system of regulation can remove all risk, and that raises a series of questions. How robust is the definition of “self-sufficiency” underpinning the capital adequacy requirement? What happens if it proves not to be adequate in a given trust? How ring-fenced or guaranteed is that capital buffer? What if the scheme funder becomes insolvent? How frequently will the Pensions Regulator monitor a scheme’s capital adequacy? Who will meet the wind-up costs in extremis? How solid is the protection that members’ funds will not be run down? As no protection fund is being proposed, should there be a pay-as-you-go levy system? Will there be a provider of last resort to take over the processes and costs of winding up and to accept bulk transfers? What action will the Government take, and how quickly, to simplify the bulk transfer process? Members in master trusts deserve to be given clear answers to all of these questions.
On Royal Assent, transition to the new authorisation regime will be demanding. For example, some master trusts will not apply for authorisation and will pre-emptively leave the market. The retrospective provision in the Bill to prohibit increasing member charges on wind-up is welcome, as it is commonplace for master trust deeds to allow for such costs to be borne by the members. But some of these trusts have set up business with little capital at risk if things do not work out. What are the member protections in this situation? These trusts do not support only automatic enrolment; they provide in-retirement products too—they have quite a wide remit.
The Bill allows for regulations on the sufficiency of master trust systems and processes, but how robust will they be? We are referred to them in the Bill, but we are only referred to matters that will be taken into account. We are unclear as to where the line will be on the minimum prescriptive obligations that will be applied. The Bill is undemanding about governance on investment decisions and there is no mention of this in the impact assessment.
As my noble friend Lord McKenzie and the noble Lord, Lord Stoneham, have detailed, the Bill is insufficient in what it says about member communication and member engagement. These trusts have the potential for huge scale, but there is no explicit requirement for transparency on how workers’ money is invested and stewarded. The Government seem to be reluctant about this, so I join my noble friend Lord McKenzie in asking the Minister, in terms of the consultation exercise run by the Government on requiring transparency on the part of pension schemes about investments, when we will get a response because it closed in December 2015. We could be heading towards two years before we know what the answer is.
Many private pension policy issues are outstanding—several noble Lords have referred to them in the debate, and all of them are compelling and worthy of attention—but auto-enrolment has been transformational. Millions of people are saving, but not because they made an active decision; it is because they had to do nothing. The DWP and the Pensions Regulator have done a good job, but we should recognise that thousands of employers have undertaken their new duty and auto-enrolled their workers in a manner that has kept the opt-out rates low. Employers are a powerful influence on people saving because employees trust their employers, but the thrust of recent government policy seems to invite or exacerbate employer disengagement from pensions.
The complexity in private pensions now, and indeed in any long-term investment product available to the ordinary saver, fed in part by the detailed regulation needed to protect weak consumers, means that it is heading to near impossible for people to understand all the detail. Together with the noble Baroness, Lady Wheatcroft, I hope that it will not be long before the revised proposals for financial and pensions guidance are revealed. For pensions guidance to be meaningful, it needs to be independent and impartial. If it is, it can go much further than guidance from a product provider fettered by its product suite.
The guidance also needs to be specialist, as savers’ low level of knowledge means that guidance needs to diagnose the issues as the consumer’s presenting question is often not the underlying matter that needs to be addressed. It also needs to mitigate market failures which cannot and should not be resolved by making people pay for expensive advice. Our private pension system harnesses inertia on the way in and maximises individual responsibility on the way out. Savers remain insufficiently protected in the first instance and are lacking in empowerment in the latter.
As so many noble Lords have said, there is much to be done. I am very keen to drill down into the robust regime for master trusts being proposed in this Bill because these organisations are going to grow in scale. They will have under their management billions and billions of pounds of ordinary workers’ money, so it is important that at the least we should get the Bill right.