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My Lords, I am sure there is general support across the House for the Bill, and I congratulate my noble friend Lady Altmann on being very much its instigator. I take a slightly more positive view, in that it seems to be a case of the market actually responding rather successfully to a need. For auto-enrolment there needed to be relatively low-cost arrangements for managing money and for administration, along with an arrangement that would be suitable for a large number of small firms, and that is what has come up.
I wonder how many people even know what master trusts are. I suspect that if a survey was made of your Lordships’ House, we might find that only 20% of Members would know. They have arisen to meet a demand and in the main, they have done so rather successfully. I have seen different figures, but already between 4 million and 6 million members have £8 billion of funds under management, and about half of all employers are choosing master trusts for their auto-enrolment needs. As your Lordships are probably aware, there are four major players among a total of 84 master trusts, and it is clear that many of those will need to merge because they are of insufficient size to be viable in the long term.
There has been constructive dialogue between the Government, the Pensions Regulator and the emerged master trust industry on putting in regulation. I believe that, in the main, the regulation we are discussing today will address most of what is needed, although some areas still require work. However, I would have strongly opposed any form of levy to finance master trusts which get into trouble, because that is an unnecessary and hazardous path that should not be taken.
It is wise to leave the important territory of capital base to the Pensions Regulator to determine what sort of level of capital is adequate, but it is important that it be done on an ongoing basis. It is no good if it is done just initially when the master trust is setting up. It needs to be reviewed, probably annually. The concept of having minimal capital as six months’ operating costs is not suitable. When a master trust is small and setting up, those operating costs will be fairly small, but quite quickly they will be a lot larger. The capital base of just six months of initial costs would prove inadequate.
Importantly, in practice, when a master trust is failing it will not be difficult to sort it out because larger master trusts will be very keen to acquire the funds under management, for which they will charge their fees. It is also quite sensible to allow the regulator to act as some form of honest broker in putting together failing master trusts and suitable larger partners to absorb them.
There are some quite big issues. The first is whether the regulator should be the FCA or TPR. Group personal pension schemes, which are relatively similar—a lot of the larger providers provide both master trusts and group personal pension schemes—are regulated by the FCA. In general, the FCA is viewed as taking a tougher line than the Pensions Regulator. There certainly needs to be a level playing field between the two. While right now it is clearly more suitable for the Pensions Regulator to regulate master trusts, there are some slightly sensitive differences between the regulation of group personal pension schemes and master trusts.
There is also an issue with master trusts that attract members not connected to an employer. That may well increase in due course with self-employed individuals. They are regulated by the FCA, so there is another anomaly. The insurance industry has also made the point that where providers have both group personal pension schemes and master trusts, their capital adequacy is already determined under Solvency II, which requires them to hold sufficient capital for their master trusts. We have slight duplication, depending on the structure of the provider.
Historically, master trusts’ approval came from HMRC. It is now to be from the Pensions Regulator, but I repeat that there are some issues to be sorted out where insurance companies offer both. It is important that the regulator should not grant exemptions, as it has in the past, to NEST. Indeed, there is the argument that so to do is a breach of EU state aid rules. Also, to date there has been a voluntary process of accreditation for master trusts, the master trust assurance framework. That will need to be rolled into and absorbed into TPR regulation; but at present the larger master trusts meet the voluntary accreditation requirements and will now have to meet TPR’s requirements. Overall, there needs to be a full review of duplication areas, which can probably be dealt with after the legislation is enacted.
There is a second issue relevant to both master trusts and group personal pension schemes. If a member wants to leave a master trust and move to a new one, that master trust can require that whatever accumulated assets he has must move to his new master trust, but the new master trust cannot require it the other way around—that the assets the individual has with his old master trust are moved to them. I take the view that it is undesirable for people to have tiny amounts in different pension pots about the place, and that it is not an infringement of human liberty to require that amounts follow the individual into their new pension trust.
There is a similar situation with group personal pension schemes. Most people in such schemes—some 95% or more on average—opt for the default funds, I believe quite sensibly, as it happens. However, if a group personal pension scheme changes its managerial administrator, it cannot require that member similarly to move their money across from the old default fund to the new one, which would make life easier for everybody.
I came across a larger anomaly that rather surprised me. Generally, group personal pension schemes do not have trustees. That seems rather strange. It means that only the sponsor company can monitor how the pension is being managed—whether the administration is efficient and so forth. Master trusts have to have trustees, but the issue of group personal pension schemes and trustees needs to be thought about. At present it is left to someone called an independent governance officer to monitor and keep an eye on all group personal pension schemes managed by a particular manager. I take the view that there is insufficient time for one person, in many cases, to monitor all the schemes being managed.
I turn to two pension funds issues that are related but not in the Bill. The first is an income tax issue. Pension contributions are taxed in two ways. There is net PAYE, whereby the pension contribution is deducted from someone’s pay before PAYE is applied to it. The second route is pension trust relief at source—PTRAS—whereby PAYE is applied to gross income without deduction of pension contributions, but the pension scheme then recovers a 20% tax credit from HMRC.
The problem arises for individuals who do not pay tax, such as those employed part-time and earning less than £11,000. Under PTRAS they still get their 20% tax credit but under PAYE they do not. I believe this is worth somewhere between £5 and £10 per annum. Perhaps the easiest way to solve it would be to credit members under PAYE with that amount per annum to put them on to a level playing field. This is particularly relevant to those in part-time work. Also, I do not accept the logic of deducting £5,824 from all individuals’ pay for the purposes of calculating the amount to which employer, employee and government pension contributions should apply.
I strongly support the argument that a central advice scheme needs to be set up as soon as possible. It is a pity that the FCA has not admitted that RDR has been a disaster and resulted in no financial advice at all being available to the great majority of the population.
My final point was raised also by the noble Lord, Lord Naseby, and I very much agree with him. As a result of what was FRS 17, now FRS 102 or IAS 19, no one has any idea of the real scale of defined benefit scheme deficits. For the pension fund of which I am a trustee, my company’s old scheme, I worked out that the required FRS discount rate for discounting the value of future liabilities—the rate of interest applied—is roughly half what the pension fund has achieved in returns going back 10 or 15 years, and in good years and bad. Under the FRS rules, we are approximately in balance; the reality is that we have a huge surplus. We live in a world where some large established companies are putting off investment decisions because they allegedly have huge pension fund deficits to make good. The truth is that the FRS formula is completely out of date as a result of QE, which in turn has led to artificially low gilt yields.
When this issue has been raised with the Government, the answer has been, “Oh, we can’t interfere with accounting rules”. Well, my response to that is that Governments act in the interest of the nation. A serious issue is not being addressed. The US Congress had no trouble whatever in dealing with it. If the accounting industry is unwilling to see the sense of the argument that the FRS is now inappropriate, government should intervene. One reads of potential defined benefit deficits of £700 billion, £800 billion or more. I suspect that the reality in net terms is that there is hardly any deficit. We are starving the British economy of investment because of a piece of accounting/discounting which is wrong. I urge the Government to do something about this increasingly important issue.